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, 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 May 10, 2013
Common Stock, $0.01 par value per share		31,116,881shares

Harris & Harris Group, Inc.

Form 10-Q, March 31, 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	37

Financial Highlights	58

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	59

Background	59

Overview	59

Maturity of Current Equity-Focused Venture Capital Portfolio	61

Investment Objective and Strategy	62

Involvement with Portfolio Companies	63

Investments and Current Investment Pace	64

Our Sources of Liquid Capital	65

Potential Pending Liquidity Events from our Portfolio as of March 31, 2013	66

Strategy for Managing Publicly Traded Positions	67

Portfolio Company Revenue	68

Current Business Environment	68

Valuation of Investments	70

Results of Operations	72

Financial Condition	77

Liquidity	78

Borrowings	80

Contractual Obligations	80

Critical Accounting Policies	80

Recent Developments – Portfolio Companies	84

Cautionary Statement Regarding Forward-Looking Statements	85

Item 3. Quantitative and Qualitative Disclosures About Market Risk	86

Item 4. Controls and Procedures	89

PART II. OTHER INFORMATION

Item 1A. Risk Factors	90

Item 6. Exhibits	90

Signatures	91

Exhibit Index	92

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

	March 31, 2013			December 31, 2012
	(Unaudited)
ASSETS

Investments, in portfolio securities at value:
Unaffiliated privately held companies (cost: $29,753,283 and $29,365,558, respectively)	$	26,379,915		$	24,949,756
Unaffiliated rights to milestone payments (adjusted cost basis: $3,291,750 and $3,291,750, respectively)		3,404,812			3,400,734
Unaffiliated publicly traded securities (cost: $5,854,604 and $5,070,447, respectively)		13,614,673			14,422,261
Non-controlled affiliated privately held companies (cost: $54,932,975 and $57,789,263, respectively)		61,546,927			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: $14,628,771 and $14,233,804, respectively)		2,917,174			3,088,816
Total, investments in private portfolio companies, rights to milestone payments and public securities at value (cost: $108,461,383 and $111,750,822, respectively)	$	107,863,501		$	108,002,191
Investments, in put options at value (cost: $5,637 and $0, respectively)		5,637			0
Investments, in U.S. Treasury obligations at value (cost: $13,999,531 and $13,996,136, respectively)		13,999,720			13,998,880
Cash		7,060,100			8,379,111
Restricted funds (Note 3)		10,020			10,015
Funds held in escrow from sales of investments at value (Note 3)		0			1,052,345
Receivable from sales of investments (Note 3)		273,361			0
Receivable from portfolio company		21,060			23,830
Interest receivable		26,960			49,068
Prepaid expenses		411,160			97,410
Other assets		374,484			377,400
Total assets	$	130,046,003		$	131,990,250

LIABILITIES & NET ASSETS

Accounts payable and accrued liabilities	$	1,068,801		$	1,262,202
Post retirement plan liabilities (Note 8)		800,939			1,876,447
Deferred rent		359,673			368,977
Written call options payable (premiums received:
$196,597 and $50,000, respectively) (Note 7)		63,737			42,500
Debt interest and other payable		3,750			3,350
Total liabilities		2,296,900			3,553,476

Net assets	$	127,749,103		$	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 3/31/13 and 12/31/12; 32,945,621 issued at 3/31/13 and 12/31/12		329,456			329,456
Additional paid in capital (Note 9)		213,509,195			213,194,474
Accumulated net operating and realized loss		(83,276,984	)		(77,943,238	)
Accumulated unrealized (depreciation) appreciation of investments		(464,833	)		(3,738,387	)
Accumulated other comprehensive income (Note 8)		1,057,800			0
Treasury stock, at cost (1,828,740 shares at 3/31/13 and 12/31/12)		(3,405,531	)		(3,405,531	)

Net assets	$	127,749,103		$	128,436,774

Shares outstanding		31,116,881			31,116,881
Net asset value per outstanding share	$	4.11		$	4.13

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

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended			Three Months Ended
	March 31, 2013			March 31, 2012
Investment income:
Interest from:
Unaffiliated companies	$	74,995		$	50,064
Non-controlled affiliated companies		15,305			42,812
Controlled affiliated companies		46,804			27,342
Cash and U.S. Treasury obligations and other		5,659			6,312
Miscellaneous income		42,327			34,360
Total investment income		185,090			160,890

Expenses:
Salaries, benefits and stock-based compensation (Notes 8 & 9)		1,317,685			1,389,391
Administration and operations		210,215			356,684
Professional fees		385,730			273,343
Rent (Note 3)		101,215			98,443
Directors' fees and expenses		72,470			95,826
Custody fees		13,793			10,855
Depreciation		13,724			13,953
Interest and other debt expense		5,831			11,776
Total expenses		2,120,663			2,250,271

Net operating loss		(1,935,573	)		(2,089,381	)

