UNITED STATES

SECURITIES
AND EXCHANGE COMMISSION

WASHINGTON,
D. C. 20549



Form 10-Q



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



For the quarterly period ended September 30, 2012



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



For the transition period from ____________ to _____________



Commission file number: 0-11576



|HARRIS & HARRIS GROUP, INC.                           
|------------------------------------------------------
|(Exact Name of Registrant as Specified in Its Charter)



|New York                                 | 13-3119827                          
|---------------------------------------- | ------------------------------------
|(State or Other Jurisdiction of          | (I.R.S. Employer Identification No.)
|Incorporation or Organization)           |                                     
|                                         |                                     
|1450 Broadway, New York, New York        | 10018                               
|(Address of Principal Executive Offices) | (Zip Code)                          



|(212) 582-0900                                      
|----------------------------------------------------
|(Registrant's Telephone Number, Including Area Code)



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

Yes     x                  No     £



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

Yes      ̈                  No      ̈



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



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



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

Yes      ̈                  No     x



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



|Class                                   |  | Outstanding at November 8, 2012
|--------------------------------------- |  | -------------------------------
|Common Stock, $0.01 par value per share |  | 31,000,601 shares              











Harris & Harris Group, Inc.

Form 10-Q, September 30, 2012



|                                                                                               | Page Number
|---------------------------------------------------------------------------------------------- | -----------
|                                                                                               |            
|PART I. FINANCIAL INFORMATION                                                                  |            
|                                                                                               |            
|Item 1. Consolidated Financial Statements                                                      | 1          
|                                                                                               |            
|Consolidated Statements of Assets and Liabilities                                              | 2          
|                                                                                               |            
|Consolidated Statements of Operations                                                          | 3          
|                                                                                               |            
|Consolidated Statements of Cash Flows                                                          | 4          
|                                                                                               |            
|Consolidated Statements of Changes in Net Assets                                               | 5          
|                                                                                               |            
|Consolidated Schedule of Investments                                                           | 6          
|                                                                                               |            
|Notes to Consolidated Financial Statements                                                     | 37         
|                                                                                               |            
|Financial Highlights                                                                           | 58         
|                                                                                               |            
|Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations | 59         
|                                                                                               |            
|Background                                                                                     | 59         
|                                                                                               |            
|Overview                                                                                       | 59         
|                                                                                               |            
|Investment Objective and Strategy                                                              | 60         
|                                                                                               |            
|Involvement with Portfolio Companies                                                           | 61         
|                                                                                               |            
|Investments and Current Investment Pace                                                        | 61         
|                                                                                               |            
|Our Sources of Liquid Capital                                                                  | 63         
|                                                                                               |            
|Potential Pending Liquidity Events from our Portfolio as of September 30, 2012                 | 64         
|                                                                                               |            
|Strategy for Managing Publicly Traded Positions                                                | 64         
|                                                                                               |            
|Maturity of Current Equity-Focused Venture Capital Portfolio                                   | 65         
|                                                                                               |            
|Portfolio Company Revenue                                                                      | 66         
|                                                                                               |            
|Current Business Environment                                                                   | 66         
|                                                                                               |            
|Valuation of Investments                                                                       | 67         
|                                                                                               |            
|Results of Operations                                                                          | 70         
|                                                                                               |            
|Financial Condition                                                                            | 78         
|                                                                                               |            
|Liquidity                                                                                      | 80         
|                                                                                               |            
|Borrowings                                                                                     | 81         
|                                                                                               |            
|Contractual Obligations                                                                        | 82         
|                                                                                               |            
|Critical Accounting Policies                                                                   | 82         
|                                                                                               |            
|Recent Developments – Portfolio Companies                                                      | 85         
|                                                                                               |            
|Cautionary Statement Regarding Forward-Looking Statements                                      | 86         
|                                                                                               |            
|Item 3.  Quantitative and Qualitative Disclosures About Market Risk                            | 88         
|                                                                                               |            
|Item 4.  Controls and Procedures                                                               | 90         
|                                                                                               |            
|PART II.  OTHER INFORMATION                                                                    |            
|                                                                                               |            
|Item 1A.  Risk Factors                                                                         | 91         
|                                                                                               |            
|Item 6.     Exhibits                                                                           | 91         
|                                                                                               |            
|Signatures                                                                                     | 92         
|                                                                                               |            
|Exhibit Index                                                                                  | 93         











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, 2011.



1







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



|                                                                                                                                                                   |  | September 30, 2012 |             |   | December 31, 2011 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ----------- | - | ----------------- | -
|                                                                                                                                                                   |  | (Unaudited)        |             |   |                   |  
|ASSETS                                                                                                                                                             |  |                    |             |   |                   |  
|Investments, in portfolio securities at value:                                                                                                                     |  |                    |             |   |                   |  
|Unaffiliated privately held companies (cost: $28,812,415 and $23,794,145, respectively)                                                                            |  | $                  | 29,279,753  |   |                   | $
|Unaffiliated rights to milestone payments (adjusted cost basis: $3,291,750 and $3,291,750, respectively)                                                           |  |                    | 3,400,488   |   |                   |  
|Unaffiliated publicly traded securities (cost: $11,879,859 and $12,743,787, respectively)                                                                          |  |                    | 24,903,100  |   |                   |  
|Non-controlled affiliated privately held companies (cost: $51,924,083 and $48,968,029, respectively)                                                               |  |                    | 58,722,585  |   |                   |  
|Non-controlled affiliated publicly traded companies (cost: $2,000,000 and $2,000,000, respectively)                                                                |  |                    | 1,314,667   |   |                   |  
|Controlled affiliated privately held companies (cost: $14,243,460 and $12,518,936, respectively)                                                                   |  |                    | 6,256,363   |   |                   |  
|Total, investments in private portfolio companies, rights to milestone payments and public securities at value (cost: $112,151,567 and $103,316,647, respectively) |  | $                  | 123,876,956 |   |                   | $
|Investments in U.S. Treasury obligations, at value (cost: $9,999,914 and $0, respectively)                                                                         |  |                    | 10,000,000  |   |                   |  
|Cash                                                                                                                                                               |  |                    | 16,556,886  |   |                   |  
|Restricted funds (Note 3)                                                                                                                                          |  |                    | 2,010,010   |   |                   |  
|Funds held in escrow from sales of investments, at value (Note 3)                                                                                                  |  |                    | 588,276     |   |                   |  
|Receivable from portfolio company                                                                                                                                  |  |                    | 49,288      |   |                   |  
|Receivable from unsettled trade                                                                                                                                    |  |                    | 64,185      |   |                   |  
|Interest receivable                                                                                                                                                |  |                    | 13,911      |   |                   |  
|Prepaid expenses                                                                                                                                                   |  |                    | 145,235     |   |                   |  
|Other assets                                                                                                                                                       |  |                    | 391,966     |   |                   |  
|Total assets                                                                                                                                                       |  | $                  | 153,696,713 |   |                   | $
|                                                                                                                                                                   |  |                    |             |   |                   |  
|LIABILITIES & NET ASSETS                                                                                                                                           |  |                    |             |   |                   |  
|                                                                                                                                                                   |  |                    |             |   |                   |  
|Post retirement plan liabilities                                                                                                                                   |  | $                  | 1,818,490   |   |                   | $
|Revolving loan (Note 5)                                                                                                                                            |  |                    | 2,000,000   |   |                   |  
|Accounts payable and accrued liabilities                                                                                                                           |  |                    | 972,269     |   |                   |  
|Deferred rent                                                                                                                                                      |  |                    | 377,000     |   |                   |  
|Written call options payable (premiums received:                                                                                                                   |  |                    |             |   |                   |  
|$1,011,413 and $315,000, respectively) (Note 7)                                                                                                                    |  |                    | 364,080     |   |                   |  
|Debt interest and other payable                                                                                                                                    |  |                    | 4,497       |   |                   |  
|Total liabilities                                                                                                                                                  |  |                    | 5,536,336   |   |                   |  
|                                                                                                                                                                   |  |                    |             |   |                   |  
|Net assets                                                                                                                                                         |  | $                  | 148,160,377 |   |                   | $
|                                                                                                                                                                   |  |                    |             |   |                   |  
|Net assets are comprised of:                                                                                                                                       |  |                    |             |   |                   |  
|Preferred stock, $0.10 par value, 2,000,000 shares authorized; none issued                                                                                         |  | $                  | 0           |   |                   | $
|Common stock, $0.01 par value, 45,000,000 shares authorized at 9/30/12 and 12/31/11; 32,829,341 issued at 9/30/12 and 12/31/11                                     |  |                    | 328,294     |   |                   |  
|Additional paid in capital (Note 8)                                                                                                                                |  |                    | 212,927,792 |   |                   |  
|Accumulated net operating and realized loss                                                                                                                        |  |                    | (74,062,986 | ) |                   |  
|Accumulated unrealized appreciation of investments                                                                                                                 |  |                    | 12,372,808  |   |                   |  
|Treasury stock, at cost (1,828,740 shares at 9/30/12 and 12/31/11)                                                                                                 |  |                    | (3,405,531  | ) |                   |  
|                                                                                                                                                                   |  |                    |             |   |                   |  
|Net assets                                                                                                                                                         |  | $                  | 148,160,377 |   |                   | $
|                                                                                                                                                                   |  |                    |             |   |                   |  
|Shares outstanding                                                                                                                                                 |  |                    | 31,000,601  |   |                   |  
|Net asset value per outstanding share                                                                                                                              |  | $                  | 4.78        |   |                   | $



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



2







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED STATEMENTS OF OPERATIONS
        (Unaudited)
|---------------------------------------------------------------------------------------------



|                                                                   |  | Three Months Ended Sept. 30, |            |   | Nine Months Ended Sept. 30, |  
|------------------------------------------------------------------ |  | ---------------------------- | ---------- | - | --------------------------- | -
|                                                                   |  | 2012                         |            |   | 2011                        |  
|Investment income:                                                 |  |                              |            |   |                             |  
|Interest from:                                                     |  |                              |            |   |                             |  
|Unaffiliated companies                                             |  | $                            | 64,019     |   |                             | $
|Non-controlled affiliated companies                                |  |                              | 236,695    |   |                             |  
|Controlled affiliated companies                                    |  |                              | 44,042     |   |                             |  
|Cash and U.S. Treasury obligations                                 |  |                              | 5,213      |   |                             |  
|Miscellaneous income                                               |  |                              | 46,277     |   |                             |  
|Total investment income                                            |  |                              | 396,246    |   |                             |  
|                                                                   |  |                              |            |   |                             |  
|Expenses:                                                          |  |                              |            |   |                             |  
|Salaries, benefits and stock-based compensation (Note 8)           |  |                              | 1,200,902  |   |                             |  
|Administration and operations                                      |  |                              | 212,917    |   |                             |  
|Professional fees                                                  |  |                              | 222,467    |   |                             |  
|Rent                                                               |  |                              | 105,705    |   |                             |  
|Directors’ fees and expenses                                       |  |                              | 63,015     |   |                             |  
|Custody fees                                                       |  |                              | 13,653     |   |                             |  
|Depreciation                                                       |  |                              | 15,020     |   |                             |  
|Interest and other debt expense                                    |  |                              | 12,901     |   |                             |  
|Total expenses                                                     |  |                              | 1,846,580  |   |                             |  
|                                                                   |  |                              |            |   |                             |  
|Net operating loss                                                 |  |                              | (1,450,334 | ) |                             |  
|                                                                   |  |                              |            |   |                             |  
|Net realized gain (loss):                                          |  |                              |            |   |                             |  
|Realized gain (loss) from investments:                             |  |                              |            |   |                             |  
|Unaffiliated companies                                             |  |                              | 0          |   |                             |  
|Non-Controlled affiliated companies                                |  |                              | 354        |   |                             |  
|Publicly traded companies                                          |  |                              | 2,695,339  |   |                             |  
|Written call options                                               |  |                              | 80,573     |   |                             |  
|U.S. Treasury obligations/other                                    |  |                              | (218       | ) |                             |  
|Realized gain (loss) from investments                              |  |                              | 2,776,048  |   |                             |  
|                                                                   |  |                              |            |   |                             |  
|Income tax expense (Note 9)                                        |  |                              | 7,161      |   |                             |  
|Net realized gain (loss) from investments                          |  |                              | 2,768,887  |   |                             |  
|                                                                   |  |                              |            |   |                             |  
|Net (decrease) increase in unrealized appreciation on investments: |  |                              |            |   |                             |  
|Change as a result of investment sales                             |  |                              | (3,616,482 | ) |                             |  
|Change on investments held                                         |  |                              | (2,483,303 | ) |                             |  
|Change on written call options                                     |  |                              | 1,111,515  |   |                             |  
|Net (decrease) increase in unrealized appreciation on investments  |  |                              | (4,988,270 | ) |                             |  
|                                                                   |  |                              |            |   |                             |  
|Net realized and unrealized (loss) gain on investments             |  |                              | (2,219,383 | ) |                             |  
|                                                                   |  |                              |            |   |                             |  
|Net (decrease) increase in net assets resulting from operations:   |  |                              |            |   |                             |  
|                                                                   |  |                              |            |   |                             |  
|Total                                                              |  | $                            | (3,669,717 | ) |                             | $
|                                                                   |  |                              |            |   |                             |  
|Per average basic and diluted outstanding share                    |  | $                            | (0.12      | ) |                             | $
|                                                                   |  |                              |            |   |                             |  
|Average outstanding shares - basic                                 |  |                              | 31,000,601 |   |                             |  
|                                                                   |  |                              |            |   |                             |  
|Average outstanding shares - diluted                               |  |                              | 31,000,601 |   |                             |  



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



3







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED STATEMENTS OF CASH FLOWS
        (Unaudited)
|---------------------------------------------------------------------------------------------



|                                                                                                                                      |  | Nine Months Ended  |             |   | Nine Months Ended  |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------- | - | ------------------ | -
|                                                                                                                                      |  | September 30, 2012 |             |   | September 30, 2011 |  
|                                                                                                                                      |  |                    |             |   | (Corrected)        |  
|Cash flows used in operating activities:                                                                                              |  |                    |             |   |                    |  
|Net increase (decrease) in net assets resulting from operations                                                                       |  | $                  | 4,547       |   |                    | $
|Adjustments to reconcile net increase in net assets resulting from operations to net cash (used in) provided by operating activities: |  |                    |             |   |                    |  
|Net realized (gain) loss and (increase) decrease in                                                                                   |  |                    |             |   |                    |  
|unrealized appreciation on investments                                                                                                |  |                    | (6,834,778  | ) |                    |  
|Depreciation of fixed assets, amortization of premium or                                                                              |  |                    |             |   |                    |  
|discount on U.S. government securities, and bridge note interest                                                                      |  |                    | (168,346    | ) |                    |  
|Stock-based compensation expense                                                                                                      |  |                    | 2,457,423   |   |                    |  
|Purchase of U.S. government securities                                                                                                |  |                    | (9,999,356  | ) |                    |  
|Sale of U.S. government securities                                                                                                    |  |                    | 0           |   |                    |  
|Purchase of affiliated portfolio companies                                                                                            |  |                    | (8,242,326  | ) |                    |  
|Purchase of unaffiliated portfolio companies                                                                                          |  |                    | (1,575,514  | ) |                    |  
|Principal payments received on debt investments                                                                                       |  |                    | 331,264     |   |                    |  
|Proceeds from sale of investments                                                                                                     |  |                    | 5,062,210   |   |                    |  
|Proceeds from call option premiums                                                                                                    |  |                    | 2,654,935   |   |                    |  
|Payments for call option purchases                                                                                                    |  |                    | (1,367,364  | ) |                    |  
|                                                                                                                                      |  |                    |             |   |                    |  
|Changes in assets and liabilities:                                                                                                    |  |                    |             |   |                    |  
|Restricted funds                                                                                                                      |  |                    | (497,979    | ) |                    |  
|Receivable from portfolio company                                                                                                     |  |                    | (11,957     | ) |                    |  
|Receivable from unsettled trades                                                                                                      |  |                    | (64,185     | ) |                    |  
|Interest receivable                                                                                                                   |  |                    | 165         |   |                    |  
|Income tax receivable                                                                                                                 |  |                    | 7,161       |   |                    |  
|Prepaid expenses                                                                                                                      |  |                    | 253,623     |   |                    |  
|Other assets                                                                                                                          |  |                    | (525        | ) |                    |  
|Post retirement plan liabilities                                                                                                      |  |                    | 157,532     |   |                    |  
|Accounts payable and accrued liabilities                                                                                              |  |                    | 66,458      |   |                    |  
|Deferred rent                                                                                                                         |  |                    | (1,980      | ) |                    |  
|                                                                                                                                      |  |                    |             |   |                    |  
|Net cash (used in) provided by operating activities                                                                                   |  |                    | (17,768,992 | ) |                    |  
|                                                                                                                                      |  |                    |             |   |                    |  
|Cash flows from investing activities:                                                                                                 |  |                    |             |   |                    |  
|Purchase of fixed assets                                                                                                              |  |                    | (15,516     | ) |                    |  
|Net cash used in investing activities                                                                                                 |  |                    | (15,516     | ) |                    |  
|                                                                                                                                      |  |                    |             |   |                    |  
|Cash flows from financing activities:                                                                                                 |  |                    |             |   |                    |  
|Proceeds from stock option exercises                                                                                                  |  |                    | 0           |   |                    |  
|Proceeds from drawdown of credit facility                                                                                             |  |                    | 500,000     |   |                    |  
|                                                                                                                                      |  |                    |             |   |                    |  
|Net cash provided by financing activities                                                                                             |  |                    | 500,000     |   |                    |  
|                                                                                                                                      |  |                    |             |   |                    |  
|Net increase (decrease) in cash:                                                                                                      |  |                    |             |   |                    |  
|Cash at beginning of the period                                                                                                       |  |                    | 33,841,394  |   |                    |  
|Cash at end of the period                                                                                                             |  |                    | 16,556,886  |   |                    |  
|                                                                                                                                      |  |                    |             |   |                    |  
|Net (decrease) increase in cash                                                                                                       |  | $                  | (17,284,508 | ) |                    | $
|                                                                                                                                      |  |                    |             |   |                    |  
|Supplemental disclosures of cash flow information:                                                                                    |  |                    |             |   |                    |  
|Income taxes paid                                                                                                                     |  | $                  | 8,075       |   |                    | $
|Interest paid                                                                                                                         |  | $                  | 21,158      |   |                    | $