Net realized (loss) gain:
Realized (loss) gain from investments:
Unaffiliated companies		0			476,887
Non-controlled affiliated companies		(4,236,033	)		27,616
Publicly traded companies		893,004			0
Written call options		23,948			165,000
Purchased put options		(57,082	)		0
Realized (loss) gain from investments		(3,376,163	)		669,503
Income tax expense (Note 10)		22,010			8,075
Net realized (loss) gain from investments		(3,398,173	)		661,428

Net increase (decrease) in unrealized appreciation on investments:
Change as a result of investment sales		3,534,350			0
Change on investments held		(386,156	)		7,220,971
Change on written call options		125,360			(212,835	)
Net increase (decrease) in unrealized appreciation on investments		3,273,554			7,008,136

Net realized and unrealized (loss) gain on investments		(124,619	)		7,669,564

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

Total	$	(2,060,192	)	$	5,580,183

Per average basic and diluted outstanding share	$	(0.07	)	$	0.18

Average outstanding shares - basic		31,116,881			31,000,601

Average outstanding shares - diluted		31,116,881			31,006,926

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

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	Three Months Ended			Three Months Ended
	March 31, 2013			March 31, 2012

Net (decrease) increase resulting from operations	$	(2,060,192	)	$	5,580,183

Other comprehensive income (loss):

Amendment to medical retirement plan		1,101,338			0
Amortization of prior service cost		(43,538	)		0

Other comprehensive income		1,057,800			0

Comprehensive (loss) income	$	(1,002,392	)	$	5,580,183

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

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended			Three Months Ended
	March 31, 2013			March 31, 2012

Cash flows (used in) provided by operating activities:
Net (decrease) increase in net assets resulting from operations	$	(2,060,192	)	$	5,580,183
Adjustments to reconcile net (decrease) increase in net assets resulting from operations to net cash provided by (used in) operating activities:
Net realized loss (gain) and unrealized appreciation on investments		102,609			(7,677,639	)
Depreciation of fixed assets, amortization of premium or discount on U.S. government securities, and bridge note interest		(58,495	)		(56,603	)
Stock-based compensation expense		314,721			447,824
Purchase of U.S. government securities		(13,999,456	)		0
Sale of U.S. government securities		14,000,000			0
Purchase of affiliated portfolio companies		(2,063,170	)		(2,985,307	)
Purchase of unaffiliated portfolio companies		(452,540	)		(820,473	)
Principal payments received on debt investments		76,751			100,922
Proceeds from sale of investments and conversion of bridge notes		3,077,920			953,480
Proceeds from call option premiums		352,809			454,665
Payments for put and call option purchases		64,578			(159,000	)

Changes in assets and liabilities:
Restricted funds		(5	)		12,031
Receivable from sale of portfolio company		(148,729	)		0
Receivable from portfolio company		2,770			9,711
Interest receivable		22,108			6,848
Prepaid expenses		(313,750	)		65,113
Other assets		(9,418	)		0
Post retirement plan liabilities		(17,708	)		52,637
Accounts payable and accrued liabilities		(199,438	)		11,079
Deferred rent		(9,304	)		(7,681	)
Other liabilities		400			2,548

Net cash used in operating activities		(1,317,539	)		(4,009,662	)

Cash flows from investing activities:
Purchase of fixed assets		(1,472	)		(4,879	)
Net cash used in investing activities		(1,472	)		(4,879	)

Net decrease in cash		(1,319,011	)		(4,014,541	)

Cash at beginning of the period		8,379,111			33,841,394
Cash at end of the period	$	7,060,100		$	29,826,853

Supplemental disclosures of cash flow information:
Income taxes paid	$	22,010		$	8,075
Interest paid	$	0		$	3,748

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

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

	Three Months Ended			Year Ended
	March 31, 2013			December 31, 2012
	(Unaudited)

Changes in net assets from operations:

Net operating loss	$	(1,935,573	)	$	(8,803,343	)
Net realized (loss) gain on investments		(3,398,173	)		2,406,433
Net increase (decrease) in unrealized appreciation on investments as a result of sales		3,534,350			(1,427,730	)
Net (decrease) increase in unrealized appreciation on investments held		(386,156	)		(12,049,760	)
Net increase (decrease) in unrealized appreciation on written call options		125,360			(112,500	)

Net decrease in net assets resulting from operations		(2,060,192	)		(19,986,900	)

Changes in net assets from capital stock transactions:

Payment of employee withholding on net settlement of vested restricted stock awards		0			(203,676	)
Stock-based compensation expense		314,721			2,928,943

Net increase in net assets resulting from capital stock transactions		314,721			2,725,267

Changes in net assets from accumulated other comprehensive income:

Other comprehensive income		1,057,800			0

Net increase in net assets resulting from accumulated other comprehensive income		1,057,800			0

Net decrease in net assets		(687,671	)		(17,261,633	)

Net Assets:

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

End of the period	$	127,749,103		$	128,436,774

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

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2013

(Unaudited)

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

Investments in Unaffiliated Companies (3) – 34.0% of net assets at value

Private Placement Portfolio (Illiquid) (4) – 20.6% of net assets at value

Bridgelux, Inc. (7)(8)(10)		Energy
Manufacturing high-power light emitting diodes (LEDs) and arrays
Series B Convertible Preferred Stock	(M)		$	1,000,000		1,861,504	$	612,118
Series C Convertible Preferred Stock	(M)			1,352,196		2,130,699		700,638
Series D Convertible Preferred Stock	(M)			1,371,622		999,999		890,260
Series E Convertible Preferred Stock	(M)			672,599		440,334		564,345
Series E-1 Convertible Preferred Stock	(M)			534,482		399,579		408,042
Warrants for Series C Convertible Preferred Stock expiring 12/31/14	( I )			168,270		163,900		18,180
Warrants for Series D Convertible Preferred Stock expiring 8/26/14	( I )			88,531		124,999		37,891
Warrants for Series D Convertible Preferred Stock expiring 3/10/15	( I )			40,012		41,666		15,741
Warrants for Series E Convertible Preferred Stock expiring 12/31/17	( I )			93,969		170,823		155,571
Warrants for Common Stock expiring 6/1/16	( I )			72,668		132,100		4,677
Warrants for Common Stock expiring 10/21/18	( I )			18,816		84,846		5,343
				5,413,165				3,412,806

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		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		3,119
Warrants for Series E-1 Pref. Stock expiring on 3/11/23	( I )			5,355		2,707		6,050
				995,142				1,202,738

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

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2013

(Unaudited)

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

Investments in Unaffiliated Companies (3) – 34.0% of net assets at value (Cont.)

Private Placement Portfolio (Illiquid) (4) – 20.6% of net assets at value (Cont.)

Ensemble Therapeutics Corporation (7)(9)(12)		Life Sciences
Developing DNA-Programmed Chemistry^TM for 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)			341,486	$	250,211		1,332,623
Secured Convertible Bridge Note, 8%, acquired 12/10/09	(M)			61,822	$	48,868		255,399
Secured Convertible Bridge Note, 8%, acquired 1/25/12	(M)			119,792	$	109,400		553,148
Secured Convertible Bridge Note, 8%, acquired 3/28/13	(M)			73,685	$	73,598		365,222
				2,596,785				2,506,392

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 4/4/13	( I )			254,501	$	344,751		344,405
Warrants for Series A Pref. Stock expiring on 9/17/17	( I )			66,684		100,000		83,044
Warrants for Series A-1 Pref. Stock expiring on 6/30/18	( I )			23,566		34,500		29,166
Loan and Security Agreement with GEO Semiconductor relating to the following assets:
Subordinated secured debt, 15.75%, maturing on 4/5/13	( I )			109,942	$	125,000		129,500
Warrants for Series A Pref. Stock expiring on 3/1/18	( I )			7,512		10,000		8,035
Warrants for Series A-1 Pref. Stock expiring on 6/29/18	( I )			7,546		10,000		8,060
				469,751				602,210

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 MARCH 31, 2013

(Unaudited)

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

Investments in Unaffiliated Companies (3) – 34.0% of net assets at value (Cont.)

Private Placement Portfolio (Illiquid) (4) – 20.6% 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	$	185,646
Series D Convertible Preferred Stock	(M)			3,000,003		1,016,950		2,814,923
Series E Convertible Preferred Stock	(M)			496,573		433,688		698,907
Unsecured Convertible Bridge Note, 4%, acquired 7/16/12	(M)			45,065	$	43,821		249,521
				5,041,641				3,948,997

Nano Terra, Inc. (9)		Energy
Developing surface chemistry and nano-manufacturing solutions
Senior secured debt, 12.0%, maturing on 12/1/15	( I )			918,896	$	954,299		931,900
Warrants for Series A-2 Pref. Stock expiring on 2/22/21	( I )			69,168		446,248		65,571
Warrants for Series C Pref. Stock expiring on 11/15/22	( I )			35,403		241,662		35,291
				1,023,467				1,032,762

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)		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 )			581,395	$	683,200		622,400
Warrants for Series C Pref. Stock expiring on 3/30/22	( I )			91,742		1,109,333		67,603
				673,137				690,003

Total Unaffiliated Private Placement Portfolio (cost: $29,753,283)							$	26,379,915

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

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2013

(Unaudited)

	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	$	3,404,812

Laird Technologies, Inc. (7)(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)							$	3,404,812

Publicly Traded Portfolio (6) – 10.7% of net assets at value

Solazyme, Inc. (10)(17)		Energy
Developing algal biodiesel, industrial chemicals and specialty ingredients using synthetic biology
Common Stock	(M)		$	3,654,604		1,546,490	$	12,062,622