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



4







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



|                                                                                       |  | Nine Months Ended  |             |   | Year Ended        |  
|-------------------------------------------------------------------------------------- |  | ------------------ | ----------- | - | ----------------- | -
|                                                                                       |  | September 30, 2012 |             |   | December 31, 2011 |  
|                                                                                       |  | (Unaudited)        |             |   |                   |  
|                                                                                       |  |                    |             |   |                   |  
|Changes in net assets from operations:                                                 |  |                    |             |   |                   |  
|                                                                                       |  |                    |             |   |                   |  
|Net operating loss                                                                     |  | $                  | (6,814,995  | ) |                   | $
|Net realized gain on investments                                                       |  |                    | 4,298,337   |   |                   |  
|Net (decrease) increase in unrealized appreciation on investments as a result of sales |  |                    | (4,287,361  | ) |                   |  
|Net increase in unrealized appreciation on investments held                            |  |                    | 6,281,233   |   |                   |  
|Net increase in unrealized appreciation on written call options                        |  |                    | 527,333     |   |                   |  
|                                                                                       |  |                    |             |   |                   |  
|Net increase (decrease) in net assets resulting from operations                        |  |                    | 4,547       |   |                   |  
|                                                                                       |  |                    |             |   |                   |  
|Changes in net assets from capital stock transactions:                                 |  |                    |             |   |                   |  
|                                                                                       |  |                    |             |   |                   |  
|Issuance of common stock upon the exercise of stock options                            |  |                    | 0           |   |                   |  
|Additional paid in capital on common stock issued net of offering expenses             |  |                    | 0           |   |                   |  
|Stock-based compensation expense                                                       |  |                    | 2,457,423   |   |                   |  
|                                                                                       |  |                    |             |   |                   |  
|Net increase in net assets resultingfrom capital stock transactions                    |  |                    | 2,457,423   |   |                   |  
|                                                                                       |  |                    |             |   |                   |  
|Net increase (decrease) in net assets                                                  |  |                    | 2,461,970   |   |                   |  
|                                                                                       |  |                    |             |   |                   |  
|Net Assets:                                                                            |  |                    |             |   |                   |  
|                                                                                       |  |                    |             |   |                   |  
|Beginning of the period                                                                |  |                    | 145,698,407 |   |                   |  
|                                                                                       |  |                    |             |   |                   |  
|End of the period                                                                      |  | $                  | 148,160,377 |   |                   | $



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



5







|HARRIS & HARRIS GROUP,
        INC.
        CONSOLIDATED
        SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2012
        (Unaudited)
|-------------------------------------------------------------------------------------------------------------------------------------



|                                                                          |  |  | Method of     |  |  |  |              |  |  |      |           | Shares/ |           |   |           |      
|------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------ |  |  | ---- | --------- | ------- | --------- | - | --------- | -----
|                                                                          |  |  | Valuation (1) |  |  |  | Industry (2) |  |  | Cost |           |         | Principal |   |           | Value
|                                                                          |  |  |               |  |  |  |              |  |  |      |           |         |           |   |          
|Investments in Unaffiliated Companies (3) – 38.9% of net assets at value  |  |  |               |  |  |  |              |  |  |      |           |         |           |   |          
|                                                                          |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Private Placement Portfolio (Illiquid) (4) – 19.8% 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 |      
|Series C Convertible Preferred Stock                                      |  |  | (M)           |  |  |  |              |  |  |      | 1,352,196 |         |           |   | 2,130,699 |      
|Series D Convertible Preferred Stock                                      |  |  | (M)           |  |  |  |              |  |  |      | 1,371,622 |         |           |   | 999,999   |      
|Series E Convertible Preferred Stock                                      |  |  | (M)           |  |  |  |              |  |  |      | 672,599   |         |           |   | 440,334   |      
|Series E-1 Convertible Preferred Stock                                    |  |  | (M)           |  |  |  |              |  |  |      | 534,482   |         |           |   | 399,579   |      
|Warrants for Series C Convertible Preferred Stock expiring 12/31/14       |  |  | ( I )         |  |  |  |              |  |  |      | 168,270   |         |           |   | 163,900   |      
|Warrants for Series D Convertible Preferred Stock expiring 8/26/14        |  |  | ( I )         |  |  |  |              |  |  |      | 88,531    |         |           |   | 124,999   |      
|Warrants for Series D Convertible Preferred Stock expiring 3/10/15        |  |  | ( I )         |  |  |  |              |  |  |      | 40,012    |         |           |   | 41,666    |      
|Warrants for Series E Convertible Preferred Stock expiring 12/31/17       |  |  | ( I )         |  |  |  |              |  |  |      | 93,969    |         |           |   | 170,823   |      
|Warrants for Common Stock expiring 6/1/16                                 |  |  | ( I )         |  |  |  |              |  |  |      | 72,668    |         |           |   | 132,100   |      
|Warrant for Common Stock expiring 10/21/18                                |  |  | ( I )         |  |  |  |              |  |  |      | 18,816    |         |           |   | 84,846    |      
|                                                                          |  |  |               |  |  |  |              |  |  |      | 5,413,165 |         |           |   |           |      
|                                                                          |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|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 |      
|Series C Convertible Preferred Stock                                      |  |  | (M)           |  |  |  |              |  |  |      | 1,300,000 |         |           |   | 1,300,000 |      
|Series D Convertible Preferred Stock                                      |  |  | (M)           |  |  |  |              |  |  |      | 515,756   |         |           |   | 515,756   |      
|Series D-2 Convertible Preferred Stock                                    |  |  | (M)           |  |  |  |              |  |  |      | 92,400    |         |           |   | 92,400    |      
|Series D-4 Convertible Preferred Stock                                    |  |  | (M)           |  |  |  |              |  |  |      | 216,168   |         |           |   | 216,168   |      
|                                                                          |  |  |               |  |  |  |              |  |  |      | 3,418,349 |         |           |   |           |      
|                                                                          |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|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   |      
|Series D-1 Convertible Preferred Stock                                    |  |  | (M)           |  |  |  |              |  |  |      | 122,070   |         |           |   | 48,828    |      
|Secured Convertible Bridge Note, 10%, acquired 5/25/12                    |  |  | (M)           |  |  |  |              |  |  |      | 46,691    |         |           | $ | 45,097    |      
|                                                                          |  |  |               |  |  |  |              |  |  |      | 918,759   |         |           |   |           |      



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



6







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF SEPTEMBER 30, 2012
        (Unaudited)
|-----------------------------------------------------------------------------------------------------------------------------



|                                                                                       |  |  | Method of     |  |  |  |              |  |  |      |           | Shares/ |           |   |           |      
|-------------------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------ |  |  | ---- | --------- | ------- | --------- | - | --------- | -----
|                                                                                       |  |  | Valuation (1) |  |  |  | Industry (2) |  |  | Cost |           |         | Principal |   |           | Value
|                                                                                       |  |  |               |  |  |  |              |  |  |      |           |         |           |   |          
|Investments in Unaffiliated Companies (3) – 38.9% of net assets at value (Cont.)       |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|                                                                                       |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Private Placement Portfolio (Illiquid) (4) – 19.8% of net assets at value (Cont.)      |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|                                                                                       |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Ensemble Therapeutics Corporation (7)(9)(12)                                           |  |  |               |  |  |  | Healthcare   |  |  |      |           |         |           |   |           |      
|Developing DNA-Programmed ChemistryTM for the discovery of new classes of therapeutics |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Series B Convertible Preferred Stock                                                   |  |  | (M)           |  |  |  |              |  |  | $    | 2,000,000 |         |           |   | 1,449,275 |      
|Secured Convertible Bridge Note, 8%, acquired 9/11/08                                  |  |  | (M)           |  |  |  |              |  |  |      | 331,505   |         |           | $ | 250,211   |      
|Secured Convertible Bridge Note, 8%, acquired 12/10/09                                 |  |  | (M)           |  |  |  |              |  |  |      | 59,872    |         |           | $ | 48,868    |      
|Secured Convertible Bridge Note, 8%, acquired 1/25/12                                  |  |  | (M)           |  |  |  |              |  |  |      | 115,428   |         |           | $ | 109,400   |      
|                                                                                       |  |  |               |  |  |  |              |  |  |      | 2,506,805 |         |           |   |           |      
|                                                                                       |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|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 11/30/12                                      |  |  | ( I )         |  |  |  |              |  |  |      | 314,769   |         |           | $ | 406,851   |      
|Warrants for Series A Pref. Stock expiring on 9/17/17                                  |  |  | ( I )         |  |  |  |              |  |  |      | 66,684    |         |           |   | 100,000   |      
|Warrants for Series A-1 Pref. Stock expiring on 6/30/18                                |  |  | ( I )         |  |  |  |              |  |  |      | 23,566    |         |           |   | 34,500    |      
|Loan and Security Agreement with GEO Semiconductor relating to the following assets:   |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Subordinated secured debt, 15.75%, maturing on 11/30/12                                |  |  | ( I )         |  |  |  |              |  |  |      | 108,587   |         |           | $ | 125,000   |      
|Warrants for Series A Pref. Stock expiring on 3/1/18                                   |  |  | ( I )         |  |  |  |              |  |  |      | 7,512     |         |           |   | 10,000    |      
|Warrants for Series A-1 Pref. Stock expiring on 6/29/18                                |  |  | ( I )         |  |  |  |              |  |  |      | 7,546     |         |           |   | 10,000    |      
|                                                                                       |  |  |               |  |  |  |              |  |  |      | 528,664   |         |           |   |           |      
|                                                                                       |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Mersana Therapeutics, Inc. (7)(9)(14)                                                  |  |  |               |  |  |  | Healthcare   |  |  |      |           |         |           |   |           |      
|Developing treatments for cancer based on novel drug delivery polymers                 |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Series A-1 Convertible Preferred Stock                                                 |  |  | (M)           |  |  |  |              |  |  |      | 316,453   |         |           |   | 294,019   |      
|Common Stock                                                                           |  |  | (M)           |  |  |  |              |  |  |      | 3,875,395 |         |           |   | 350,539   |      
|                                                                                       |  |  |               |  |  |  |              |  |  |      | 4,191,848 |         |           |   |           |      
|                                                                                       |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Molecular Imprints, Inc. (7)(15)                                                       |  |  |               |  |  |  | Electronics  |  |  |      |           |         |           |   |           |      
|Manufacturing nanoimprint lithography capital equipment                                |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Series B Convertible Preferred Stock                                                   |  |  | (M)           |  |  |  |              |  |  |      | 2,000,000 |         |           |   | 1,333,333 |      
|Series C Convertible Preferred Stock                                                   |  |  | (M)           |  |  |  |              |  |  |      | 2,406,595 |         |           |   | 1,285,071 |      
|Non-Convertible Bridge Note                                                            |  |  | ( I )         |  |  |  |              |  |  |      | 0         |         |           | $ | 0         |      
|                                                                                       |  |  |               |  |  |  |              |  |  |      | 4,406,595 |         |           |   |           |      



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



7







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF SEPTEMBER 30, 2012
        (Unaudited)
|-----------------------------------------------------------------------------------------------------------------------------



|                                                                                                                            |  |  | Method of     |  |  |  |              |  |  |      |           | Shares/ |           |   |           |      
|--------------------------------------------------------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------ |  |  | ---- | --------- | ------- | --------- | - | --------- | -----
|                                                                                                                            |  |  | Valuation (1) |  |  |  | Industry (2) |  |  | Cost |           |         | Principal |   |           | Value
|                                                                                                                            |  |  |               |  |  |  |              |  |  |      |           |         |           |   |          
|Investments in Unaffiliated Companies (3) – 38.9% of net assets at value (Cont.)                                            |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|                                                                                                                            |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Private Placement Portfolio (Illiquid) (4) – 19.8% of net assets at value (Cont.)                                           |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|                                                                                                                            |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Nanosys, Inc. (7)                                                                                                           |  |  |               |  |  |  | Energy       |  |  |      |           |         |           |   |           |      
|Developing inorganic nanowires and quantum dots for use in batteries and LED-backlit devices                                |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Series C Convertible Preferred Stock                                                                                        |  |  | (M)           |  |  |  |              |  |  | $    | 1,500,000 |         |           |   | 803,428   |      
|Series D Convertible Preferred Stock                                                                                        |  |  | (M)           |  |  |  |              |  |  |      | 3,000,003 |         |           |   | 1,016,950 |      
|Series E Convertible Preferred Stock                                                                                        |  |  | (M)           |  |  |  |              |  |  |      | 496,573   |         |           |   | 433,688   |      
|Unsecured Convertible Bridge Note, 4%, acquired 7/16/12                                                                     |  |  | (M)           |  |  |  |              |  |  |      | 44,191    |         |           | $ | 43,821    |      
|                                                                                                                            |  |  |               |  |  |  |              |  |  |      | 5,040,767 |         |           |   |           |      
|                                                                                                                            |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|NanoTerra, Inc. (9)                                                                                                         |  |  |               |  |  |  | Energy       |  |  |      |           |         |           |   |           |      
|Developing surface chemistry and nano- manufacturing solutions                                                              |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Senior secured debt, 12.0%, maturing on 2/22/14                                                                             |  |  | ( I )         |  |  |  |              |  |  |      | 201,796   |         |           | $ | 258,445   |      
|Senior secured debt, 12.0%, maturing on 2/22/13                                                                             |  |  | ( I )         |  |  |  |              |  |  |      | 44,597    |         |           | $ | 57,117    |      
|Warrants for Series A-2 Pref. Stock expiring on 2/22/21                                                                     |  |  | ( I )         |  |  |  |              |  |  |      | 69,168    |         |           |   | 446,248   |      
|                                                                                                                            |  |  |               |  |  |  |              |  |  |      | 315,561   |         |           |   |           |      
|                                                                                                                            |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|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   |      
|Series B Convertible Preferred Stock                                                                                        |  |  | (M)           |  |  |  |              |  |  |      | 323,000   |         |           |   | 207,051   |      
|Series C Convertible Preferred Stock                                                                                        |  |  | (M)           |  |  |  |              |  |  |      | 571,329   |         |           |   | 188,315   |      
|                                                                                                                            |  |  |               |  |  |  |              |  |  |      | 1,384,328 |         |           |   |           |      
|                                                                                                                            |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|OHSO Clean, Inc. (16)(17)                                                                                                   |  |  |               |  |  |  | Healthcare   |  |  |      |           |         |           |   |           |      
|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 9/30/14                                                                            |  |  | ( I )         |  |  |  |              |  |  |      | 595,832   |         |           | $ | 697,920   |      
|Warrants for Series C Pref. Stock expiring on 3/30/22                                                                       |  |  | ( I )         |  |  |  |              |  |  |      | 91,742    |         |           |   | 1,109,333 |      
|                                                                                                                            |  |  |               |  |  |  |              |  |  |      | 687,574   |         |           |   |           |      
|                                                                                                                            |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Total Unaffiliated Private Placement Portfolio (cost: $28,812,415)                                                          |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      



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



8







|HARRIS & HARRIS GROUP,
        INC.
        CONSOLIDATED
        SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2012
        (Unaudited)
|-------------------------------------------------------------------------------------------------------------------------------------



|                                                                                                   |  |  | Method of     |  |  |  |              |  |  |      |           | Shares/ |           |   |           |      
|-------------------------------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------ |  |  | ---- | --------- | ------- | --------- | - | --------- | -----
|                                                                                                   |  |  | Valuation (1) |  |  |  | Industry (2) |  |  | Cost |           |         | Principal |   |           | Value
|                                                                                                   |  |  |               |  |  |  |              |  |  |      |           |         |           |   |          
|Rights to Milestone Payments (Illiquid) (5) – 2.3% of net assets at value                          |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|                                                                                                   |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Amgen, Inc. (7)(10)                                                                                |  |  |               |  |  |  | Healthcare   |  |  |      |           |         |           |   |           |      
|Rights to Milestone Payments from Acquisition of BioVex Group, Inc.                                |  |  | ( I )         |  |  |  |              |  |  | $    | 3,291,750 |         |           | $ | 3,291,750 |      
|                                                                                                   |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Total Unaffiliated Rights to Milestone Payments (cost: $3,291,750)                                 |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|                                                                                                   |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Publicly Traded Portfolio (6) – 16.8% of net assets at value                                       |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|                                                                                                   |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|NeoPhotonics Corporation (10)(18)                                                                  |  |  |               |  |  |  | Electronics  |  |  |      |           |         |           |   |           |      
|Developing and manufacturing optical devices and components                                        |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Common Stock                                                                                       |  |  | (M)           |  |  |  |              |  |  | $    | 7,299,590 |         |           |   | 450,907   |      
|                                                                                                   |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Solazyme, Inc. (10)(19)                                                                            |  |  |               |  |  |  | Energy       |  |  |      |           |         |           |   |           |      
|Developing algal biodiesel, industrial chemicals and specialty ingredients using synthetic biology |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Common Stock                                                                                       |  |  | (M)           |  |  |  |              |  |  |      | 4,580,269 |         |           |   | 1,938,190 |      
|                                                                                                   |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Total Unaffiliated Publicly Traded Portfolio (cost: $11,879,859)                                   |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|                                                                                                   |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Total Investments in Unaffiliated Companies (cost: $43,984,024)                                    |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      



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



9







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF SEPTEMBER 30, 2012
        (Unaudited)
|-----------------------------------------------------------------------------------------------------------------------------



|                                                                                      |  |  | Method of     |  |  |  |              |  |  |      |           | Shares/ |           |  |           |      
|------------------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------ |  |  | ---- | --------- | ------- | --------- |  | --------- | -----
|                                                                                      |  |  | Valuation (1) |  |  |  | Industry (2) |  |  | Cost |           |         | Principal |  |           | Value
|                                                                                      |  |  |               |  |  |  |              |  |  |      |           |         |           |  |          
|Investments in Non-Controlled Affiliated Companies (3) – 40.5% of net assets at value |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|                                                                                      |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|Private Placement Portfolio (Illiquid) (20) – 39.6% of net assets at value            |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|                                                                                      |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|ABSMaterials, Inc. (7)(9)(10)                                                         |  |  |               |  |  |  | Energy       |  |  |      |           |         |           |  |           |      
|Developing nano-structured absorbent materials for environmental remediation          |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|Series A Convertible Preferred Stock                                                  |  |  | (M)           |  |  |  |              |  |  | $    | 435,000   |         |           |  | 390,000   |      
|                                                                                      |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|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 |      
|Series B Convertible Preferred Stock                                                  |  |  | (M)           |  |  |  |              |  |  |      | 2,200,000 |         |           |  | 5,952,381 |      
|Series C Convertible Preferred Stock                                                  |  |  | (M)           |  |  |  |              |  |  |      | 1,485,531 |         |           |  | 2,122,187 |      
|Series D Convertible Preferred Stock                                                  |  |  | (M)           |  |  |  |              |  |  |      | 1,393,147 |         |           |  | 1,466,470 |      
|                                                                                      |  |  |               |  |  |  |              |  |  |      | 7,278,678 |         |           |  |           |      
|                                                                                      |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|Contour Energy Systems, Inc. (7)(9)(10)                                               |  |  |               |  |  |  | Energy       |  |  |      |           |         |           |  |           |      
|Developing batteries using nanostructured materials                                   |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|Series A Convertible Preferred Stock                                                  |  |  | (M)           |  |  |  |              |  |  |      | 2,009,995 |         |           |  | 2,565,798 |      
|Series B Convertible Preferred Stock                                                  |  |  | (M)           |  |  |  |              |  |  |      | 1,300,000 |         |           |  | 812,500   |      
|Series C Convertible Preferred Stock                                                  |  |  | (M)           |  |  |  |              |  |  |      | 1,200,000 |         |           |  | 1,148,325 |      
|                                                                                      |  |  |               |  |  |  |              |  |  |      | 4,509,995 |         |           |  |           |      
|                                                                                      |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|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 |      
|Series 1 Class C Convertible Preferred Stock                                          |  |  | (M)           |  |  |  |              |  |  |      | 487,804   |         |           |  | 450,450   |      
|Series 1 Class D Convertible Preferred Stock                                          |  |  | (M)           |  |  |  |              |  |  |      | 748,473   |         |           |  | 855,131   |      
|Series 1 Class E Convertible Preferred Stock                                          |  |  | (M)           |  |  |  |              |  |  |      | 248,049   |         |           |  | 269,280   |      
|Series 1 Class F Convertible Preferred Stock                                          |  |  | (M)           |  |  |  |              |  |  |      | 238,323   |         |           |  | 258,721   |      
|Series 2 Class D Convertible Preferred Stock                                          |  |  | (M)           |  |  |  |              |  |  |      | 736,019   |         |           |  | 678,264   |      
|Series 2 Class E Convertible Preferred Stock                                          |  |  | (M)           |  |  |  |              |  |  |      | 409,032   |         |           |  | 317,746   |      
|Series 2 Class F Convertible Preferred Stock                                          |  |  | (M)           |  |  |  |              |  |  |      | 392,993   |         |           |  | 305,286   |      
|Warrants for Common Stock expiring 6/30/15                                            |  |  | ( I )         |  |  |  |              |  |  |      | 98,644    |         |           |  | 153,890   |      
|                                                                                      |  |  |               |  |  |  |              |  |  |      | 4,361,411 |         |           |  |           |      