Champions Oncology, Inc. (10)(18)		Life Sciences
Developing its TumorGraft^TM platform for personalized medicine and drug development
Common Stock	(M)			2,199,600		3,293,190		1,551,880
Warrants for Common Stock expiring 1/29/18	( I )			400		40,000		171
				2,200,000				1,552,051

Total Unaffiliated Publicly Traded Portfolio (cost: $5,854,604)							$	13,614,673

Total Investments in Unaffiliated Companies (cost: $38,899,637)							$	43,399,400

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

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2013

(Unaudited)

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

Investments in Non-Controlled Affiliated Companies (3) – 48.2% of net assets at value

Private Placement Portfolio (Illiquid) (19) – 48.2% 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	$	87,119
Unsecured Convertible Bridge Note, 8%, acquired 10/1/12	(M)			207,978	$	200,000		212,612
				642,978				299,731

Adesto Technologies Corporation (7)(9)		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
Subordinated Convertible Bridge Note, 8%, acquired 1/17/13	(M)			682,970	$	672,070		682,970
				7,961,648				12,146,137

AgBiome, LLC (formerly AgInnovation, LLC) (7)(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		2,500,000

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		953,703
Series B Convertible Preferred Stock	(M)			1,300,000		812,500		554,429
Series C Convertible Preferred Stock	(M)			1,200,000		1,148,325		1,050,000
				4,509,995				2,558,132

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

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2013

(Unaudited)

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

Investments in Non-Controlled Affiliated Companies (3) – 48.2% of net assets at value (Cont.)

Private Placement Portfolio (Illiquid) (19) – 48.2% of net assets at value (Cont.)

D-Wave Systems, Inc. (7)(9)(21)		Electronics
Developing high-performance quantum computing systems
Series 1 Class B Convertible Preferred Stock	(M)		$	1,002,074		1,144,869	$	1,462,914
Series 1 Class C Convertible Preferred Stock	(M)			487,804		450,450		575,585
Series 1 Class D Convertible Preferred Stock	(M)			748,473		855,131		1,092,686
Series 1 Class E Convertible Preferred Stock	(M)			248,049		269,280		344,086
Series 1 Class F Convertible Preferred Stock	(M)			238,323		258,721		330,594
Series 2 Class D Convertible Preferred Stock	(M)			736,019		678,264		866,686
Series 2 Class E Convertible Preferred Stock	(M)			659,493		513,900		656,662
Series 2 Class F Convertible Preferred Stock	(M)			633,631		493,747		630,909
Warrants for Common Stock expiring 6/30/15	( I )			98,644		153,890		34,605
				4,852,510				5,994,727

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		1,478,450
Series A-1 Convertible Preferred Stock	(M)			750,000		576,923		836,538
				1,776,832				2,314,988

HzO, Inc. (7)(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)			2,000,000		7,895,776		2,000,000
Secured Convertible Bridge Note, 8%, acquired 3/26/13	(M)			350,460	$	350,000		389,400
				3,017,127				3,417,113

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 MARCH 31, 2013

(Unaudited)

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

Investments in Non-Controlled Affiliated Companies (3) – 48.2% of net assets at value (Cont.)

Private Placement Portfolio (Illiquid) (19) – 48.2% 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		54,872
				5,999,999				6,081,793

OpGen, Inc. (7)(10)		Life Sciences
Developing tools for genomic sequence assembly and analysis
Series C Convertible Preferred Stock	(M)			3,260,000		23,623,188		2,445,000

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		250,000

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		270,000
Warrants for Series B Preferred Stock expiring 10/15/17	( I )			131,538		164,423		32,868
				1,350,000				302,868

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

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2013

(Unaudited)

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

Investments in Non-Controlled Affiliated Companies (3) – 48.2% of net assets at value (Cont.)

Private Placement Portfolio (Illiquid) (19) – 48.2% 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		35,842
Warrants for Common Stock expiring 3/28/17	( I )			84,207		418,507		22,958
				6,640,523				7,701,933

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		13,140,763

Total Non-Controlled Private Placement Portfolio (cost: $54,932,975)							$	61,546,927

Total Investments in Non-Controlled Affiliated Companies (cost: $54,932,975)							$	61,546,927

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

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2013

(Unaudited)

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

Investments in Controlled Affiliated Companies (3) – 2.3% of net assets at value

Private Placement Portfolio (Illiquid) (22) – 2.3% 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		0
Senior Secured Debt, 12.00%, maturing on 12/11/13	( I )			456,894	$	500,000		456,250
Secured Convertible Bridge Note, 8%, acquired 1/23/13	(M)			355,216	$	350,000		37,004
				8,397,554				493,254

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		1,288,505
Secured Convertible Bridge Note, 12%, acquired 10/7/11	(M)			235,638	$	200,000		235,638
Secured Convertible Bridge Note, 12%, acquired 11/17/11	(M)			111,407	$	95,652		111,407
Secured Convertible Bridge Note, 12%, acquired 12/21/11	(M)			95,292	$	82,609		95,292
Secured Convertible Bridge Note, 12%, acquired 3/5/12	(M)			490,818	$	434,784		490,818
Secured Convertible Bridge Note, 12%, acquired 7/26/12	(M)			202,260	$	186,955		202,260
				6,231,217				2,423,920

Total Controlled Private Placement Portfolio (cost: $14,628,771)							$	2,917,174

Total Investments in Controlled Affiliated Companies (cost: $14,628,771)							$	2,917,174

Total Private Placement and Publicly Traded Portfolio (cost: $108,461,383)							$	107,863,501

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

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2013

(Unaudited)

	Method of	Number of
	Valuation (1)	Contracts			Value

Purchased Put Options (23) – 0.0% of net assets at value

Solazyme, Inc. — Strike Price $7.50, April 20, 2013	(M)		(200	)	$	5,637

Total Purchased Put Options (Cost: $5,637)					$	5,637

	Method of			Shares/
	Valuation (1)	Cost		Principal		Value

U.S. Government Securities (24) – 10.9% of net assets at value

U.S. Treasury Bill — due date 04/25/13	(M)	$	13,999,531	$	14,000,000	$	13,999,720

Total Investments in U.S. Government Securities (cost: $13,999,531)						$	13,999,720

Total Investments (cost: $122,466,551)						$	121,868,858

	Method of	Number of
	Valuation (1)	Contracts		Value

Written Call Options (23) – (0.05)% of net assets at value

Solazyme, Inc. — Strike Price $7.50, April 20, 2013	(M)		200		(9,737	)
Solazyme, Inc. — Strike Price $10.00, June 22, 2013	(M)		5,400		(54,000	)

Total Written Call Options (Premiums Received $196,597)				$	(63,737	)

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

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2013

(Unaudited)

Notes to Consolidated Schedule of Investments

(1)

See "Footnote to Consolidated Schedule of Investments" on page 33 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. 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 $29,753,283. The gross unrealized appreciation based on the tax cost for these securities is $4,431,342. The gross unrealized depreciation based on the tax cost for these securities is $7,804,710.

(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 $113,062. 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 $5,854,604. The gross unrealized appreciation based on the tax cost for these securities is $8,408,018. The gross unrealized depreciation based on the tax cost for these securities is $647,949.

(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 March 31, 2013.

(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.

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

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2013

(Unaudited)

(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 $241,038 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 March 28, 2020. The cost basis of these warrants is $144.85.

(13)

The outstanding loans were repaid in full on April 4 and 5, 2013. We continue to own warrants to purchase Series A and Series A-1 Preferred Stock of GEO Semiconductor, Inc.

(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 March 31, 2013, and, therefore, this warrant is a contingent asset as of that date. The warrant will expire on July 27, 2022.

(15)

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 March 31, 2013.

(16)

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

(17)

A portion of this security is held in connection with written call option contracts: 560,000 shares, having a fair value of $4,368,000, have been pledged to brokers.

(18)

As of March 31, 2013, we owned a total of 3,293,190 shares of Champions Oncology, Inc.; 626,523 of these shares are subject to legal restrictions on their sale. Our remaining 2,666,667 shares of common stock of Champions are not subject to legal restrictions on their sale.

(19)

The aggregate cost for federal income tax purposes of investments in non-controlled affiliated privately held companies is $54,932,975. The gross unrealized appreciation based on the tax cost for these securities is $17,048,815. The gross unrealized depreciation based on the tax cost for these securities is $10,434,863.

(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)

The aggregate cost for federal income tax purposes of investments in controlled affiliated companies is $14,628,771. 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 $11,711,597.

(23)

Initial investment was made in 2013.

(24)

The aggregate cost for federal income tax purposes of our U.S. government securities is $13,999,531. The gross unrealized appreciation on the tax cost for these securities is $189. 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.

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^TM for 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 33 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)

(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 uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. For example, the market approach often uses market multiples derived from a set of comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range each appropriate multiple falls requires judgment considering factors specific to the measurement (qualitative and quantitative).

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 companies commercializing and integrating products enabled by nanotechnology and microsystems. 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 March 31, 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. Certain prior period amounts have been reclassified to conform to the current period presentation.

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 March 31, 2013, our financial statements include privately held investments and one illiquid publicly traded venture capital investment, Champions Oncology, Inc., collectively fair valued at $95,800,879. The fair values of our privately held and illiquid publicly traded venture capital investments 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 March 31, 2013, and December 31, 2012, we held $10,020 and $10,015, respectively, in "Restricted funds," which were held in security deposits for sublessors.