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



10







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF SEPTEMBER 30, 2012
        (Unaudited)
|-----------------------------------------------------------------------------------------------------------------------------



|                                                                                                                 |  |  | Method of     |  |  |  |              |  |  |      |           | Shares/ |           |  |           |      
|---------------------------------------------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------ |  |  | ---- | --------- | ------- | --------- |  | --------- | -----
|                                                                                                                 |  |  | Valuation (1) |  |  |  | Industry (2) |  |  | Cost |           |         | Principal |  |           | Value
|                                                                                                                 |  |  |               |  |  |  |              |  |  |      |           |         |           |  |          
|Investments in Non-Controlled Affiliated Companies (3) – 40.5% of net assets at value (Cont.)                    |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|                                                                                                                 |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|Private Placement Portfolio (Illiquid) (20) – 39.6% of net assets at value (Cont.)                               |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|                                                                                                                 |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|Enumeral Biomedical Corp. (7)(9)(10)                                                                             |  |  |               |  |  |  | Healthcare   |  |  |      |           |         |           |  |           |      
|Developing therapeutics and diagnostics through functional assaying of single cells                              |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|Series A Convertible Preferred Stock                                                                             |  |  | (M)           |  |  |  |              |  |  | $    | 1,026,832 |         |           |  | 957,038   |      
|Series A-1 Convertible Preferred Stock                                                                           |  |  | (M)           |  |  |  |              |  |  |      | 750,000   |         |           |  | 576,923   |      
|                                                                                                                 |  |  |               |  |  |  |              |  |  |      | 1,776,832 |         |           |  |           |      
|                                                                                                                 |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|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 |      
|Series B Convertible Preferred Stock                                                                             |  |  | (M)           |  |  |  |              |  |  |      | 1,000,000 |         |           |  | 3,947,888 |      
|                                                                                                                 |  |  |               |  |  |  |              |  |  |      | 1,666,667 |         |           |  |           |      
|                                                                                                                 |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|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 |      
|Series B' Convertible Preferred Stock                                                                            |  |  | (M)           |  |  |  |              |  |  |      | 2,006,540 |         |           |  | 3,015,493 |      
|                                                                                                                 |  |  |               |  |  |  |              |  |  |      | 7,249,533 |         |           |  |           |      
|                                                                                                                 |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|Metabolon, Inc. (7)(10)                                                                                          |  |  |               |  |  |  | Healthcare   |  |  |      |           |         |           |  |           |      
|Developing service and diagnostic products through the use of a metabolomics, or biochemical, profiling platform |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|Series B Convertible Preferred Stock                                                                             |  |  | (M)           |  |  |  |              |  |  |      | 2,500,000 |         |           |  | 371,739   |      
|Series B-1 Convertible Preferred Stock                                                                           |  |  | (M)           |  |  |  |              |  |  |      | 706,214   |         |           |  | 148,696   |      
|Series C Convertible Preferred Stock                                                                             |  |  | (M)           |  |  |  |              |  |  |      | 1,000,000 |         |           |  | 1,000,000 |      
|Series D Convertible Preferred Stock                                                                             |  |  | (M)           |  |  |  |              |  |  |      | 1,499,999 |         |           |  | 835,882   |      
|Warrants for Series B-1 Convertible Preferred                                                                    |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|Stock expiring 3/25/15                                                                                           |  |  | ( I )         |  |  |  |              |  |  |      | 293,786   |         |           |  | 74,348    |      
|                                                                                                                 |  |  |               |  |  |  |              |  |  |      | 5,999,999 |         |           |  |           |      



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



11







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF SEPTEMBER 30, 2012
        (Unaudited)
|-----------------------------------------------------------------------------------------------------------------------------



|                                                                                                                                |  |  | Method of     |  |  |  |              |  |  |      |           | Shares/ |           |  |           |      
|------------------------------------------------------------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------ |  |  | ---- | --------- | ------- | --------- |  | --------- | -----
|                                                                                                                                |  |  | Valuation (1) |  |  |  | Industry (2) |  |  | Cost |           |         | Principal |  |           | Value
|                                                                                                                                |  |  |               |  |  |  |              |  |  |      |           |         |           |  |          
|Investments in Non-Controlled Affiliated Companies (3) – 40.5% of net assets at value (Cont.)                                   |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|                                                                                                                                |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|Private Placement Portfolio (Illiquid) (20) – 39.6% of net assets at value (Cont.)                                              |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|                                                                                                                                |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|Nextreme Thermal Solutions, Inc. (7)(9)(10)                                                                                     |  |  |               |  |  |  | Energy       |  |  |      |           |         |           |  |           |      
|Developing thin-film thermoelectric devices for cooling and energy conversion                                                   |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|Common Stock                                                                                                                    |  |  | (M)           |  |  |  |              |  |  | $    | 4,384,762 |         |           |  | 8,080,153 |      
|                                                                                                                                |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|OpGen, Inc. (7)(10)(16)                                                                                                         |  |  |               |  |  |  | Healthcare   |  |  |      |           |         |           |  |           |      
|Developing tools for genomic sequence assembly and analysis                                                                     |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|Series C Convertible Preferred Stock                                                                                            |  |  | (M)           |  |  |  |              |  |  |      | 815,000   |         |           |  | 5,905,797 |      
|                                                                                                                                |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|Produced Water Absorbents, Inc. (7)(9)(10)                                                                                      |  |  |               |  |  |  | Energy       |  |  |      |           |         |           |  |           |      
|Developing nano-stuctured 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 |      
|                                                                                                                                |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|Senova Systems, Inc. (7)(9)(10)                                                                                                 |  |  |               |  |  |  | Healthcare   |  |  |      |           |         |           |  |           |      
|Developing next-generation sensors to measure pH                                                                                |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|Series B Convertible Preferred Stock                                                                                            |  |  | (M)           |  |  |  |              |  |  |      | 1,218,462 |         |           |  | 1,350,000 |      
|Warrants for Series B Preferred Stock expiring 7/18/17                                                                          |  |  | ( I )         |  |  |  |              |  |  |      | 131,538   |         |           |  | 164,423   |      
|                                                                                                                                |  |  |               |  |  |  |              |  |  |      | 1,350,000 |         |           |  |           |      
|                                                                                                                                |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|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   |      
|Series A-1 Convertible Preferred Stock                                                                                          |  |  | (M)           |  |  |  |              |  |  |      | 890,000   |         |           |  | 2,966,667 |      
|Series A-2 Convertible Preferred Stock                                                                                          |  |  | (M)           |  |  |  |              |  |  |      | 2,445,000 |         |           |  | 4,207,537 |      
|Series B-1 Convertible Preferred Stock                                                                                          |  |  | (M)           |  |  |  |              |  |  |      | 1,169,561 |         |           |  | 1,892,836 |      
|Series C Convertible Preferred Stock                                                                                            |  |  | (M)           |  |  |  |              |  |  |      | 1,171,316 |         |           |  | 1,674,030 |      
|Warrants for Series B-1 Convertible Preferred                                                                                   |  |  |               |  |  |  |              |  |  |      |           |         |           |  |           |      
|Stock expiring 2/23/17                                                                                                          |  |  | ( I )         |  |  |  |              |  |  |      | 130,439   |         |           |  | 247,350   |      
|Warrants for Common Stock expiring 3/28/17                                                                                      |  |  | ( I )         |  |  |  |              |  |  |      | 84,207    |         |           |  | 418,507   |      
|                                                                                                                                |  |  |               |  |  |  |              |  |  |      | 6,640,523 |         |           |  |           |      



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



12







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF SEPTEMBER 30, 2012
        (Unaudited)
|-----------------------------------------------------------------------------------------------------------------------------



|                                                                                                                  |  |  | Method of     |  |  |  |              |  |  |      |           | Shares/ |           |   |           |      
|----------------------------------------------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------ |  |  | ---- | --------- | ------- | --------- | - | --------- | -----
|                                                                                                                  |  |  | Valuation (1) |  |  |  | Industry (2) |  |  | Cost |           |         | Principal |   |           | Value
|                                                                                                                  |  |  |               |  |  |  |              |  |  |      |           |         |           |   |          
|Investments in Non-Controlled Affiliated Companies (3) – 40.5% of net assets at value (Cont.)                     |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|                                                                                                                  |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Private Placement Portfolio (Illiquid) (20) – 39.6% of net assets at value (Cont.)                                |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|                                                                                                                  |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Ultora, Inc. (7)(9)                                                                                               |  |  |               |  |  |  | Energy       |  |  |      |           |         |           |   |           |      
|Developing energy-storage devices enabled by carbon nanotubes                                                     |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Series A Convertible Preferred Stock                                                                              |  |  | (M)           |  |  |  |              |  |  | $    | 282,821   |         |           |   | 282,821   |      
|Secured Convertible Bridge Note, 3%, acquired 7/12/12                                                             |  |  | (M)           |  |  |  |              |  |  |      | 65,082    |         |           | $ | 64,652    |      
|Secured Convertible Bridge Note, 3%, acquired 9/28/12                                                             |  |  | (M)           |  |  |  |              |  |  |      | 107,780   |         |           | $ | 107,753   |      
|                                                                                                                  |  |  |               |  |  |  |              |  |  |      | 455,683   |         |           |   |           |      
|                                                                                                                  |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|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 |      
|                                                                                                                  |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Total Non-Controlled Private Placement Portfolio (cost: $51,924,083)                                              |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      



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



13







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF SEPTEMBER 30, 2012
        (Unaudited)
|-----------------------------------------------------------------------------------------------------------------------------



|                                                                                              |  |  | Method of     |  |  |  |              |  |  |      |           | Shares/ |           |   |           |      
|--------------------------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------ |  |  | ---- | --------- | ------- | --------- | - | --------- | -----
|                                                                                              |  |  | Valuation (1) |  |  |  | Industry (2) |  |  | Cost |           |         | Principal |   |           | Value
|                                                                                              |  |  |               |  |  |  |              |  |  |      |           |         |           |   |          
|Investments in Non-Controlled Affiliated Companies (3) – 40.5% of net assets at value (Cont.) |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|                                                                                              |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Publicly Traded Portfolio (Illiquid) (22) – 0.09% of net assets at value                      |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|                                                                                              |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Champions Oncology, Inc. (10)                                                                 |  |  |               |  |  |  | Healthcare   |  |  |      |           |         |           |   |           |      
|Developing its TumorGraftTM platform for personalized medicine and drug development           |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Common Stock                                                                                  |  |  | (M)           |  |  |  |              |  |  | $    | 2,000,000 |         |           |   | 2,666,667 |      
|                                                                                              |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Total Non-Controlled Affiliated Publicly Traded Portfolio (cost: $2,000,000)                  |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|                                                                                              |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Total Investments in Non-Controlled Affiliated Companies (cost: $53,924,083)                  |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|                                                                                              |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|                                                                                              |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Investments in Controlled Affiliated Companies (3)(23) – 4.2% of net assets at value          |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|                                                                                              |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Private Placement Portfolio (Illiquid) – 4.2% of net assets at value                          |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|                                                                                              |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Ancora Pharmaceuticals Inc. (7)(9)                                                            |  |  |               |  |  |  | Healthcare   |  |  |      |           |         |           |   |           |      
|Developing synthetic carbohydrates for pharmaceutical applications                            |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           |      
|Common Stock                                                                                  |  |  | (M)           |  |  |  |              |  |  | $    | 2,729,817 |         |           |   | 57,463    |      
|Series A' Convertible Preferred Stock                                                         |  |  | (M)           |  |  |  |              |  |  |      | 4,855,627 |         |           |   | 4,855,627 |      
|Senior Secured Debt, 12.00%, maturing on 12/11/12                                             |  |  | ( I )         |  |  |  |              |  |  |      | 486,635   |         |           | $ | 500,000   |      
|                                                                                              |  |  |               |  |  |  |              |  |  |      | 8,072,079 |         |           |   |           |      



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



14







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF SEPTEMBER 30, 2012
        (Unaudited)
|-----------------------------------------------------------------------------------------------------------------------------



|                                                                                               |  |  | Method of     |  |  |  |              |  |  |      |           | Shares/ |           |   |            |      
|---------------------------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------ |  |  | ---- | --------- | ------- | --------- | - | ---------- | -----
|                                                                                               |  |  | Valuation (1) |  |  |  | Industry (2) |  |  | Cost |           |         | Principal |   |            | Value
|                                                                                               |  |  |               |  |  |  |              |  |  |      |           |         |           |   |           
|Investments in Controlled Affiliated Companies (3)(23) – 4.2% of net assets at value (Cont.)   |  |  |               |  |  |  |              |  |  |      |           |         |           |   |            |      
|                                                                                               |  |  |               |  |  |  |              |  |  |      |           |         |           |   |            |      
|Private Placement Portfolio (Illiquid) – 4.2% 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  |      
|Series B Convertible Preferred Stock                                                           |  |  | (M)           |  |  |  |              |  |  |      | 3,095,802 |         |           |   | 13,571,848 |      
|Secured Convertible Bridge Note, 12%, acquired 10/7/11                                         |  |  | (M)           |  |  |  |              |  |  |      | 223,671   |         |           | $ | 200,000    |      
|Secured Convertible Bridge Note, 12%, acquired 11/17/11                                        |  |  | (M)           |  |  |  |              |  |  |      | 105,684   |         |           | $ | 95,652     |      
|Secured Convertible Bridge Note, 12%, acquired 12/21/11                                        |  |  | (M)           |  |  |  |              |  |  |      | 90,349    |         |           | $ | 82,609     |      
|Secured Convertible Bridge Note, 12%, acquired 3/5/12                                          |  |  | (M)           |  |  |  |              |  |  |      | 464,802   |         |           | $ | 434,784    |      
|Secured Convertible Bridge Note, 12%, acquired 7/26/12                                         |  |  | (M)           |  |  |  |              |  |  |      | 191,073   |         |           | $ | 186,955    |      
|                                                                                               |  |  |               |  |  |  |              |  |  |      | 6,171,381 |         |           |   |            |      
|                                                                                               |  |  |               |  |  |  |              |  |  |      |           |         |           |   |            |      
|Total Controlled Private Placement Portfolio (cost: $14,243,460)                               |  |  |               |  |  |  |              |  |  |      |           |         |           |   |            |      
|                                                                                               |  |  |               |  |  |  |              |  |  |      |           |         |           |   |            |      
|Total Investments in Controlled Affiliated Companies (cost: $14,243,460)                       |  |  |               |  |  |  |              |  |  |      |           |         |           |   |            |      
|                                                                                               |  |  |               |  |  |  |              |  |  |      |           |         |           |   |            |      
|Total Private Placement and Publicly Traded Portfolio (cost: $112,151,567)                     |  |  |               |  |  |  |              |  |  |      |           |         |           |   |            |      



|                                                                   |  |  | Method of     |  |  |      |           |  | Shares/   |   |            |       | 
|------------------------------------------------------------------ |  |  | ------------- |  |  | ---- | --------- |  | --------- | - | ---------- | ----- | 
|                                                                   |  |  | Valuation (1) |  |  | Cost |           |  | Principal |   |            | Value | 
|                                                                   |  |  |               |  |  |      |           |  |           |   |            |      
|U.S. Government Securities (24) – 6.7% of net assets at value      |  |  |               |  |  |      |           |  |           |   |            |       | 
|                                                                   |  |  |               |  |  |      |           |  |           |   |            |       | 
|U.S. Treasury Bill — due date 10/04/12                             |  |  | (M)           |  |  | $    | 9,999,914 |  |           | $ | 10,000,000 |       | 
|                                                                   |  |  |               |  |  |      |           |  |           |   |            |       | 
|Total Investments in U.S. Government Securities (cost: $9,999,914) |  |  |               |  |  |      |           |  |           |   |            |       | 
|                                                                   |  |  |               |  |  |      |           |  |           |   |            |       | 
|Total Investments (cost: $122,151,481)                             |  |  |               |  |  |      |           |  |           |   |            |       | 