Unaffiliated Rights to Milestone Payments. At March 31, 2013, and December 31, 2012, the outstanding milestone payments from Amgen, Inc.’s acquisition of Biovex Group, Inc., were valued at $3,404,812 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 March 31, 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 March 31, 2013, we had a receivable totaling $273,361 relating to the sale of Crystal IS, Inc. The escrow period expired on March 28, 2013, and the funds were released to us on April 4, 2013.

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 credit facilities and are capitalized at the time of payment. Deferred financing charges are amortized over the term of the credit 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 $275,871 and $288,122 at March 31, 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 ten years 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, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. When securities are determined to be non-income producing, 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 recorded as a debit to interest income. During the three months ended March 31, 2013, the Company earned $95,209 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 ended March 31, 2013, the Company recorded $59,881 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 or offset against the proceeds or amount paid on the transaction to determine the realized gain or loss. At March 31, 2013, the Company had 560,000 shares 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. See "Note 12. Subsequent Events."

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.

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 March 31, 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 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 March 31, 2013, included in the net decrease in unrealized depreciation on investments was an unrealized loss of $113,006 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.

Recently Issued Accounting Guidance. In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-02: Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income to improve the transparency of reporting the reclassifications of significant amounts out of accumulated other comprehensive income. This guidance requires entities to present the effects on the line items of net income of significant reclasses from accumulated other comprehensive income, either where net income is presented or in the notes, as well as cross-reference to other disclosures currently required under GAAP for other reclassification items (that are not required under GAAP) to be reclassified directly to net income in their entirety in the same reporting period. The new disclosure requirements are effective for annual reporting periods beginning after December 15, 2012. The new disclosures are required for both interim and annual reporting. The implementation of this guidance did not have an impact on the Company's financial position, results of operations or cash flows.

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 and some of our publicly traded investments, there is greater risk of loss than is the case with traditional 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 March 31, 2013, our largest 10 investments by value accounted for approximately 73 percent of the value of our equity-focused venture capital portfolio. Our largest three investments, by value, Xradia, Inc., Adesto Technologies Corporation and Solazyme, Inc., accounted for approximately 13 percent, 12 percent and 12 percent, respectively, of our equity-focused venture capital portfolio at March 31, 2013. Xradia and Adesto Technologies are privately held portfolio companies. Solazyme is a publicly traded portfolio company.

Approximately 87 percent of our equity-focused venture capital portfolio by value was comprised of securities of 25 privately held companies. 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 February 24, 2011, the Company established a $10 million three-year revolving credit facility (the "credit facility") with TD Bank, N.A. to be used in conjunction with its investments in venture debt.

The credit facility matures on February 24, 2014, and generally bears interest, at the Company’s option, based on (i) LIBOR plus 1.25 percent or (2) the higher of the federal funds rate plus fifty basis points (0.50 percent) or the U.S. prime rate as published in the Wall Street Journal. The credit facility generally requires payment of interest on a monthly basis and requires the payment of a non-use fee of 0.15 percent annually. All outstanding principal is due upon maturity. The credit facility is secured by cash collateral held in a non-interest bearing account at TD Bank, N.A. The credit facility contains affirmative and restrictive covenants, including: (a) periodic financial reporting requirements, (b) maintaining our status as a BDC (c) maintaining unencumbered, liquid assets of not less than $7,500,000, (d) limitations on the incurrence of additional indebtedness, (e) limitations on liens, and (f) limitations on mergers and dissolutions. The credit facility is used to supplement our capital to make additional venture debt investments.

At March 31, 2013, and December 31, 2012, the Company had no outstanding debt. At March 31, 2013, and December 31, 2012, $0 was held in a collateral account at TD Bank, N.A. as security for the loan. The weighted average annual interest rate for the three months ended March 31, 2013, was zero percent, exclusive of amortization of closing fees and other expenses related to establishing the credit facility. The remaining capacity under the credit facility was $10,000,000 at March 31, 2013. At March 31, 2013, the Company was in compliance with all financial covenants required by the credit facility.

NOTE 6. FAIR VALUE OF INVESTMENTS

At March 31, 2013, our financial assets were categorized as follows in the fair value hierarchy:

	Fair Value Measurement at Reporting Date Using:

Description	March 31, 2013		Unadjusted Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

U.S. Government Securities	$	13,999,720	$	13,999,720	$	0	$	0

Put Options	$	5,637	$	5,637	$	0	$	0

Privately Held Portfolio Companies:
Preferred Stock	$	79,279,756	$	0	$	0	$	79, 279,756
Bridge Notes	$	5,213,314	$	0	$	0	$	5,213,314
Warrants	$	544,844	$	0	$	0	$	544,844
Rights to Milestone Payments	$	3,404,812	$	0	$	0	$	3,404,812
Common Stock	$	108,667	$	0	$	0	$	108,667
Senior Secured Debt	$	1,388,150	$	0	$	0	$	1,388,150
Participation Agreement	$	1,146,618	$	0	$	0	$	1,146,618
Subordinated Secured Debt	$	129,500	$	0	$	0	$	129,500
Non-Convertible Promissory Note	$	3,033,338	$	0	$	0	$	3,033,338