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



15







|HARRIS & HARRIS GROUP,
        INC.
        CONSOLIDATED SCHEDULE OF
        INVESTMENTS AS OF SEPTEMBER 30, 2012
        (Unaudited)
|-------------------------------------------------------------------------------------------------------------------------------------



|                                                                 |  |  | Method of     |  |  | Number of |       |  |       |  
|---------------------------------------------------------------- |  |  | ------------- |  |  | --------- | ----- |  | ----- | -
|                                                                 |  |  | Valuation (1) |  |  | Contracts |       |  | Value |  
|Written Call Options (16)(25) – (0.25)% of net assets at value   |  |  |               |  |  |           |       |  |       |  
|                                                                 |  |  |               |  |  |           |       |  |       |  
|Solazyme, Inc. — Strike Price $12.50, October 20, 2012           |  |  | (M)           |  |  |           | 32    |  |       | $
|                                                                 |  |  |               |  |  |           |       |  |       |  
|Solazyme, Inc. — Strike Price $15.00, October 20, 2012           |  |  | (M)           |  |  |           | 1,000 |  |       |  
|                                                                 |  |  |               |  |  |           |       |  |       |  
|Solazyme, Inc. — Strike Price $10.00, December 22, 2012          |  |  | (M)           |  |  |           | 74    |  |       |  
|                                                                 |  |  |               |  |  |           |       |  |       |  
|Solazyme, Inc. — Strike Price $12.50, December 22, 2012          |  |  | (M)           |  |  |           | 4,000 |  |       |  
|                                                                 |  |  |               |  |  |           |       |  |       |  
|Solazyme, Inc. — Strike Price $15.00, December 22, 2012          |  |  | (M)           |  |  |           | 2,750 |  |       |  
|                                                                 |  |  |               |  |  |           |       |  |       |  
|Solazyme, Inc. — Strike Price $17.50, December 22, 2012          |  |  | (M)           |  |  |           | 2,000 |  |       |  
|                                                                 |  |  |               |  |  |           |       |  |       |  
|Solazyme, Inc. — Strike Price $17.50, March 8, 2013              |  |  | (M)           |  |  |           | 4,010 |  |       |  
|                                                                 |  |  |               |  |  |           |       |  |       |  
|NeoPhotonics Corporation — Strike Price $7.50, February 16, 2013 |  |  | (M)           |  |  |           | 500   |  |       |  
|                                                                 |  |  |               |  |  |           |       |  |       |  
|Total Written Call Options (Premiums Received $1,011,413)        |  |  |               |  |  |           |       |  |       | $



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



16







|HARRIS & HARRIS GROUP,
        INC.
        CONSOLIDATED SCHEDULE OF
        INVESTMENTS AS OF SEPTEMBER 30, 2012
        (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 "Healthcare" companies as those that use nanotechnology to address
problems in healthcare-related industries, including biotechnology, pharmaceuticals and medical devices.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (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 $28,812,415. The gross unrealized appreciation based on the tax cost for these securities is $5,307,124. The gross
unrealized depreciation based on the tax cost for these securities is $4,839,786.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (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 $108,738. 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 $11,879,859. The gross unrealized appreciation based on the tax cost for these securities is $17,689,534. The gross
unrealized depreciation based on the tax cost for these securities is $4,666,293.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (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. Should the company complete a sale or an IPO prior to the
end of 2012, the warrant will become void.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (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.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



17







|HARRIS
        & HARRIS GROUP, INC.
        CONSOLIDATED
        SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2012
        (Unaudited)
|-------------------------------------------------------------------------------------------------------------------------------------



| | (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 maturity dates of the senior secured debt and the subordinated secured debt are expected to
be extended to the end of 2012 or 2013. As such, the notes were not repaid on September 28, 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 purchase price and exercise dates of the warrant are
contingent upon Mersana's achievement of certain milestones. 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 September 30, 2012.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (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 have been pledged to brokers.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------



| | (19) | A portion of this security is held in connection with written
call option contracts: 1,386,600 shares have been pledged to brokers.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------



| | (20) | The aggregate cost for federal income tax purposes of investments in non-controlled affiliated
companies is $51,924,083. The gross unrealized appreciation based on the tax cost for these securities is $16,103,134. The gross
unrealized depreciation based on the tax cost for these securities is $9,304,632.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (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."
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



18







|HARRIS
        & HARRIS GROUP, INC.
        CONSOLIDATED
        SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2012
        (Unaudited)
|-------------------------------------------------------------------------------------------------------------------------------------



| | (22) | 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 $685,333.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (23) | The aggregate cost for federal income tax purposes of investments in controlled affiliated companies
is $14,243,460. The gross unrealized appreciation based on the tax cost for these securities is $0. The gross unrealized depreciation
based on the tax cost for these securities is $7,987,097.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (24) | The aggregate cost for federal income tax purposes of our U.S. government securities is $9,999,914.
The gross unrealized appreciation on the tax cost for these securities is $86. The gross unrealized depreciation on the tax cost
of these securities is $0.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (25) | The call options with expiration dates of October 20, 2012, expired, and we retained the shares
originally covered by these contracts.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------



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





19









|HARRIS & HARRIS GROUP,
        INC.
        CONSOLIDATED
        SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2011
|----------------------------------------------------------------------------------------------------------------



|                                                                                       |  | Method of     |  |  |              |        |  |      |   |           | Shares/   |  |   |           | 
|-------------------------------------------------------------------------------------- |  | ------------- |  |  | ------------ | ------ |  | ---- | - | --------- | --------- |  | - | --------- | 
|                                                                                       |  | Valuation (1) |  |  | Industry (2) |        |  | Cost |   |           | Principal |  |   | Value     | 
|Investments in Unaffiliated Companies (3)(4)(5)(6) – 38.8% of net assets at value      |  |               |  |  |              |        |  |      |   |           |           |  |   |           | 
|                                                                                       |  |               |  |  |              |        |  |      |   |           |           |  |   |           | 
|Private Placement Portfolio (Illiquid) –  16.3% 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 | 
|Series C Convertible Preferred Stock                                                   |  | (M)           |  |  |              |        |  |      |   | 1,352,196 |           |  |   | 2,130,699 | 
|Series D Convertible Preferred Stock                                                   |  | (M)           |  |  |              |        |  |      |   | 1,371,622 |           |  |   | 999,999   | 
|Series E Convertible Preferred Stock                                                   |  | (M)           |  |  |              |        |  |      |   | 730,369   |           |  |   | 440,334   | 
|Warrants for Series C Convertible Preferred Stock expiring 12/31/14                    |  | ( I )         |  |  |              |        |  |      |   | 168,270   |           |  |   | 163,900   | 
|Warrants for Series D Convertible Preferred Stock expiring 8/26/14                     |  | ( I )         |  |  |              |        |  |      |   | 88,531    |           |  |   | 124,999   | 
|Warrants for Series D Convertible Preferred Stock expiring 3/10/15                     |  | ( I )         |  |  |              |        |  |      |   | 40,012    |           |  |   | 41,666    | 
|Warrants for Series E Convertible Preferred Stock expiring 12/31/17                    |  | ( I )         |  |  |              |        |  |      |   | 108,867   |           |  |   | 170,823   | 
|Secured Convertible Bridge Note (including interest)                                   |  | (M)           |  |  |              |        |  |      |   | 529,697   |           |  | $ | 538,945   | 
|Warrant for Common Stock expiring 10/21/18                                             |  | ( I )         |  |  |              |        |  |      |   | 18,816    |           |  |   | 56,564    | 
|                                                                                       |  |               |  |  |              |        |  |      |   | 5,408,380 |           |  |   |           | 
|                                                                                       |  |               |  |  |              |        |  |      |   |           |           |  |   |           | 
|Cambrios Technologies Corporation (7)(9)                                               |  |               |  |  | Electronics  |        |  |      |   |           |           |  |   |           | 
|Developing nanowire-enabled electronic materials for the display industry              |  |               |  |  |              |        |  |      |   |           |           |  |   |           | 
|Series B Convertible Preferred Stock                                                   |  | (M)           |  |  |              |        |  |      |   | 1,294,025 |           |  |   | 1,294,025 | 
|Series C Convertible Preferred Stock                                                   |  | (M)           |  |  |              |        |  |      |   | 1,300,000 |           |  |   | 1,300,000 | 
|Series D Convertible Preferred Stock                                                   |  | (M)           |  |  |              |        |  |      |   | 515,756   |           |  |   | 515,756   | 
|Series D-2 Convertible Preferred Stock                                                 |  | (M)           |  |  |              |        |  |      |   | 92,400    |           |  |   | 92,400    | 
|                                                                                       |  |               |  |  |              |        |  |      |   | 3,202,181 |           |  |   |           | 
|                                                                                       |  |               |  |  |              |        |  |      |   |           |           |  |   |           | 
|Cobalt Technologies, Inc. (7)(9)(10)                                                   |  |               |  |  | Energy       |        |  |      |   |           |           |  |   |           | 
|Developing processes for making bio- butanol through biomass fermentation              |  |               |  |  |              |        |  |      |   |           |           |  |   |           | 
|Series C-1 Convertible Preferred Stock                                                 |  | (M)           |  |  |              |        |  |      |   | 749,998   |           |  |   | 352,112   | 
|Series D-1 Convertible Preferred Stock                                                 |  | (M)           |  |  |              |        |  |      |   | 122,070   |           |  |   | 48,828    | 
|                                                                                       |  |               |  |  |              |        |  |      |   | 872,068   |           |  |   |           | 
|                                                                                       |  |               |  |  |              |        |  |      |   |           |           |  |   |           | 
|Ensemble Therapeutics Corporation (7)(9)(11)                                           |  |               |  |  | Healthcare   |        |  |      |   |           |           |  |   |           | 
|Developing DNA- Programmed ChemistryTMfor the discovery of new classes of therapeutics |  |               |  |  |              |        |  |      |   |           |           |  |   |           | 
|Series B Convertible Preferred Stock                                                   |  | (M)           |  |  |              |        |  |      |   | 2,000,000 |           |  |   | 1,449,275 | 
|Secured Convertible Bridge Notes (including interest)                                  |  | (M)           |  |  |              |        |  |      |   | 373,439   |           |  | $ | 299,169   | 
|                                                                                       |  |               |  |  |              |        |  |      |   |           | 2,373,439 |  |   |           | 



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



20







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF DECEMBER 31, 2011
|--------------------------------------------------------------------------------------------------------



|                                                                                             |  | Method of     |  |  |              |             |  |      |   |           | Shares/   |  |   |           | 
|-------------------------------------------------------------------------------------------- |  | ------------- |  |  | ------------ | ----------- |  | ---- | - | --------- | --------- |  | - | --------- | 
|                                                                                             |  | Valuation (1) |  |  | Industry (2) |             |  | Cost |   |           | Principal |  |   | Value     | 
|Investments in Unaffiliated Companies (3)(4)(5)(6) –  38.8% of net assets at value (Cont.)   |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|                                                                                             |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|Private Placement Portfolio (Illiquid) –  16.3% of net assets at value (Cont.)               |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|                                                                                             |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|GEO Semiconductor Inc.                                                                       |  |               |  |  |              | 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 6/30/12                                             |  | ( I )         |  |  |              |             |  |      | $ | 403,732   |           |  | $ | 500,000   | 
|Warrants for Series A Pref. Stock expiring on 9/17/17                                        |  | ( I )         |  |  |              |             |  |      |   | 66,684    |           |  |   | 100,000   | 
|Warrants for Series A-1 Pref. Stock expiring on 6/30/18                                      |  | ( I )         |  |  |              |             |  |      |   | 23,566    |           |  |   | 34,500    | 
|Loan and Security Agreement with GEO Semiconductor relating to the following
    assets:     |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|Subordinated secured debt, 15.75%, maturing on 1/1/12                                        |  | ( I )         |  |  |              |             |  |      |   | 109,942   |           |  | $ | 125,000   | 
|Warrants for Series A Pref. Stock expiring on 3/1/18                                         |  | ( I )         |  |  |              |             |  |      |   | 7,512     |           |  |   | 10,000    | 
|Warrants for Series A-1 Pref. Stock expiring on 6/29/18                                      |  | ( I )         |  |  |              |             |  |      |   | 7,546     |           |  |   | 10,000    | 
|                                                                                             |  |               |  |  |              |             |  |      |   | 618,982   |           |  |   |           | 
|                                                                                             |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|Molecular Imprints, Inc. (7)(12)                                                             |  |               |  |  | Electronics  |             |  |      |   |           |           |  |   |           | 
|Manufacturing nanoimprint lithography capital equipment                                      |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|Series B Convertible Preferred Stock                                                         |  | (M)           |  |  |              |             |  |      |   | 2,000,000 |           |  |   | 1,333,333 | 
|Series C Convertible Preferred Stock                                                         |  | (M)           |  |  |              |             |  |      |   | 2,406,595 |           |  |   | 1,285,071 | 
|Non-Convertible Bridge Note                                                                  |  | ( I )         |  |  |              |             |  |      |   | 0         |           |  |   | 0         | 
|                                                                                             |  |               |  |  |              |             |  |      |   | 4,406,595 |           |  |   |           | 
|                                                                                             |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|Nanosys, Inc. (7)(13)                                                                        |  |               |  |  | Energy       |             |  |      |   |           |           |  |   |           | 
|Developing inorganic nanowires and quantum dots for use in batteries and LED-backlit devices |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|Series C Convertible Preferred Stock                                                         |  | (M)           |  |  |              |             |  |      |   | 1,500,000 |           |  |   | 803,428   | 
|Series D Convertible Preferred Stock                                                         |  | (M)           |  |  |              |             |  |      |   | 3,000,003 |           |  |   | 1,016,950 | 
|Series E Convertible Preferred Stock                                                         |  | (M)           |  |  |              |             |  |      |   | 496,573   |           |  |   | 433,688   | 
|                                                                                             |  |               |  |  |              |             |  |      |   | 4,996,576 |           |  |   |           | 
|                                                                                             |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|NanoTerra, Inc. (9)(14)                                                                      |  |               |  |  | Energy       |             |  |      |   |           |           |  |   |           | 
|Developing surface chemistry and nano- manufacturing solutions                               |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|Senior secured debt, 12.0%, maturing on 2/22/14                                              |  | ( I )         |  |  |              |             |  |      |   | 329,307   |           |  | $ | 378,564   | 
|Senior secured debt, 12.0%, maturing on 2/22/13                                              |  | ( I )         |  |  |              |             |  |      |   | 133,121   |           |  | $ | 153,032   | 
|Warrants for Series A-2 Pref. Stock expiring on 2/22/21                                      |  | ( I )         |  |  |              |             |  |      |   | 69,168    |           |  |   | 446,248   | 
|                                                                                             |  |               |  |  |              |             |  |      |   |           | 531,596   |  |   |           | 



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



21









|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF DECEMBER 31, 2011
|--------------------------------------------------------------------------------------------------------



|                                                                                               |  | Method of     |  |  |              |             |  |      |   |           | Shares/   |  |   |           | 
|---------------------------------------------------------------------------------------------- |  | ------------- |  |  | ------------ | ----------- |  | ---- | - | --------- | --------- |  | - | --------- | 
|                                                                                               |  | Valuation (1) |  |  | Industry (2) |             |  | Cost |   |           | Principal |  |   | Value     | 
|Investments in Unaffiliated Companies (3)(4)(5)(6) –  38.8% of net assets at value (Cont.)     |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|                                                                                               |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|Private Placement Portfolio (Illiquid) –  16.3% of net assets at value (Cont.)                 |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|                                                                                               |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|Nantero, Inc. (7)(9)(13)                                                                       |  |               |  |  |              | Electronics |  |      |   |           |           |  |   |           | 
|Developing a high-density, nonvolatile, random access memory chip, enabled by carbon nanotubes |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|Series A Convertible Preferred Stock                                                           |  | (M)           |  |  |              |             |  |      | $ | 489,999   |           |  |   | 345,070   | 
|Series B Convertible Preferred Stock                                                           |  | (M)           |  |  |              |             |  |      |   | 323,000   |           |  |   | 207,051   | 
|Series C Convertible Preferred Stock                                                           |  | (M)           |  |  |              |             |  |      |   | 571,329   |           |  |   | 188,315   | 
|                                                                                               |  |               |  |  |              |             |  |      |   |           | 1,384,328 |  |   |           | 
|                                                                                               |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|Total Unaffiliated Private Placement Portfolio (cost: $23,794,145)                             |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|                                                                                               |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|Rights to Milestone Payments (Illiquid) –  2.3% of net assets at value                         |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|                                                                                               |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|Amgen, Inc. (7)(13)                                                                            |  |               |  |  |              | Healthcare  |  |      |   |           |           |  |   |           | 
|Rights to Milestone Payments from  Acquisition of BioVex Group, Inc.                           |  | ( I )         |  |  |              |             |  |      | $ | 3,291,750 |           |  | $ | 3,291,750 | 
|                                                                                               |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|Total Unaffiliated Rights to Milestone Payments (cost: $3,291,750)                             |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|                                                                                               |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|Publicly Traded Portfolio  –  20.2% of net assets at value                                     |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|                                                                                               |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|NeoPhotonics Corporation (13)                                                                  |  |               |  |  |              | Electronics |  |      |   |           |           |  |   |           | 
|Developing and manufacturing optical devices and components                                    |  |               |  |  |              |             |  |      |   |           |           |  |   |           | 
|Common Stock                                                                                   |  | (M)           |  |  |              |             |  |      | $ | 7,299,590 |           |  |   | 450,907   | 



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



22







|HARRIS & HARRIS GROUP,
        INC.
        CONSOLIDATED
        SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2011
|----------------------------------------------------------------------------------------------------------------



|                                                                                                    |  | Method of     |  |              |  |      |           |  | Shares/   |  |           |       | 
|--------------------------------------------------------------------------------------------------- |  | ------------- |  | ------------ |  | ---- | --------- |  | --------- |  | --------- | ----- | 
|                                                                                                    |  | Valuation (1) |  | Industry (2) |  | Cost |           |  | Principal |  |           | Value | 
|                                                                                                    |  |               |  |              |  |      |           |  |           |  |           |       | 
|Solazyme, Inc. (13)(15)(16)                                                                         |  |               |  | Energy       |  |      |           |  |           |  |           |       | 
|Developing algal biodiesel, industrial chemicals and specialty ingredients using  synthetic biology |  |               |  |              |  |      |           |  |           |  |           |       | 
|Common Stock                                                                                        |  | (M)           |  |              |  | $    | 5,444,197 |  |           |  | 2,304,149 |       | 
|                                                                                                    |  |               |  |              |  |      |           |  |           |  |           |       | 
|Total Unaffiliated Publicly Traded Portfolio (cost: $12,743,787)                                    |  |               |  |              |  |      |           |  |           |  |           |       | 
|                                                                                                    |  |               |  |              |  |      |           |  |           |  |           |       | 
|Total Investments in Unaffiliated Companies (cost: $39,829,682)                                     |  |               |  |              |  |      |           |  |           |  |           |       | 