Publicly Traded Portfolio Companies:
Common Stock	$	13,614,502	$	12,062,622	$	0	$	1,551,880

Total Investments	$	121,868,858	$	26,067,979	$	0	$	95,800,879

Liabilities:
Written Call Options	$	63,737	$	63,737	$	0	$	0

Total Liabilities	$	63,737	$	63,737	$	0	$	0

Significant Unobservable Inputs

The table below presents the valuation technique and quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurements of Level 3 assets. Unobservable inputs are those inputs for which little or no market data exists and, therefore, require an entity to develop its own assumptions.

Fair Value at
March 31, 2013

Valuation Techniques(s)

Unobservable Input

Range (Weighted
Average⁽¹⁾)

Preferred Stock

79,279,756

Income Approach
Market Approach

Probability of Achieving Milestones
Private Offering Price
Non-Performance Risk
Revenue Multiple
Discount for Illiquidity
Probability of Exit Outcomes

50% - 100% (N/A)

$0.14 - $4.00 ($1.30)

0% - 88% (11%)

1.25 - 2.9 (1.3)

20% - 30% (22%)

0% - 100% (50%)

Bridge Notes

5,213,314

Market Approach

Private Offering Price
Non-Performance Risk

$1.00 ($1.00)

0% - 25% (0%)

Common Stock

108,667

Market Approach

Private Offering Price
Non-Performance Risk

$9.98 - $47.51 ($11.06)

0% - 25% (0%)

Warrants

544,844

Black-Sholes-Merton Model

Stock Price
Volatility
Expected Term

$0.16 - $2.44 ($0.87)

10% - 107% (107%)

0.25 - 9.95 Years (4.06)

Rights to Milestone Payments

3,404,812

Probability Weighted
Discounted Cash Flow

Probability of Achieving Independent Milestones
Probability of Achieving Dependent Milestones

0% - 75% (N/A)
0.07% - 28.125% (N/A)

Participation Agreements

1,146,618

Income Approach

Warrant Adjusted Effective Yield
Effective Yield
Non-Performance Risk
Participation Payment Risk
Discount for Comparable Prices of High-Yield Debt

21.5% (21.5%)

0% (0%)

Subordinated
Secured Debt

129,500

Income Approach

Non-Performance Risk

0% (0%)

Senior Secured Debt

1,388,150

Income Approach

Effective Yield
Non-Performance Risk

15.8% - 26.2% (19%)

0% - 25% (8%)

Non-Convertible Promissory Note

3,033,338

Income Approach

Probability of Exit Outcomes
Private Offering Price
Non-Performance Risk

25% - 75% (50%)

$3.00 ($3.00)

50% (50%)

OTC Traded
Common Stock

1,551,880

Market Approach

Illiquidity Discount
Non-Performance Risk
Warrant Adjusted Price per Share

15.3% (15.3%)

0% (0%)

$0.47 ($0.47)

Total

95,800,879

⁽¹⁾ Weighted average based on fair value at March 31, 2013.

Valuation Methodologies and Inputs for Level 3 Assets

The following sections describe the valuation techniques and significant unobservable inputs used to measure Level 3 assets.

Preferred Stock, Bridge Notes and Common Stock

Preferred stock, bridge notes and common stock are valued by either a market or income approach using internal models with inputs, most of which are not market observable. Common inputs for valuing Level 3 preferred stock, bridge note and private common stock investments include: prices from recently executed private transactions in a company’s securities or unconditional firm offers, revenue multiples of comparable publicly traded companies, discounts for lack of marketability, rights and preferences of the class of securities we own as compared with other classes of securities the portfolio company has issued, particularly related to potential liquidity scenarios of an IPO or an acquisition transaction, and management’s best estimate of risk attributable to non-performance risk. Certain securities are valued using the present value of future cash flows. We define non-performance as the risk that the price per share (or implied valuation of a portfolio company) or the effective yield of a debt security of a portfolio company, as applicable, does not appropriately represent the risk that a portfolio company with negative cash flow will be: (a) unable to raise capital, will need to be shut down and will not return our invested capital; or (b) able to raise capital, but at a valuation significantly lower than the implied post-money valuation of the last round of financing. We assess non-performance risk for each private portfolio company quarterly. Our assessment of non-performance risk typically includes an evaluation of the financial condition and operating results of the company, the company's progress towards milestones, and the long-term potential of the business and technology of the company and how this potential may or may not affect the value of the shares owned by us. An increase to the non-performance risk or a decrease in the private offering price of a future round of financing from that of the most recent round would result in a lower fair value measurement and/or a change in the distribution of value among the classes of securities we own.