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



23







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF DECEMBER 31, 2011
|--------------------------------------------------------------------------------------------------------



|                                                                                               |  | Method of     |  |              |  |      |           |  | Shares/   |   |           |       | 
|---------------------------------------------------------------------------------------------- |  | ------------- |  | ------------ |  | ---- | --------- |  | --------- | - | --------- | ----- | 
|                                                                                               |  | Valuation (1) |  | Industry (2) |  | Cost |           |  | Principal |   |           | Value | 
|Investments in Non-Controlled  Affiliated Companies (3)(17)(18) – 34.1% of net assets at value |  |               |  |              |  |      |           |  |           |   |           |       | 
|                                                                                               |  |               |  |              |  |      |           |  |           |   |           |       | 
|Private Placement Portfolio (Illiquid) –  32.7% of net assets at value                         |  |               |  |              |  |      |           |  |           |   |           |       | 
|                                                                                               |  |               |  |              |  |      |           |  |           |   |           |       | 
|ABSMaterials, Inc. (7)(9)(13)                                                                  |  |               |  | Energy       |  |      |           |  |           |   |           |       | 
|Developing nano-structured absorbent materials for environmental remediation                   |  |               |  |              |  |      |           |  |           |   |           |       | 
|Series A Convertible Preferred Stock                                                           |  | (M)           |  |              |  | $    | 435,000   |  |           |   | 390,000   |       | 
|                                                                                               |  |               |  |              |  |      |           |  |           |   |           |       | 
|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 |       | 
|Series B Convertible Preferred Stock                                                           |  | (M)           |  |              |  |      | 2,200,000 |  |           |   | 5,952,381 |       | 
|Series C Convertible Preferred Stock                                                           |  | (M)           |  |              |  |      | 1,485,531 |  |           |   | 2,122,187 |       | 
|                                                                                               |  |               |  |              |  |      | 5,885,531 |  |           |   |           |       | 
|                                                                                               |  |               |  |              |  |      |           |  |           |   |           |       | 
|Contour Energy Systems, Inc. (7)(9)(13)                                                        |  |               |  | Energy       |  |      |           |  |           |   |           |       | 
|Developing batteries using nanostructured materials                                            |  |               |  |              |  |      |           |  |           |   |           |       | 
|Series A Convertible Preferred Stock                                                           |  | (M)           |  |              |  |      | 2,009,995 |  |           |   | 2,565,798 |       | 
|Series B Convertible Preferred Stock                                                           |  | (M)           |  |              |  |      | 1,300,000 |  |           |   | 812,500   |       | 
|Series C Convertible Preferred Stock                                                           |  | (M)           |  |              |  |      | 720,000   |  |           |   | 688,995   |       | 
|                                                                                               |  |               |  |              |  |      | 4,029,995 |  |           |   |           |       | 
|                                                                                               |  |               |  |              |  |      |           |  |           |   |           |       | 
|D-Wave Systems, Inc. (7)(9)(19)                                                                |  |               |  | Electronics  |  |      |           |  |           |   |           |       | 
|Developing high- performance quantum computing systems                                         |  |               |  |              |  |      |           |  |           |   |           |       | 
|Series B Convertible Preferred Stock                                                           |  | (M)           |  |              |  |      | 1,002,074 |  |           |   | 1,144,869 |       | 
|Series C Convertible Preferred Stock                                                           |  | (M)           |  |              |  |      | 487,804   |  |           |   | 450,450   |       | 
|Series D Convertible Preferred Stock                                                           |  | (M)           |  |              |  |      | 1,484,492 |  |           |   | 1,533,395 |       | 
|Series E Convertible Preferred Stock                                                           |  | (M)           |  |              |  |      | 248,049   |  |           |   | 269,280   |       | 
|Series F Convertible Preferred Stock                                                           |  | (M)           |  |              |  |      | 238,323   |  |           |   | 258,721   |       | 
|Warrants for Common Stock expiring 6/30/15                                                     |  | ( I )         |  |              |  |      | 98,644    |  |           |   | 153,890   |       | 
|Secured Convertible Bridge Note (including interest)                                           |  | (M)           |  |              |  |      | 341,047   |  |           | $ | 337,579   |       | 
|                                                                                               |  |               |  |              |  |      | 3,900,433 |  |           |   |           |       | 
|                                                                                               |  |               |  |              |  |      |           |  |           |   |           |       | 
|Enumeral Biomedical Corp. (7)(9)                                                               |  |               |  | Healthcare   |  |      |           |  |           |   |           |       | 
|Developing therapeutics and diagnostics through functional assaying of single cells            |  |               |  |              |  |      |           |  |           |   |           |       | 
|Series A Convertible Preferred Stock                                                           |  | (M)           |  |              |  |      | 1,026,832 |  |           |   | 957,038   |       | 



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

24







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF DECEMBER 31, 2011
|--------------------------------------------------------------------------------------------------------



|                                                                                                                 |  | Method of     |  |              |  |      |           |  | Shares/   |   |           |       | 
|---------------------------------------------------------------------------------------------------------------- |  | ------------- |  | ------------ |  | ---- | --------- |  | --------- | - | --------- | ----- | 
|                                                                                                                 |  | Valuation (1) |  | Industry (2) |  | Cost |           |  | Principal |   |           | Value | 
|Investments in Non-Controlled  Affiliated Companies (3)(17)(18) – 34.1% of net assets at value (Cont.)           |  |               |  |              |  |      |           |  |           |   |           |       | 
|                                                                                                                 |  |               |  |              |  |      |           |  |           |   |           |       | 
|Private Placement Portfolio (Illiquid) –  32.7% of net assets at value (Cont.)                                   |  |               |  |              |  |      |           |  |           |   |           |       | 
|                                                                                                                 |  |               |  |              |  |      |           |  |           |   |           |       | 
|HzO, Inc. (7)(9)(13)(14)                                                                                         |  |               |  | Electronics  |  |      |           |  |           |   |           |       | 
|Developing novel industrial coatings that  protect electronics against damage from liquids                       |  |               |  |              |  |      |           |  |           |   |           |       | 
|Series A Convertible Preferred Stock                                                                             |  | (M)           |  |              |  | $    | 666,667   |  |           |   | 4,057,294 |       | 
|Series B Convertible Preferred Stock                                                                             |  | (M)           |  |              |  |      | 1,000,000 |  |           |   | 3,947,888 |       | 
|                                                                                                                 |  |               |  |              |  |      | 1,666,667 |  |           |   |           |       | 
|                                                                                                                 |  |               |  |              |  |      |           |  |           |   |           |       | 
|Kovio, Inc. (7)(9)(13)                                                                                           |  |               |  | Electronics  |  |      |           |  |           |   |           |       | 
|Developing semiconductor products using printed electronics and thin-film technologies                           |  |               |  |              |  |      |           |  |           |   |           |       | 
|Series A' Convertible Preferred Stock                                                                            |  | (M)           |  |              |  |      | 5,242,993 |  |           |   | 2,160,000 |       | 
|Series B' Convertible Preferred Stock                                                                            |  | (M)           |  |              |  |      | 1,418,540 |  |           |   | 2,131,827 |       | 
|                                                                                                                 |  |               |  |              |  |      | 6,661,533 |  |           |   |           |       | 
|                                                                                                                 |  |               |  |              |  |      |           |  |           |   |           |       | 
|Mersana Therapeutics, Inc. (7)(9)                                                                                |  |               |  | Healthcare   |  |      |           |  |           |   |           |       | 
|Developing treatments for cancer based on novel drug delivery polymers                                           |  |               |  |              |  |      |           |  |           |   |           |       | 
|Series A Convertible Preferred Stock                                                                             |  | (M)           |  |              |  |      | 700,000   |  |           |   | 68,451    |       | 
|Series B Convertible Preferred Stock                                                                             |  | (M)           |  |              |  |      | 1,542,098 |  |           |   | 866,500   |       | 
|Unsecured Convertible Bridge Notes (including interest)                                                          |  | (M)           |  |              |  |      | 1,442,871 |  |           | $ | 1,195,875 |       | 
|                                                                                                                 |  |               |  |              |  |      | 3,684,969 |  |           |   |           |       | 
|                                                                                                                 |  |               |  |              |  |      |           |  |           |   |           |       | 
|Metabolon, Inc. (7)(13)                                                                                          |  |               |  | Healthcare   |  |      |           |  |           |   |           |       | 
|Developing service and diagnostic products through the use of a metabolomics, or biochemical, profiling platform |  |               |  |              |  |      |           |  |           |   |           |       | 
|Series B Convertible Preferred Stock                                                                             |  | (M)           |  |              |  |      | 2,500,000 |  |           |   | 371,739   |       | 
|Series B-1 Convertible Preferred Stock                                                                           |  | (M)           |  |              |  |      | 706,214   |  |           |   | 148,696   |       | 
|Series C Convertible Preferred Stock                                                                             |  | (M)           |  |              |  |      | 1,000,000 |  |           |   | 1,000,000 |       | 
|Series D Convertible Preferred Stock                                                                             |  | (M)           |  |              |  |      | 1,499,999 |  |           |   | 835,882   |       | 
|Warrants for Series B-1 Convertible Preferred Stock expiring 3/25/15                                             |  | ( I )         |  |              |  |      | 293,786   |  |           |   | 74,348    |       | 
|                                                                                                                 |  |               |  |              |  |      | 5,999,999 |  |           |   |           |       | 



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



25







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF DECEMBER 31, 2011
|--------------------------------------------------------------------------------------------------------



|                                                                                                                                 |  | Method of     |  |              |  |      |           |  | Shares/   |  |           |       | 
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------- |  | ------------ |  | ---- | --------- |  | --------- |  | --------- | ----- | 
|                                                                                                                                 |  | Valuation (1) |  | Industry (2) |  | Cost |           |  | Principal |  |           | Value | 
|Investments in Non-Controlled  Affiliated Companies (3)(17)(18) – 34.1% of net assets at value (Cont.)                           |  |               |  |              |  |      |           |  |           |  |           |       | 
|                                                                                                                                 |  |               |  |              |  |      |           |  |           |  |           |       | 
|Private Placement Portfolio (Illiquid) –  32.7% of net assets at value (Cont.)                                                   |  |               |  |              |  |      |           |  |           |  |           |       | 
|                                                                                                                                 |  |               |  |              |  |      |           |  |           |  |           |       | 
|Nextreme Thermal Solutions, Inc. (7)(9)(13)                                                                                      |  |               |  | Energy       |  |      |           |  |           |  |           |       | 
|Developing thin-film thermoelectric devices for cooling and energy conversion                                                    |  |               |  |              |  |      |           |  |           |  |           |       | 
|Series A Convertible Preferred Stock                                                                                             |  | (M)           |  |              |  | $    | 4,384,762 |  |           |  | 44,053    |       | 
|                                                                                                                                 |  |               |  |              |  |      |           |  |           |  |           |       | 
|Produced Water Absorbents, Inc. (7)(9)(13)(14)                                                                                   |  |               |  | 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 |       | 
|                                                                                                                                 |  |               |  |              |  |      |           |  |           |  |           |       | 
|Senova Systems, Inc. (7)(9)(13)(14)                                                                                              |  |               |  | Healthcare   |  |      |           |  |           |  |           |       | 
|Developing next-generation sensors to measure pH                                                                                 |  |               |  |              |  |      |           |  |           |  |           |       | 
|Series B Convertible Preferred Stock                                                                                             |  | (M)           |  |              |  |      | 692,308   |  |           |  | 692,308   |       | 
|                                                                                                                                 |  |               |  |              |  |      |           |  |           |  |           |       | 
|SiOnyx, Inc. (7)(9)(13)                                                                                                          |  |               |  | Electronics  |  |      |           |  |           |  |           |       | 
|Developing silicon-based optoelectronic products enabled by its proprietary Black Silicon                                        |  |               |  |              |  |      |           |  |           |  |           |       | 
|Series A Convertible Preferred Stock                                                                                             |  | (M)           |  |              |  |      | 750,000   |  |           |  | 233,499   |       | 
|Series A-1 Convertible Preferred Stock                                                                                           |  | (M)           |  |              |  |      | 890,000   |  |           |  | 2,966,667 |       | 
|Series A-2 Convertible Preferred Stock                                                                                           |  | (M)           |  |              |  |      | 2,445,000 |  |           |  | 4,207,537 |       | 
|Series B-1 Convertible Preferred Stock                                                                                           |  | (M)           |  |              |  |      | 1,169,561 |  |           |  | 1,892,836 |       | 
|Warrants for Series B-1 Convertible Preferred                                                                                    |  |               |  |              |  |      |           |  |           |  |           |       | 
|Stock expiring 2/23/17                                                                                                           |  | ( I )         |  |              |  |      | 130,439   |  |           |  | 247,350   |       | 
|                                                                                                                                 |  |               |  |              |  |      | 5,385,000 |  |           |  |           |       | 
|                                                                                                                                 |  |               |  |              |  |      |           |  |           |  |           |       | 
|Ultora, Inc. (7)(9)(13)                                                                                                          |  |               |  | Energy       |  |      |           |  |           |  |           |       | 
|Developing energy-storage devices enabled by carbon nanotubes                                                                    |  |               |  |              |  |      |           |  |           |  |           |       | 
|Series A Convertible Preferred Stock                                                                                             |  | (M)           |  |              |  |      | 215,000   |  |           |  | 215,000   |       | 



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



26







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF DECEMBER 31, 2011
|--------------------------------------------------------------------------------------------------------



|                                                                                                                  |  | Method of     |  |              |  |      |           |  | Shares/   |  |           |       | 
|----------------------------------------------------------------------------------------------------------------- |  | ------------- |  | ------------ |  | ---- | --------- |  | --------- |  | --------- | ----- | 
|                                                                                                                  |  | Valuation (1) |  | Industry (2) |  | Cost |           |  | Principal |  |           | Value | 
|Investments in Non-Controlled  Affiliated Companies (3)(17)(18) – 34.1% of net assets at value (Cont.)            |  |               |  |              |  |      |           |  |           |  |           |       | 
|                                                                                                                  |  |               |  |              |  |      |           |  |           |  |           |       | 
|Private Placement Portfolio (Illiquid) –  32.7% of net assets at value (Cont.)                                    |  |               |  |              |  |      |           |  |           |  |           |       | 
|                                                                                                                  |  |               |  |              |  |      |           |  |           |  |           |       | 
|Xradia, Inc. (7)(13)                                                                                              |  |               |  | 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 |       | 
|                                                                                                                  |  |               |  |              |  |      |           |  |           |  |           |       | 
|Total Non-Controlled Private Placement Portfolio (cost: $48,968,029)                                              |  |               |  |              |  |      |           |  |           |  |           |       | 
|                                                                                                                  |  |               |  |              |  |      |           |  |           |  |           |       | 
|Publicly Traded Portfolio (Illiquid) –  1.4% of net assets at value                                               |  |               |  |              |  |      |           |  |           |  |           |       | 
|                                                                                                                  |  |               |  |              |  |      |           |  |           |  |           |       | 
|Champions Oncology, Inc. (13)(14)(20)                                                                             |  |               |  | Healthcare   |  |      |           |  |           |  |           |       | 
|Developing its TumorGraftTM platform for personalized medicine and drug development                               |  |               |  |              |  |      |           |  |           |  |           |       | 
|Common Stock                                                                                                      |  | (M)           |  |              |  | $    | 2,000,000 |  |           |  | 2,666,667 |       | 
|                                                                                                                  |  |               |  |              |  |      |           |  |           |  |           |       | 
|Total Non-Controlled Affiliated Publicly Traded Portfolio (cost: $2,000,000)                                      |  |               |  |              |  |      |           |  |           |  |           |       | 
|                                                                                                                  |  |               |  |              |  |      |           |  |           |  |           |       | 
|Total Investments in Non-Controlled Affiliated Companies (cost: $50,968,029)                                      |  |               |  |              |  |      |           |  |           |  |           |       | 



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



27







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF DECEMBER 31, 2011
|--------------------------------------------------------------------------------------------------------



|                                                                                               |  | Method of     |  |              |  |      |           |  | Shares/   |   |            |       | 
|---------------------------------------------------------------------------------------------- |  | ------------- |  | ------------ |  | ---- | --------- |  | --------- | - | ---------- | ----- | 
|                                                                                               |  | Valuation (1) |  | Industry (2) |  | Cost |           |  | Principal |   |            | Value | 
|                                                                                               |  |               |  |              |  |      |           |  |           |   |            |       | 
|Investments in Controlled Affiliated Companies (3)(21) – 4.7% of net assets at value           |  |               |  |              |  |      |           |  |           |   |            |       | 
|                                                                                               |  |               |  |              |  |      |           |  |           |   |            |       | 
|Private Placement Portfolio (Illiquid) – 4.7% of net assets at value                           |  |               |  |              |  |      |           |  |           |   |            |       | 
|                                                                                               |  |               |  |              |  |      |           |  |           |   |            |       | 
|Ancora Pharmaceuticals Inc. (7)(9)                                                             |  |               |  | Healthcare   |  |      |           |  |           |   |            |       | 
|Developing synthetic carbohydrates for pharmaceutical applications                             |  |               |  |              |  |      |           |  |           |   |            |       | 
|Common Stock                                                                                   |  | (M)           |  |              |  | $    | 2,729,817 |  |           |   | 57,463     |       | 
|Series A Convertible Preferred Stock                                                           |  | (M)           |  |              |  |      | 3,855,627 |  |           |   | 3,855,627  |       | 
|Senior Secured Debt, 12.00%, maturing on 12/11/12                                              |  | ( I )         |  |              |  |      | 452,060   |  |           | $ | 500,000    |       | 
|                                                                                               |  |               |  |              |  |      | 7,037,504 |  |           |   |            |       | 
|                                                                                               |  |               |  |              |  |      |           |  |           |   |            |       | 
|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  |       | 
|Series B Convertible Preferred Stock                                                           |  | (M)           |  |              |  |      | 3,095,802 |  |           |   | 13,571,848 |       | 
|Secured Convertible Bridge Note (including interest)                                           |  | (M)           |  |              |  |      | 385,630   |  |           | $ | 378,261    |       | 
|                                                                                               |  |               |  |              |  |      | 5,481,432 |  |           |   |            |       | 
|                                                                                               |  |               |  |              |  |      |           |  |           |   |            |       | 
|Total Controlled Private Placement Portfolio (cost: $12,518,936)                               |  |               |  |              |  |      |           |  |           |   |            |       | 
|                                                                                               |  |               |  |              |  |      |           |  |           |   |            |       | 
|Total Investments in Controlled Affiliated Companies (cost: $12,518,936)                       |  |               |  |              |  |      |           |  |           |   |            |       | 
|                                                                                               |  |               |  |              |  |      |           |  |           |   |            |       | 
|Total Private Placement and Publicly Traded Portfolio (cost: $103,316,647)                     |  |               |  |              |  |      |           |  |           |   |            |       | 
|                                                                                               |  |               |  |              |  |      |           |  |           |   |            |       | 
|Total Investments (cost: $103,316,647)                                                         |  |               |  |              |  |      |           |  |           |   |            |       | 



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



28







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF DECEMBER 31, 2011
|--------------------------------------------------------------------------------------------------------



|                                                           |  | Method of     |  | Number of |       |  |       |  
|---------------------------------------------------------- |  | ------------- |  | --------- | ----- |  | ----- | -
|                                                           |  | Valuation (1) |  | Contracts |       |  | Value |  
|                                                           |  |               |  |           |       |  |       |  
|Written Call Options (15) –  (0.1)% of net assets at value |  |               |  |           |       |  |       |  
|                                                           |  |               |  |           |       |  |       |  
|Solazyme, Inc. — Strike Price $15.00, 3/17/12              |  | (M)           |  |           | 3,000 |  |       | $
|                                                           |  |               |  |           |       |  |       |  
|Total Written Call Options (Premiums Received $315,000)    |  |               |  |           |       |  |       | $



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



29







|HARRIS & HARRIS GROUP,
        INC.
        CONSOLIDATED SCHEDULE OF
        INVESTMENTS AS OF DECEMBER 31, 2011
|----------------------------------------------------------------------------------------------------------------



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 "Healthcare" companies as those that use nanotechnology
to address problems in healthcare-related industries, including biotechnology, pharmaceuticals and medical devices. We
use the term "Other" for companies that operate primarily in industries other than those within "Energy," "Electronics"
and "Healthcare." We do not have any portfolio companies classified as "Other" as of December 31, 2011.In
the first quarter of 2011, we renamed the sector classification "Electronics/Semiconductors" to "Electronics"
and reclassified three companies, NeoPhotonics Corporation, Polatis, Inc., and Xradia, Inc., from a sector classification of "Other"
to "Electronics" to reflect a broader definition of electronics to include photonics, metrology, and test and measurement.
We also renamed the sector classification "Healthcare/Biotech" to "Healthcare." In the fourth quarter of 2011,
we renamed the sector classification,"Cleantech"to"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 $23,794,145. The gross unrealized appreciation based on the tax cost for these securities is $5,997,220. The gross
unrealized depreciation based on the tax cost for these securities is $6,043,118.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (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 $71,041. 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 $12,743,787. The gross unrealized appreciation based on the tax cost for these securities is $21,975,176. The gross
unrealized depreciation based on the tax cost for these securities is $5,234,436.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (7) | We are subject to legal restrictions on the sale of our investment(s) in this company.
| | --- | --------------------------------------------------------------------------------------



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



30







|HARRIS & HARRIS GROUP,
        INC.
        CONSOLIDATED SCHEDULE OF
        INVESTMENTS AS OF DECEMBER 31, 2011
|----------------------------------------------------------------------------------------------------------------



| | (8) | With our investment in the Series E round of financing, we received a warrant to purchase shares
of common stock of up to 30 percent of the amount invested in the Series E round of financing of Bridgelux, Inc., depending on
certain financial performance metrics of the company as of December 31, 2011, at a price per share of $1.9056. The number of shares
able to be purchased and beginning of the period for when this warrant is exercisable will be set upon receipt of the audited financial
statements of the company for the 2011 fiscal year or upon the completion of an IPO or sale of the company, whichever comes first.
Bridgelux did not complete an IPO or sale of the company as of December 31, 2011. Also as of that date, the audited financials
for the company’s 2011 fiscal year were not available. This warrant is, therefore, a contingent asset as of December 31,
2011. With our investment in the bridge note financing in the fourth quarter of 2011, we received a warrant for the purchase of
common stock that is exercisable at the date of issuance, but the number of shares for which it can be exercised increases monthly
from the date of issuance through the close of the next round of equity financing of the company up to 50 percent of the principal
amount invested in the note divided by $1.9056. The warrant for common stock is exercisable for 56,564 shares of common stock of
Bridgelux as of December 31, 2011.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (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) | Cobalt Technologies, Inc., also does business as Cobalt
Biofuels.
| | ---- | -----------------------------------------------------------------



| | (11) | 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 $149,539.57 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.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (12) | 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 December 31, 2011.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (13) | 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.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (14) | Initial investment was made during 2011.
| | ---- | ----------------------------------------



| | (15) | A portion of this security is held in connection with written
call option contracts: 300,000 shares have been pledged to brokers.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------



| | (16) | The lock-up period on our 2,304,149 shares of Solazyme, Inc., expired on November 25, 2011.
| | ---- | -------------------------------------------------------------------------------------------



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

31







|HARRIS & HARRIS GROUP,
        INC.
        CONSOLIDATED SCHEDULE OF
        INVESTMENTS AS OF DECEMBER 31, 2011
|----------------------------------------------------------------------------------------------------------------



| | (17) | The aggregate cost for federal income tax purposes of investments in non-controlled affiliated
companies is $48,968,029. The gross unrealized appreciation based on the tax cost for these securities is $9,066,325. The gross
unrealized depreciation based on the tax cost for these securities is $10,432,569.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (18) | 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 $26,666.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (19) | 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 2. Summary of Significant Accounting Policies."
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (20) | Our 2,666,667 shares of Champions Oncology, Inc., became freely tradable on October 1, 2011, pursuant
to Rule 144.
| | ---- | ------------------------------------------------------------------------------------------------------------------



| | (21) | The aggregate cost for federal income tax purposes of investments in controlled affiliated companies
is $12,518,936. 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 $5,641,370.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



32







|HARRIS & HARRIS GROUP, INC.
        FOOTNOTE TO CONSOLIDATED SCHEDULE OF
        INVESTMENTS
|--------------------------------------------------------------------------------------------



VALUATION PROCEDURES



| | I. | 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 also 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 fair 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
| | --- | ------------------------------------



Accounting principles
generally accepted in the United States of America ("GAAP") define 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).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



33







| | · | 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- inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| | • |  | Level 2- inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs 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:



34







| | A. | EQUITY-RELATED SECURITIES
| | -- | -------------------------



Equity-related
securities, including options or warrants, are 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.



| | B. | LONG-TERM FIXED-INCOME SECURITIES
| | -- | ---------------------------------



| | 1. | Readily Marketable: Long-term fixed-income securities for which market quotations
are readily available are valued using the most recent bid quotations when available.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | 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.                           



35









| | C. | 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.



| | D. | 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 or 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.
| | - | -------------------------



| | E. | 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.

36







|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|------------------------------------------



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 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., is a 100 percent wholly owned subsidiary
of the Company. Ventures is taxed under Subchapter C of the Internal Revenue Code of 1986 (the "Code") (a "C Corporation").
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 any non-passive investment income generated by Harris Partners I, L.P. For the period ended September 30, 2012, 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 ourAnnual Report on Form 10-K for
the fiscal year ended December 31, 2011.



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:



37







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.



Revision of Previously
Reported Consolidated Financial Statements During the First Quarter of 2012. During the period ended March 31, 2012, the Company
concluded the Consolidated Statements of Cash Flows erroneously classified cash flow items within operating and investing activities.
Specifically, the Company's purchases and sales of various debt, equity and other securities were previously classified within
investing activities when such purchases and sales activities should have been classified within operating activities.  Following
is a list of purchases and sales activities that have now been included in operating activities, rather than investing activities,
in the Consolidated Statements of Cash Flows:



Purchase of U.S. government securities
Sale of U.S. government securities
Investment in affiliated portfolio companies
Investment in unaffiliated portfolio companies
Proceeds from sale of investments
Proceeds from call option premiums
Payments for call option purchases
Principal payments received on debt investments



The net impact of these
revisions was to increase the total cash used in operating activities and decrease the total cash used in investing activities
by $4,475,222, $3,765,559 and $23,780,399 for the three months ended March 31, 2011, the six months ended June 30, 2011, and the
nine months ended September 30, 2011, respectively. For the years ended December 31, 2011, and 2010, the net impact was to increase
total operating activities and decrease total investing activities by $35,665,311 and $8,058,322, respectively. For the year ended
December 31, 2009, the net impact was to decrease total operating activities and increase total investing activities by $15,432,513.
The Company assessed the impact of the error on its prior period financial statements and concluded that the error was not
material to any of those financial statements.



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.



38







Portfolio Investment
Valuations. Investments are stated at "value" as defined in the 1940 Act and in the applicable regulations of the
Securities and Exchange Commission ("SEC") and in accordance with GAAP. Value, as defined in Section 2(a)(41) of the
1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) the fair value
as determined in good faith by, or under the direction of, the Board of Directors for all other assets. (See "Valuation Procedures"
in the "Footnote to Consolidated Schedule of Investments.") As of September 30, 2012, our financial statements include
privately held investments and one illiquid publicly traded venture capital investment, Champions Oncology, Inc., collectively
fair valued at $98,973,856. 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 September 30, 2012, and December 31, 2011, we held $2,010,010and $1,512,031, respectively,
in "Restricted funds." At September 30, 2012, and December 31, 2011, we held $2,000,000 and $1,500,000, respectively,
in a collateral account for our credit facility discussed in "Note 5. Debt." At September 30, 2012, and December 31,
2011, we also held $10,010 and $12,031, respectively, in security deposits for sublessors.



Unaffiliated Rights
to Milestone Payments. At September 30, 2012, the outstanding milestone payments from Amgen, Inc.’s acquisition of Biovex
Group, Inc., were valued at $3,400,488.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 assurances
as to how much of this amount we will ultimately realize or when it will be realized, if at all.



Funds Held in Escrow
from Sales of Investments. At September 30, 2012, there were funds held in escrow fair valued at $588,276 relating to the sales
of Innovalight, Inc., and Crystal IS, Inc. Funds held in escrow are valued using certain discounts applied to the amounts withheld.
Funds held in escrow from the Innovalight transaction will be released in January 2013 upon settlement of any indemnity claims
and expenses related to the transaction. A portion of the funds held in escrow from the Crystal IS transaction was released on
April 30, 2012. The balance of the Crystal IS funds in escrow will be released in March 2013 upon settlement of any remaining indemnity
claims and expenses related to the transaction. If the funds held in escrow for these transactions are released in full, we would
receive $1,201,074. On March 16, 2012, the Company received payment of its portion of the proceeds held in escrow since the closing
of the transaction on March 4, 2011, from Amgen, Inc.’s acquisition of BioVex Group, Inc., totaling $953,480.



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 $302,688 and $331,006 at September 30, 2012,
and December 31, 2011, 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.



39







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, interest on the accumulated postretirement benefit obligation and amortization
of the transition obligation (asset) less previously accrued expenses over the average remaining service period of employees expected
to receive plan benefits. Unrecognized actuarial gains and losses are recognized as net periodic benefit cost pursuant to the Company's
historical accounting policy for amortizing such amounts. Actuarial gains and losses that arise that are not recognized as net
periodic benefit cost in the same periods are recognized as a component of net assets.



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 and
nine months ended September 30, 2012, the Company earned $74,821 and $210,146, respectively, in interest on U.S. government securities,
senior secured debt, participation agreements, subordinated secured debt and interest-bearing accounts. During the three months
and nine months ended September 30, 2012, the Company recorded, on a net basis, $275,148 and $190,466, respectively, of bridge
note interest. The nine months total includes a partial write-off of previously accrued bridge note interest of $200,583, which
was recognized in the second quarter of 2012, offset by $236,238 of interest recognized in the third quarter upon conversion of
this investment.



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.



40







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 "Amended Stock Plan") by determining the fair value of all share-based payments
to employees, including the fair value of grants of employee stock options and restricted stock awards, and records these amounts
as an expense in the Consolidated Statements of Operations over the vesting period with a corresponding increase to our additional
paid-in capital. At September 30, 2012, and December 31, 2011, 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 stock-based 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 8. 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 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 provide 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 9. 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 nine months ended September 30, 2012, included in the net increase in unrealized appreciation on investments
was unrealized appreciation of $199,932resulting 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 money
market accounts may exceed the Federal Deposit Insurance Corporation insured limit.



41

















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 September 30, 2012, our largest 10 investments by value accounted for approximately 73 percent
of the value of our equity-focused venture capital portfolio. Our largest two investments, by value, Solazyme, Inc., a publicly
traded company, and Adesto Technologies Corporation, a privately held company, accounted for approximately 18.8 percent and 12.9
percent, respectively, of our equity-focused venture capital portfolio at September 30, 2012.



Approximately 78 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, comprised
of all of the independent members of our Board of Directors, in accordance with our Valuation Procedures and is subject to significant
estimates and judgments. The determined 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 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 volatile.



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.



42







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. 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.



The Company’s
outstanding debt balance was $2,000,000 and $1,500,000, at September 30, 2012, and December 31, 2011, respectively. At September
30, 2012, and December 31, 2011, $2,000,000 and $1,500,000, respectively, was held in a collateral account at T.D. Bank as security
for the loan. The weighted average annual interest cost for the nine months ended September 30, 2012, and twelve months ended December
31, 2011, was 1.6 percent and 1.5 percent, respectively, exclusive of amortization of closing fees and other expenses related to
establishing the credit facility. The remaining capacity under the credit facility was $8,000,000 at September 30, 2012. At September
30, 2012, the Company was in compliance with all financial covenants required by the credit facility.



NOTE 6. FAIR VALUE OF INVESTMENTS



At September 30, 2012,
our financial assets were categorized as follows in the fair value hierarchy:





|                                     |  | Fair Value Measurement at Reporting Date Using: |            
|------------------------------------ |  | ----------------------------------------------- | -----------
|Description                          |  | September 30, 2012                              |            
|U.S. Government Securities           |  | $                                               | 10,000,000 
|                                     |  |                                                 |            
|Privately Held Portfolio Companies:  |  |                                                 |            
|Preferred Stock                      |  | $                                               | 84,272,454 
|Bridge Notes                         |  | $                                               | 4,061,774  
|Warrants                             |  | $                                               | 616,083    
|Rights to Milestone Payments         |  | $                                               | 3,400,488  
|Common Stock                         |  | $                                               | 174,540    
|Senior Secured Debt                  |  | $                                               | 778,482    
|Participation Agreements             |  | $                                               | 1,198,610  
|Subordinated  Secured  Debt          |  | $                                               | 123,420    
|Non-Convertible Promissory Note      |  | $                                               | 3,033,338  
|                                     |  |                                                 |            
|Publicly Traded Portfolio Companies: |  |                                                 |            
|Common Stock                         |  | $                                               | 26,217,767 
|                                     |  |                                                 |            
|Total Investments                    |  | $                                               | 133,876,956
|                                     |  |                                                 |            
|Liabilities:                         |  |                                                 |            
|Written Call Options                 |  | $                                               | 364,080    
|                                     |  |                                                 |            
|Total                                |  | $                                               | 364,080    



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.



43







|                                |  |   | Fair Value at
                                                                                                                                            Sept. 30, 2012 |  |  | Valuation Techniques(s) |  | Unobservable Input                                |  |  | Range                                                                                                              |  
|------------------------------- |  | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  | ----------------------- |  | ------------------------------------------------- |  |  | ------------------------------------------------------------------------------------------------------------------ | -
|                                |  |   |                                                                                                                                                                          |  |  |                         |  |                                                   |  |  |                                                                                                                    |  
|                                |  |   |                                                                                                                                                                          |  |  |                         |  | Private Offering Price                            |  |  | $0.14
                                                                                - $6.73                      |  
|                                |  |   |                                                                                                                                                                          |  |  |                         |  | Non-Performance Risk                              |  |  | 0%
                                                                                - 100%                          |  
|                                |  |   |                                                                                                                                                                          |  |  |                         |  | Revenue Multiple                                  |  |  | 1.3
                                                                                - 2.7                          |  
|                                |  |   |                                                                                                                                                                          |  |  |                         |  | Discount for Lack of Marketability                |  |  | 20                                                                                                                 | %
|Preferred Stock                 |  | $ | 84,272,454                                                                                                                                                               |  |  | Market Approach         |  | Probability of Exit Outcomes                      |  |  | 0%
                                                                                - 100%                          |  
|                                |  |   |                                                                                                                                                                          |  |  |                         |  |                                                   |  |  |                                                                                                                    |  
|                                |  |   |                                                                                                                                                                          |  |  |                         |  | Private Offering Price                            |  |  | $1.00                                                                                                              |  
|Bridge Notes                    |  |   | 4,061,774                                                                                                                                                                |  |  | Market Approach         |  | Non-Performance Risk                              |  |  | 0                                                                                                                  | %
|                                |  |   |                                                                                                                                                                          |  |  |                         |  |                                                   |  |  |                                                                                                                    |  
|                                |  |   |                                                                                                                                                                          |  |  |                         |  | Private Offering Price                            |  |  | $0.54
                                                                                - $47.51                     |  
|Common Stock                    |  |   | 174,540                                                                                                                                                                  |  |  | Market Approach         |  | Non-Performance Risk                              |  |  | 0%
                                                                                -100%                           |  
|                                |  |   |                                                                                                                                                                          |  |  |                         |  |                                                   |  |  |                                                                                                                    |  
|                                |  |   |                                                                                                                                                                          |  |  |                         |  | Stock Price                                       |  |  | $.09
                                                                                - $2.36                       |  
|                                |  |   |                                                                                                                                                                          |  |  | Black-Sholes-Merton     |  | Volatility                                        |  |  | 107                                                                                                                | %
|Warrants                        |  |   | 616,083                                                                                                                                                                  |  |  | Model                   |  | Expected Term                                     |  |  | 0.50
                                                                                – 9.50 Years                  |  
|                                |  |   |                                                                                                                                                                          |  |  |                         |  |                                                   |  |  |                                                                                                                    |  
|                                |  |   |                                                                                                                                                                          |  |  | Probability Weighted    |  | Probability of Achieving Independent Milestones   |  |  | 0%
                                                                                - 75%                           |  
|Rights to Milestone Payments    |  |   | 3,400,488                                                                                                                                                                |  |  | Discounted Cash Flow    |  | Probability of Achieving Dependent Milestones     |  |  | 0.44%
                                                                                - 28.125%                    |  
|                                |  |   |                                                                                                                                                                          |  |  |                         |  |                                                   |  |  |                                                                                                                    |  
|                                |  |   |                                                                                                                                                                          |  |  |                         |  | Warrant Adjusted Effective Yield                  |  |  | 23.1%
                                                                                - 29.9%                      |  
|                                |  |   |                                                                                                                                                                          |  |  |                         |  | Effective Yield                                   |  |  | 23.1%
                                                                                - 37.4%                      |  
|                                |  |   |                                                                                                                                                                          |  |  |                         |  | Non-Performance Risk                              |  |  | 0%
                                                                                - 25%                           |  
|                                |  |   |                                                                                                                                                                          |  |  |                         |  | Participation Payment Risk                        |  |  | 0                                                                                                                  | %
|Participation Agreements        |  |   | 1,198,610                                                                                                                                                                |  |  | Income Approach         |  | Discount for Comparable Prices of High-Yield Debt |  |  | 0                                                                                                                  | %
|                                |  |   |                                                                                                                                                                          |  |  |                         |  |                                                   |  |  |                                                                                                                    |  
|                                |  |   |                                                                                                                                                                          |  |  |                         |  | Warrant Adjusted Effective Yield                  |  |  | 33.1                                                                                                               | %
|                                |  |   |                                                                                                                                                                          |  |  |                         |  | Effective Yield                                   |  |  | 41.4                                                                                                               | %
|Subordinated  Secured Debt      |  |   | 123,420                                                                                                                                                                  |  |  | Income Approach         |  | Non-Performance Risk                              |  |  | 25                                                                                                                 | %
|                                |  |   |                                                                                                                                                                          |  |  |                         |  |                                                   |  |  |                                                                                                                    |  
|                                |  |   |                                                                                                                                                                          |  |  |                         |  | Effective Yield                                   |  |  | 15.7                                                                                                               | %
|Senior Secured Debt             |  |   | 778,482                                                                                                                                                                  |  |  | Income Approach         |  | Non-Performance Risk                              |  |  | 0                                                                                                                  | %
|                                |  |   |                                                                                                                                                                          |  |  |                         |  |                                                   |  |  |                                                                                                                    |  
|                                |  |   |                                                                                                                                                                          |  |  |                         |  | Probability of Exit Outcomes                      |  |  | 25%
                                                                                - 75%                          |  
|                                |  |   |                                                                                                                                                                          |  |  |                         |  | Private Offering Price                            |  |  | $1.50                                                                                                              |  
|Non-Convertible Promissory Note |  |   | 3,033,338                                                                                                                                                                |  |  | Income Approach         |  | Non-Performance Risk                              |  |  | 50                                                                                                                 | %
|                                |  |   |                                                                                                                                                                          |  |  |                         |  |                                                   |  |  |                                                                                                                    |  
|                                |  |   |                                                                                                                                                                          |  |  |                         |  | Non-Performance Risk                              |  |  | 25                                                                                                                 | %
|OTC Traded Common Stock         |  | $ | 1,314,667                                                                                                                                                                |  |  | Market Approach         |  | Volume Weighted Average Price per Share           |  |  | $0.63
                                                                                                     - $0.81 |  
|                                |  |   |                                                                                                                                                                          |  |  |                         |  |                                                   |  |  |                                                                                                                    |  
|Total                           |  | $ | 98,973,856                                                                                                                                                               |  |  |                         |  |                                                   |  |  |                                                                                                                    |  



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.