Bridge notes commonly contain terms that provide for the conversion of the full amount of principal, and sometimes interest, into shares of preferred stock at a defined price per share and/or the price per share of the next round of financing. The use of a discount for non-performance risk in the valuation of bridge notes would indicate the potential for conversion of only a portion of the principal, plus interest when applicable, into shares of preferred stock or the potential that a conversion event will not occur and that the likely outcome of a liquidation of assets would result in payment of less than the remaining principal outstanding of the note. An increase in non-performance risk would result in a lower fair value measurement.

Warrants

We use the Black-Scholes-Merton option-pricing model to determine the fair value of warrants held in our portfolio. Option pricing models, including the Black-Scholes-Merton model, require the use of subjective input assumptions, including expected volatility, expected life, expected dividend rate, and expected risk-free rate of return. In the Black-Scholes-Merton model, variations in the expected volatility or expected term assumptions have a significant impact on fair value. Because the securities underlying the warrants in our portfolio are not publicly traded, many of the required input assumptions are more difficult to estimate than they would be if a public market for the underlying securities existed.

An input to the Black-Scholes-Merton option-pricing model is the value per share of the type of stock for which the warrant is exercisable as of the date of valuation. This input is derived according to the methodologies discussed in "Preferred Stock, Bridge Notes and Common Stock."

Rights to Milestone Payments

Rights to Milestone Payments are valued using a probability-weighted discounted cash flow model. As part of Amgen Inc.’s acquisition of our former portfolio company, BioVex Group, Inc., we are entitled to potential future milestone payments based upon the achievement of certain regulatory and sales milestones. We are also entitled to future milestone payments from Laird Technologies Inc.'s acquisition of our former portfolio company, Nextreme Thermal Solutions, Inc. We assign probabilities to the achievements of the various milestones. Milestones identified as independent milestones can be achieved irrespective of the achievement of other contractual milestones. Dependent milestones are those that can only be achieved after another, or series of other, milestones are achieved. The interest rates used in these models are observable inputs from sources such as the Federal Reserve published interest rates.

Participation Agreements, Subordinated Secured Debt and Senior Secured Debt

We invest in venture debt investments through participation agreements, subordinated secured debt and senior secured debt. We value these securities using an income approach. 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. Common inputs for valuing Level 3 debt investments include: the effective yield of the debt investment or, in the case where we have received warrant coverage, the warrant-adjusted effective yield of the security, adjustments for changes in the yields of comparable publicly traded high-yield debt funds and risk-free interest rates and an assessment of non-performance risk. For those debt investments made through participation agreements, we include discounts for the risk of breach of the participation agreements. For venture debt investments, an increase in yields would result in a lower fair value measurement. Furthermore, yields would decrease, and value would increase, if the company is exceeding targets and risk has been substantially reduced from the level of risk that existed at the time of investment. Yields would increase, and values would decrease, if the company is failing to meet its targets and risk has been increased from the level of risk that existed at the time of investment.

Non-Convertible Promissory Note

We have one non-convertible promissory note, which we value using an income approach that uses a valuation technique to convert future amounts to a single present value. This security has a liquidation preference payable upon a sale of the company equal to three times the principal of the loan. While the loan has since been repaid, this liquidation preference remains outstanding as of March 31, 2013. Inputs include the preferred stock price of the portfolio company, an assessment of non-performance risk, the probability of exit outcomes between an IPO and an acquisition and the resulting impact on rights and preferences of the class of securities we own as compared with other classes of securities the portfolio company has issued.

OTC Traded Common Stock

Common stock that is thinly traded in OTC markets is valued using internal models with inputs that are not market observable. Common inputs for stock include the price per share of recent privately negotiated financing transactions, the volume-weighted price per share of the stock over a period of time, illiquidity discounts for restricted shares and an assessment of non-performance risk.

The following chart shows the components of change in the financial assets categorized as Level 3 for the three months ended March 31, 2013.

	Beginning Balance 1/1/2013		Total Realized Gains (Losses) Included in Changes in Net Assets			Transfers			Total Unrealized (Depreciation) Appreciation Included in Changes in Net Assets			Investments in Portfolio Companies, Interest on Bridge Notes, and Amortization of Loan Fees, Net		Disposals		Ending Balance 3/31/2013		Amount of Total (Depreciation) Appreciation for the Period Included in Changes in Net Assets Attributable to the Change in Unrealized Gains or Losses Relating to Assets Still Held at the Reporting Date

Preferred Stock	$	78,615,582	$	0		$	72,610		$	100,464		$	491,100	$	0	$	79,279,756	$	100,464

Bridge Notes		4,152,634		0			(77,965	)		(395,841	)		1,534,486		0		5,213,314		(395,841	)

Common Stock		108,667		(4,384,762	)		0			4,384,762			0		0		108,667		0

Warrants		586,320		0			5,355			(47,231	)		400		0		544,844		(47,231	)

Rights to Milestone Payments		3,400,734		0			0			4,078			0