44







Preferred Stock, Bridge Notes and Common
Stock



Preferred stock, bridge
notes and common stock are valued by a market 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. 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.  The
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 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.



45







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 September 30, 2012. 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 volume-weighted average of recent prices per share of privately negotiated financing transactions and the volume-weighted
price per share of the stock over a period of time and an assessment of non-performance risk.



46







The following table
shows the components of change in the financial assets categorized as Level 3 for the three months ended September 30, 2012.



|                                |  | BeginningBalance7/1/2012 |            |  | TotalRealizedGains(Losses)Includedin Changesin NetAssets |   |   | Transfers |  |   | TotalUnrealizedAppreciation(Depreciation)Included inChanges inNet Assets |   |  | Investments inPortfolioCompanies,Interest onBridge Notes,andAmortization of Loan Fees, Net |            |   | Disposals |   |           | EndingBalance9/30/2012 |  |   | Amount of TotalAppreciation(Depreciation) for thePeriod Included inChanges in Net AssetsAttributable to theChange in UnrealizedGains or Losses Relatingto Assets Still Held at theReporting  Date |  
|------------------------------- |  | ------------------------ | ---------- |  | -------------------------------------------------------- | - | - | --------- |  | - | ------------------------------------------------------------------------ | - |  | ------------------------------------------------------------------------------------------ | ---------- | - | --------- | - | --------- | ---------------------- |  | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -
|                                |  |                          |            |  |                                                          |   |   |           |  |   |                                                                          |   |  |                                                                                            |            |   |           |   |           |                        |  |   |                                                                                                                                                                                                   |  
|Preferred Stock                 |  | $                        | 79,123,640 |  |                                                          | $ | 0 |           |  | $ | 0                                                                        |   |  | $                                                                                          | 2,108,893  |   |           | $ | 3,039,921 |                        |  | $ | 0                                                                                                                                                                                                 |  
|                                |  |                          |            |  |                                                          |   |   |           |  |   |                                                                          |   |  |                                                                                            |            |   |           |   |           |                        |  |   |                                                                                                                                                                                                   |  
|Bridge Notes                    |  |                          | 3,474,341  |  |                                                          |   | 0 |           |  |   | (1,633,296                                                               | ) |  |                                                                                            | 1,542,398  |   |           |   | 678,331   |                        |  |   | 0                                                                                                                                                                                                 |  
|                                |  |                          |            |  |                                                          |   |   |           |  |   |                                                                          |   |  |                                                                                            |            |   |           |   |           |                        |  |   |                                                                                                                                                                                                   |  
|Common Stock                    |  |                          | 0          |  |                                                          |   | 0 |           |  |   | 1,633,296                                                                |   |  |                                                                                            | (1,458,756 | ) |           |   | 0         |                        |  |   | 0                                                                                                                                                                                                 |  
|                                |  |                          |            |  |                                                          |   |   |           |  |   |                                                                          |   |  |                                                                                            |            |   |           |   |           |                        |  |   |                                                                                                                                                                                                   |  
|Warrants                        |  |                          | 701,310    |  |                                                          |   | 0 |           |  |   | 0                                                                        |   |  |                                                                                            | (216,765   | ) |           |   | 131,538   |                        |  |   | 0                                                                                                                                                                                                 |  
|                                |  |                          |            |  |                                                          |   |   |           |  |   |                                                                          |   |  |                                                                                            |            |   |           |   |           |                        |  |   |                                                                                                                                                                                                   |  
|Rights to Milestone Payments    |  |                          | 3,386,224  |  |                                                          |   | 0 |           |  |   | 0                                                                        |   |  |                                                                                            | 14,264     |   |           |   | 0         |                        |  |   | 0                                                                                                                                                                                                 |  
|                                |  |                          |            |  |                                                          |   |   |           |  |   |                                                                          |   |  |                                                                                            |            |   |           |   |           |                        |  |   |                                                                                                                                                                                                   |  
|Participation Agreements        |  |                          | 1,214,935  |  |                                                          |   | 0 |           |  |   | 0                                                                        |   |  |                                                                                            | 37,027     |   |           |   | (222      | )                      |  |   | (53,130                                                                                                                                                                                           | )
|                                |  |                          |            |  |                                                          |   |   |           |  |   |                                                                          |   |  |                                                                                            |            |   |           |   |           |                        |  |   |                                                                                                                                                                                                   |  
|Subordinated  Secured Debt      |  |                          | 119,760    |  |                                                          |   | 0 |           |  |   | 0                                                                        |   |  |                                                                                            | 4,703      |   |           |   | (1,043    | )                      |  |   | 0                                                                                                                                                                                                 |  
|                                |  |                          |            |  |                                                          |   |   |           |  |   |                                                                          |   |  |                                                                                            |            |   |           |   |           |                        |  |   |                                                                                                                                                                                                   |  
|Senior Secured Debt             |  |                          | 843,180    |  |                                                          |   | 0 |           |  |   | 0                                                                        |   |  |                                                                                            | (3,562     | ) |           |   | 13,036    |                        |  |   | (74,172                                                                                                                                                                                           | )
|                                |  |                          |            |  |                                                          |   |   |           |  |   |                                                                          |   |  |                                                                                            |            |   |           |   |           |                        |  |   |                                                                                                                                                                                                   |  
|Non-Convertible Promissory Note |  |                          | 3,033,338  |  |                                                          |   | 0 |           |  |   | 0                                                                        |   |  |                                                                                            | 0          |   |           |   | 0         |                        |  |   | 0                                                                                                                                                                                                 |  
|                                |  |                          |            |  |                                                          |   |   |           |  |   |                                                                          |   |  |                                                                                            |            |   |           |   |           |                        |  |   |                                                                                                                                                                                                   |  
|OTC Traded Common Stock         |  |                          | 1,973,334  |  |                                                          |   | 0 |           |  |   | 0                                                                        |   |  |                                                                                            | (658,667   | ) |           |   | 0         |                        |  |   | 0                                                                                                                                                                                                 |  
|Total                           |  | $                        | 93,870,062 |  |                                                          | $ | 0 |           |  | $ | 0                                                                        |   |  | $                                                                                          | 1,369,535  |   |           | $ | 3,861,561 |                        |  | $ | (127,302                                                                                                                                                                                          | )



There were no transfers in or out of Level
3 during the three months ended September 30, 2012.



47







The following table
shows the components of change in the financial assets categorized as Level 3 for the nine months ended September 30, 2012.



|                                |  | BeginningBalance1/1/2012 |            |  | TotalRealizedGains(Losses)Included inChanges inNet Assets |   |   | Transfers |  |   | TotalUnrealizedAppreciation(Depreciation)Included inChanges inNet Assets |   |  | Investments inPortfolioCompanies,Interest onBridge Notes,andAmortization ofLoan Fees, Net |            |   | Disposals |   |            | EndingBalance9/30/2012 |  |   | Amount of TotalAppreciation(Depreciation) for thePeriod Included inChanges in Net AssetsAttributable to theChange in UnrealizedGains or Losses Relatingto Assets Still Held at theReporting Date |  
|------------------------------- |  | ------------------------ | ---------- |  | --------------------------------------------------------- | - | - | --------- |  | - | ------------------------------------------------------------------------ | - |  | ----------------------------------------------------------------------------------------- | ---------- | - | --------- | - | ---------- | ---------------------- |  | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -
|                                |  |                          |            |  |                                                           |   |   |           |  |   |                                                                          |   |  |                                                                                           |            |   |           |   |            |                        |  |   |                                                                                                                                                                                                  |  
|Preferred Stock                 |  | $                        | 68,833,189 |  |                                                           | $ | 0 |           |  | $ | 905,333                                                                  |   |  | $                                                                                         | 6,768,873  |   |           | $ | 7,765,059  |                        |  | $ | 0                                                                                                                                                                                                |  
|                                |  |                          |            |  |                                                           |   |   |           |  |   |                                                                          |   |  |                                                                                           |            |   |           |   |            |                        |  |   |                                                                                                                                                                                                  |  
|Bridge Notes                    |  |                          | 4,007,509  |  |                                                           |   | 0 |           |  |   | (2,538,629                                                               | ) |  |                                                                                           | 1,290,647  |   |           |   | 1,302,247  |                        |  |   | 0                                                                                                                                                                                                |  
|                                |  |                          |            |  |                                                           |   |   |           |  |   |                                                                          |   |  |                                                                                           |            |   |           |   |            |                        |  |   |                                                                                                                                                                                                  |  
|Common Stock                    |  |                          | 0          |  |                                                           |   | 0 |           |  |   | 1,633,296                                                                |   |  |                                                                                           | (1,458,756 | ) |           |   | 0          |                        |  |   | 0                                                                                                                                                                                                |  
|                                |  |                          |            |  |                                                           |   |   |           |  |   |                                                                          |   |  |                                                                                           |            |   |           |   |            |                        |  |   |                                                                                                                                                                                                  |  
|Warrants                        |  |                          | 728,787    |  |                                                           |   | 0 |           |  |   | 0                                                                        |   |  |                                                                                           | (328,449   | ) |           |   | 215,745    |                        |  |   | 0                                                                                                                                                                                                |  
|                                |  |                          |            |  |                                                           |   |   |           |  |   |                                                                          |   |  |                                                                                           |            |   |           |   |            |                        |  |   |                                                                                                                                                                                                  |  
|Rights to Milestone Payments    |  |                          | 3,362,791  |  |                                                           |   | 0 |           |  |   | 0                                                                        |   |  |                                                                                           | 37,697     |   |           |   | 0          |                        |  |   | 0                                                                                                                                                                                                |  
|                                |  |                          |            |  |                                                           |   |   |           |  |   |                                                                          |   |  |                                                                                           |            |   |           |   |            |                        |  |   |                                                                                                                                                                                                  |  
|Participation Agreements        |  |                          | 560,200    |  |                                                           |   | 0 |           |  |   | 0                                                                        |   |  |                                                                                           | 39,797     |   |           |   | 713,842    |                        |  |   | (115,229                                                                                                                                                                                         | )
|                                |  |                          |            |  |                                                           |   |   |           |  |   |                                                                          |   |  |                                                                                           |            |   |           |   |            |                        |  |   |                                                                                                                                                                                                  |  
|Subordinated  Secured Debt      |  |                          | 121,880    |  |                                                           |   | 0 |           |  |   | 0                                                                        |   |  |                                                                                           | 2,895      |   |           |   | (1,355     | )                      |  |   | 0                                                                                                                                                                                                |  
|                                |  |                          |            |  |                                                           |   |   |           |  |   |                                                                          |   |  |                                                                                           |            |   |           |   |            |                        |  |   |                                                                                                                                                                                                  |  
|Senior Secured Debt             |  |                          | 942,695    |  |                                                           |   | 0 |           |  |   | 0                                                                        |   |  |                                                                                           | 17,248     |   |           |   | 34,574     |                        |  |   | (216,035                                                                                                                                                                                         | )
|                                |  |                          |            |  |                                                           |   |   |           |  |   |                                                                          |   |  |                                                                                           |            |   |           |   |            |                        |  |   |                                                                                                                                                                                                  |  
|Non-Convertible Promissory Note |  |                          | 3,033,338  |  |                                                           |   | 0 |           |  |   | 0                                                                        |   |  |                                                                                           | 0          |   |           |   | 0          |                        |  |   | 0                                                                                                                                                                                                |  
|                                |  |                          |            |  |                                                           |   |   |           |  |   |                                                                          |   |  |                                                                                           |            |   |           |   |            |                        |  |   |                                                                                                                                                                                                  |  
|OTC Traded Common Stock         |  |                          | 1,973,334  |  |                                                           |   | 0 |           |  |   | 0                                                                        |   |  |                                                                                           | (658,667   | ) |           |   | 0          |                        |  |   | 0                                                                                                                                                                                                |  
|Total                           |  | $                        | 83,563,723 |  |                                                           | $ | 0 |           |  | $ | 0                                                                        |   |  | $                                                                                         | 5,711,285  |   |           | $ | 10,030,112 |                        |  | $ | (331,264                                                                                                                                                                                         | )



There were no transfers
in or out of Level 3 during the nine months ended September 30, 2012.



At
December 31, 2011, our financial assets were categorized as follows in the fair value hierarchy:



48









|                                     |  | Fair Value Measurement at Reporting Date Using: |            
|------------------------------------ |  | ----------------------------------------------- | -----------
|                                     |  |                                                 |            
|Description                          |  | December
    31, 2011                           |            
|U.S. Government Securities           |  | $                                               | 0          
|                                     |  |                                                 |            
|Privately Held Portfolio Companies:  |  |                                                 |            
|Preferred Stock                      |  | $                                               | 68,833,189 
|Bridge Notes                         |  | $                                               | 4,007,509  
|Warrants                             |  | $                                               | 728,787    
|Rights to Milestone Payments         |  | $                                               | 3,362,791  
|Senior Secured Debt                  |  | $                                               | 942,695    
|Participation Agreement              |  | $                                               | 560,200    
|Subordinated  Secured  Debt          |  | $                                               | 121,880    
|Non-Convertible Promissory Note      |  | $                                               | 3,033,338  
|                                     |  |                                                 |            
|Publicly Traded Portfolio Companies: |  |                                                 |            
|Common Stock                         |  | $                                               | 31,457,861 
|                                     |  |                                                 |            
|Total Investments                    |  | $                                               | 113,048,250
|                                     |  |                                                 |            
|Liabilities:                         |  |                                                 |            
|Written Call Options                 |  | $                                               | 195,000    
|                                     |  |                                                 |            
|Total                                |  | $                                               | 195,000    



The following table
shows the components of change in the financial assets categorized as Level 3 for the three months ended September 30, 2011.



|                                |  | BeginningBalance7/1/2011 |             |  | TotalRealized(Losses)GainsIncluded inChanges inNet Assets |   |            | Transfers |  |   | Total UnrealizedAppreciation(Depreciation)Included inChanges in NetAssets |   |  | Investments inPortfolioCompanies,Interest onBridge Notes,andAmortizationof Loan Fees,Net |             |   | Disposals |   |           | EndingBalance9/30/2011 |  |   | Amount of TotalAppreciation(Depreciation) forthe Period Includedin Changes in NetAssets Attributableto the Change inUnrealized Gains orLosses Relating toAssets Still Held atthe Reporting Date |  
|------------------------------- |  | ------------------------ | ----------- |  | --------------------------------------------------------- | - | ---------- | --------- |  | - | ------------------------------------------------------------------------- | - |  | ---------------------------------------------------------------------------------------- | ----------- | - | --------- | - | --------- | ---------------------- |  | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -
|                                |  |                          |             |  |                                                           |   |            |           |  |   |                                                                           |   |  |                                                                                          |             |   |           |   |           |                        |  |   |                                                                                                                                                                                                 |  
|Preferred Stock                 |  | $                        | 67,766,920  |  |                                                           | $ | (2,546,173 | )         |  | $ | 453,474                                                                   |   |  | $                                                                                        | (5,046,318  | ) |           | $ | 5,041,531 |                        |  | $ | (4,551,668                                                                                                                                                                                      | )
|                                |  |                          |             |  |                                                           |   |            |           |  |   |                                                                           |   |  |                                                                                          |             |   |           |   |           |                        |  |   |                                                                                                                                                                                                 |  
|Bridge Notes                    |  |                          | 5,208,640   |  |                                                           |   | 34,927     |           |  |   | (453,474                                                                  | ) |  |                                                                                          | 11,383      |   |           |   | 588,591   |                        |  |   | (458,569                                                                                                                                                                                        | )
|                                |  |                          |             |  |                                                           |   |            |           |  |   |                                                                           |   |  |                                                                                          |             |   |           |   |           |                        |  |   |                                                                                                                                                                                                 |  
|Common Stock                    |  |                          | 0           |  |                                                           |   | (135,105   | )         |  |   | 0                                                                         |   |  |                                                                                          | 135,105     |   |           |   | 0         |                        |  |   | 0                                                                                                                                                                                               |  
|                                |  |                          |             |  |                                                           |   |            |           |  |   |                                                                           |   |  |                                                                                          |             |   |           |   |           |                        |  |   |                                                                                                                                                                                                 |  
|Warrants                        |  |                          | 737,400     |  |                                                           |   | (37,196    | )         |  |   | 0                                                                         |   |  |                                                                                          | (50,190     | ) |           |   | 0         |                        |  |   | 0                                                                                                                                                                                               |  
|                                |  |                          |             |  |                                                           |   |            |           |  |   |                                                                           |   |  |                                                                                          |             |   |           |   |           |                        |  |   |                                                                                                                                                                                                 |  
|Rights to Milestone Payments    |  |                          | 3,316,581   |  |                                                           |   | 0          |           |  |   | 0                                                                         |   |  |                                                                                          | 27,891      |   |           |   | 0         |                        |  |   | 0                                                                                                                                                                                               |  
|                                |  |                          |             |  |                                                           |   |            |           |  |   |                                                                           |   |  |                                                                                          |             |   |           |   |           |                        |  |   |                                                                                                                                                                                                 |  
|Participation Agreement         |  |                          | 519,853     |  |                                                           |   | 0          |           |  |   | 0                                                                         |   |  |                                                                                          | 11,368      |   |           |   | 3,149     |                        |  |   | 0                                                                                                                                                                                               |  
|                                |  |                          |             |  |                                                           |   |            |           |  |   |                                                                           |   |  |                                                                                          |             |   |           |   |           |                        |  |   |                                                                                                                                                                                                 |  
|Subordinated  Secured Debt      |  |                          | 117,150     |  |                                                           |   | 0          |           |  |   | 0                                                                         |   |  |                                                                                          | 3,988       |   |           |   | 1,692     |                        |  |   | 0                                                                                                                                                                                               |  
|                                |  |                          |             |  |                                                           |   |            |           |  |   |                                                                           |   |  |                                                                                          |             |   |           |   |           |                        |  |   |                                                                                                                                                                                                 |  
|Senior Secured Debt             |  |                          | 597,310     |  |                                                           |   | 0          |           |  |   | 0                                                                         |   |  |                                                                                          | 12,413      |   |           |   | (65,823   | )                      |  |   | 0                                                                                                                                                                                               |  
|                                |  |                          |             |  |                                                           |   |            |           |  |   |                                                                           |   |  |                                                                                          |             |   |           |   |           |                        |  |   |                                                                                                                                                                                                 |  
|Non-Convertible Promissory Note |  |                          | 4,381,488   |  |                                                           |   | 0          |           |  |   | 0                                                                         |   |  |                                                                                          | 0           |   |           |   | 0         |                        |  |   | (1,348,150                                                                                                                                                                                      | )
|                                |  |                          |             |  |                                                           |   |            |           |  |   |                                                                           |   |  |                                                                                          |             |   |           |   |           |                        |  |   |                                                                                                                                                                                                 |  
|Publicly Traded Common Stock    |  |                          | 49,241,940  |  |                                                           |   | 0          |           |  |   | (2,940,405                                                                | ) |  |                                                                                          | (23,548,403 | ) |           |   | 0         |                        |  |   | 0                                                                                                                                                                                               |  
|Total                           |  | $                        | 131,887,282 |  |                                                           | $ | (2,683,547 | )         |  | $ | (2,940,405                                                                | ) |  | $                                                                                        | (28,442,763 | ) |           | $ | 5,569,140 |                        |  | $ | (6,358,387                                                                                                                                                                                      | )



49







The following table
shows the components of change in the financial assets categorized as Level 3 for the nine months ended September 30, 2011.



|                                |  | BeginningBalance1/1/2011 |             |  | TotalRealizedGains(Losses)Included inChanges inNet Assets |   |            | Transfers |  |   | TotalUnrealized(Depreciation)AppreciationIncluded inChanges in NetAssets |   |  | Investments inPortfolioCompanies,Interest onBridge Notes,andAmortization ofLoan Fees, Net |             |   | Disposals |   |            | EndingBalance9/30/2011 |  |   | Amount of Total(Depreciation)Appreciation forthe PeriodIncluded inChanges in NetAssetsAttributable tothe Change inUnrealized Gainsor LossesRelating to AssetsStill Held at theReporting Date |  
|------------------------------- |  | ------------------------ | ----------- |  | --------------------------------------------------------- | - | ---------- | --------- |  | - | ------------------------------------------------------------------------ | - |  | ----------------------------------------------------------------------------------------- | ----------- | - | --------- | - | ---------- | ---------------------- |  | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -
|                                |  |                          |             |  |                                                           |   |            |           |  |   |                                                                          |   |  |                                                                                           |             |   |           |   |            |                        |  |   |                                                                                                                                                                                              |  
|Preferred Stock                 |  | $                        | 100,451,746 |  |                                                           | $ | 4,613,504  |           |  | $ | (28,611,520                                                              | ) |  | $                                                                                         | (10,881,553 | ) |           | $ | 8,467,096  |                        |  | $ | (12,921,507                                                                                                                                                                                  | )
|                                |  |                          |             |  |                                                           |   |            |           |  |   |                                                                          |   |  |                                                                                           |             |   |           |   |            |                        |  |   |                                                                                                                                                                                              |  
|Bridge Notes                    |  |                          | 3,565,062   |  |                                                           |   | 34,927     |           |  |   | (1,785,265                                                               | ) |  |                                                                                           | 408,592     |   |           |   | 3,166,751  |                        |  |   | (458,569                                                                                                                                                                                     | )
|                                |  |                          |             |  |                                                           |   |            |           |  |   |                                                                          |   |  |                                                                                           |             |   |           |   |            |                        |  |   |                                                                                                                                                                                              |  
|Common Stock                    |  |                          | 977,414     |  |                                                           |   | (2,101,696 | )         |  |   | (479,269                                                                 | ) |  |                                                                                           | 1,767,415   |   |           |   | 0          |                        |  |   | (163,864                                                                                                                                                                                     | )
|                                |  |                          |             |  |                                                           |   |            |           |  |   |                                                                          |   |  |                                                                                           |             |   |           |   |            |                        |  |   |                                                                                                                                                                                              |  
|Warrants                        |  |                          | 684,780     |  |                                                           |   | 91,536     |           |  |   | 108,867                                                                  |   |  |                                                                                           | (197,117    | ) |           |   | 121,422    |                        |  |   | (159,474                                                                                                                                                                                     | )
|                                |  |                          |             |  |                                                           |   |            |           |  |   |                                                                          |   |  |                                                                                           |             |   |           |   |            |                        |  |   |                                                                                                                                                                                              |  
|Rights to Milestone Payments    |  |                          | 0           |  |                                                           |   | 0          |           |  |   | 3,291,750                                                                |   |  |                                                                                           | 52,722      |   |           |   | 0          |                        |  |   | 0                                                                                                                                                                                            |  
|                                |  |                          |             |  |                                                           |   |            |           |  |   |                                                                          |   |  |                                                                                           |             |   |           |   |            |                        |  |   |                                                                                                                                                                                              |  
|Participation Agreement         |  |                          | 471,420     |  |                                                           |   | 0          |           |  |   | 0                                                                        |   |  |                                                                                           | 55,502      |   |           |   | 7,448      |                        |  |   | 0                                                                                                                                                                                            |  
|                                |  |                          |             |  |                                                           |   |            |           |  |   |                                                                          |   |  |                                                                                           |             |   |           |   |            |                        |  |   |                                                                                                                                                                                              |  
|Subordinated  Secured Debt      |  |                          | 0           |  |                                                           |   | 0          |           |  |   | 0                                                                        |   |  |                                                                                           | 14,669      |   |           |   | 108,161    |                        |  |   | 0                                                                                                                                                                                            |  
|                                |  |                          |             |  |                                                           |   |            |           |  |   |                                                                          |   |  |                                                                                           |             |   |           |   |            |                        |  |   |                                                                                                                                                                                              |  
|Senior Secured Debt             |  |                          | 0           |  |                                                           |   | 0          |           |  |   | 0                                                                        |   |  |                                                                                           | 13,654      |   |           |   | 530,246    |                        |  |   | 0                                                                                                                                                                                            |  
|                                |  |                          |             |  |                                                           |   |            |           |  |   |                                                                          |   |  |                                                                                           |             |   |           |   |            |                        |  |   |                                                                                                                                                                                              |  
|Non-Convertible Promissory Note |  |                          | 0           |  |                                                           |   | 0          |           |  |   | 0                                                                        |   |  |                                                                                           | 3,033,338   |   |           |   | 1,348,150  |                        |  |   | (1,348,150                                                                                                                                                                                   | )
|                                |  |                          |             |  |                                                           |   |            |           |  |   |                                                                          |   |  |                                                                                           |             |   |           |   |            |                        |  |   |                                                                                                                                                                                              |  
|Publicly Traded Common Stock    |  |                          | 0           |  |                                                           |   | 0          |           |  |   | 22,675,822                                                               |   |  |                                                                                           | (2,472,690  | ) |           |   | 2,550,000  |                        |  |   | 0                                                                                                                                                                                            |  
|                                |  |                          |             |  |                                                           |   |            |           |  |   |                                                                          |   |  |                                                                                           |             |   |           |   |            |                        |  |   |                                                                                                                                                                                              |  
|Total                           |  | $                        | 106,150,422 |  |                                                           | $ | 2,638,271  |           |  | $ | (4,799,615                                                               | ) |  | $                                                                                         | (8,205,468  | ) |           | $ | 16,299,274 |                        |  | $ | (15,051,564                                                                                                                                                                                  | )



NOTE 7. DERIVATIVES



The Company has written
covered call options on a portion of its holdings of two of its publicly traded portfolio companies in exchange for the receipt
of a premium paid in cash upon the writing of the option. The option provides the holder the right, but not the obligation, to
purchase the shares on which the option is held at a specified price over a specified future period. The call options were sold
at a strike price above the market price on the date of the sale allowing the Company to receive potential appreciation in addition
to the premium.



50







Transactions in options written during
the nine months ended September 30, 2012, were as follows:



|                                           |  | Number
                                                                              of Contracts |         |   | Premium |  
|------------------------------------------ |  | ------------------------------------------------------------------------------------------------- | ------- | - | ------- | -
|Options outstanding at December 31, 2011   |  |                                                                                                   | 3,000   |   |         | $
|Options written                            |  |                                                                                                   | 30,669  |   |         |  
|Options expired                            |  |                                                                                                   | (2,250  | ) |         |  
|Options terminated in closing transactions |  |                                                                                                   | (17,053 | ) |         |  
|Options outstanding at September 30, 2012  |  |                                                                                                   | 14,366  |   |         | $



At September 30, 2012,
we had rights to milestone payments from Amgen, Inc.’s acquisition of our former portfolio company, BioVex Group, Inc. These
milestone payments were fair valued at $3,400,488 and are contingent upon certain milestones being achieved in the future.



The following tables
present the value of derivatives held at September 30, 2012, and the effect of derivatives held during the nine months ended September
30, 2012, along with the respective location in the financial statements.



|                                                                                |  |  | Assets      |  |  |   | Liabilities | 
|------------------------------------------------------------------------------- |  |  | ----------- |  |  | - | ----------- | 
|Derivatives                                                                     |  |  | Location    |  |  |   | Fair Value  | 
|                                                                                |  |  |             |  |  |   |             | 
|Equity Contracts                                                                |  |  | —           |  |  |   | —           | 
|                                                                                |  |  |             |  |  |   |             | 
|Amgen, Inc. Rights to Milestone Payments from Acquisition of BioVex Group, Inc. |  |  | Investments |  |  | $ | 3,400,488   | 



Statement of Operations



|Derivatives                                                                     |  | Location                                |  | Realized Gain/(Loss) |         |  | Change in unrealizedAppreciation /(Depreciation) |  
|------------------------------------------------------------------------------- |  | --------------------------------------- |  | -------------------- | ------- |  | ------------------------------------------------ | -
|Equity Contracts                                                                |  | Net Realized and Unrealized Gain (Loss) |  | $                    | 458,911 |  |                                                  | $
|                                                                                |  |                                         |  |                      |         |  |                                                  |  
|Amgen, Inc. Rights to Milestone Payments from Acquisition of BioVex Group, Inc. |  | Net Realized and Unrealized Gain (Loss) |  | $                    | 0       |  |                                                  | $



NOTE 8. STOCK-BASED COMPENSATION



In 2006, the Company
established the Harris & Harris Group, Inc. 2006 Equity Incentive Plan (the "Stock Plan"), which provides for the
grant of equity-based awards of stock options to our officers and employees who are selected by our Compensation Committee and
our directors for participation in the plan and subject to compliance with the 1940 Act.



51







On February 29, 2012,
the Board of Directors approved the Amended and Restated Harris & Harris Group, Inc. 2012 Equity Incentive Plan (the "Amended
Stock Plan"), subject to shareholder approval. The Amended Stock Plan replaces the Stock Plan. In addition to awards already
permissible under the Stock Plan, the Amended Stock Plan permits the issuance of restricted stock for up to 10 percent of our issued
and outstanding shares. On April 3, 2012, we received an exemptive order from the SEC permitting us to award shares of restricted
stock to our officers, employees and directors (the "Exemptive Order"). The Exemptive Order did not permit the issuance
of restricted stock until the Amended Stock Plan was approved by our shareholders. On June 7, 2012, the Amended Stock Plan was
approved by our shareholders.



A maximum of 20 percent
of the total shares of our common stock issued and outstanding currently are available for awards. Under the Amended Stock Plan,
no more than 50 percent of the shares of stock reserved for the grant of awards under the Stock Plan may be restricted stock awards
at any time during the term of the Amended Stock Plan. No more than 1,000,000 shares of our common stock may be made subject to
awards under the Amended Stock Plan to any individual in any year.



Unless terminated earlier
by the approval of the shareholders, the Amended Stock Plan will expire on June 7, 2022. The expiration of the Amended Stock Plan
will not, by itself, adversely affect the rights of plan participants under awards that are outstanding at the time the Amended
Stock Plan expires. Our Board of Directors may terminate, modify or suspend the Amended Stock Plan at any time, provided that no
modification of the Amended Stock Plan will be effective unless and until any required shareholder approval has been obtained.
The Board of Directors may terminate, modify or amend any outstanding award under the Amended Stock Plan at any time provided that,
in such event, the award holder may exercise any vested options prior to such termination of the Amended Stock Plan or award.



Stock Option Awards



During the nine months
ended September 30, 2012, and the year ended December 31, 2011, the Compensation Committee of the Board of Directors of the Company
did not grant any stock options. On August 3, 2011, the Compensation Committee decided that any future grants of options, if they
occur, would not be awarded at a price below net asset value per share. On May 11, 2012, certain executive officers voluntarily
cancelled 1,963,745 outstanding stock options for no consideration. Upon cancellation, we recognized $1,365,242 in compensation
expense related to these previously granted options. On May 18, 2012, the Company announced that if the Amended Stock Plan was
approved by shareholders, the Compensation Committee currently does not plan to grant new stock options to employees.



For the three months
and nine months ended September 30, 2012, the Company recognized $41,530 and $1,932,821, respectively, of compensation expense
related to stock option awards in the Consolidated Statement of Operations. The nine months total includes $1,365,242 related to
the voluntary cancellation of stock options. As of September 30, 2012, there was approximately $264,926 of unrecognized compensation
cost related to unvested stock option awards. This cost is expected to be recognized over a weighted-average period of approximately
one year. For the three months and nine months ended September 30, 2011, the Company recognized $442,201 and $1,427,321, respectively,
of compensation expense in the Consolidated Statements of Operations.



52







For the three and nine
months ended September 30, 2012, no options were exercised. For the three months ended September 30, 2011, no options were exercised.
For the nine months ended September 30, 2011, a total of 122,437 options were exercised for total proceeds to the Company of $491,058.



A summary of the changes
in outstanding stock options for the nine months ended September 30, 2012, is as follows:



|                                                                             |  |        |           |  | Weighted       |   |      | Weighted
Average |  |   | Weighted Average 
Remaining |  |  | Aggregate |     
|---------------------------------------------------------------------------- |  | ------ | --------- |  | -------------- | - | ---- | ---------------- |  | - | --------------------------- |  |  | --------- | ----
|                                                                             |  |        |           |  | Average        |   |      | Grant Date       |  |   | Contractual                 |  |  | Intrinsic |     
|                                                                             |  | Shares |           |  | Exercise Price |   |      | Fair Value       |  |   | Term (Years)                |  |  | Value     |     
|Options Outstanding at January 1, 2012                                       |  |        | 3,389,117 |  |                | $ | 8.13 |                  |  | $ | 5.04                        |  |  |           | 4.96
|Granted                                                                      |  |        | 0         |  |                | $ | 0    |                  |  | $ | 0                           |  |  |           | 0   
|Exercised                                                                    |  |        | 0         |  |                | $ | 0    |                  |  | $ | 0                           |  |  |           | 0   
|Forfeited or Expired                                                         |  |        | 1,963,745 |  |                | $ | 6.94 |                  |  | $ | 4.14                        |  |  |           | 4.41
|Options Outstanding at September 30, 2012                                    |  |        | 1,425,372 |  |                | $ | 9.77 |                  |  | $ | 6.27                        |  |  |           | 3.93
|Options Exercisable at September 30, 2012                                    |  |        | 1,368,502 |  |                | $ | 9.78 |                  |  | $ | 6.25                        |  |  |           | 3.94
|Options Exercisable and Expected to be Exercisable
    at September 30, 2012 |  |        | 1,422,870 |  |                | $ | 9.77 |                  |  | $ | 6.27                        |  |  |           | 3.93



The aggregate intrinsic
value in the table above with respect to stock options outstanding, exercisable and expected to be exercisable, is calculated as
the difference between the Company's closing stock price of $3.79 on the last trading day of the third quarter of 2012 and the
exercise price, multiplied by the number of in-the-money options. This amount represents the total pre-tax intrinsic value that
would have been received by the option holders had all stock options been fully vested and all option holders exercised their awards
on September 30, 2012. For the nine months ended September 30, 2012, no stock options were exercised.



Restricted Stock
Awards



On June 7, 2012, upon
shareholder approval of the Amended Stock Plan, our seven non-employee directors were granted 2,000 shares of restricted stock
each that vest over a three-year period. The Exemptive Order provides for a similar grant for the non-employee directors annually.



On June 11, 2012, the
Compensation Committee granted employees a total of 1,780,000 shares of restricted stock. A total of 712,000 of these shares vest
over a period from December 31, 2012, through June 30, 2017, based on the employees' continued service to the Company ("service-based
awards"). The remaining 1,068,000 awards vest when the volume-weighted stock price is at or above pre-determined stock price
targets over a 30-day period ("market-based awards"). These pre-determined stock price targets range from $5.00 per share
to $9.00 per share. After this initial employee grant, the Compensation Committee does not plan to grant additional restricted
stock to existing employees for at least three years.



53







The compensation expense
for the service-based awards is determined by the market price of our stock at the date of grant applied to the total number of
shares we anticipate to fully vest. The market prices on the dates of the director and employee service-based awards were $3.55
and $3.38, respectively.



The compensation expense
for the market-based awards is determined by the fair value of the awards applied to the number of shares granted, net of estimated
forfeitures. The fair values of the market-based awards were determined using a lattice model. The fair values of these awards
range from $2.25 per share to $2.92 per share and will be expensed over derived service periods ranging from approximately 37 to
75 months.



For the three months
and nine months ended September 30, 2012, we recognized $430,774 and $524,602, respectively, of compensation expense related to
restricted stock awards. As of September 30, 2012, there was unrecognized compensation cost of $4,637,971 related to restricted
stock awards. This cost is expected to be recognized over a weighted average period of approximately 2.4 years.



Non-vested restricted
stock awards as of September 30, 2012, and changes during the nine months ended September 30, 2012, were as follows:



|                                  |  | Shares |           |  | Weighted-Average Grant 
Date Fair Value Per Share |  
|--------------------------------- |  | ------ | --------- |  | ------------------------------------------------- | -
|Outstanding at beginning of year  |  |        | 0         |  |                                                   | $
|Granted                           |  |        | 1,794,000 |  |                                                   |  
|Vested                            |  |        | 0         |  |                                                   |  
|Forfeited                         |  |        | 0         |  |                                                   |  
|Outstanding at September 30, 2012 |  |        | 1,794,000 |  |                                                   | $



NOTE 9. INCOME TAXES



We have elected to
be treated as a RIC under the Code and operate in a manner so as to qualify for the tax treatment applicable to RICs.



In order to qualify
as a RIC, we must, in general, (1) annually, derive at least 90 percent of our gross income from dividends, interest, gains from
the sale of securities and similar sources; (2) quarterly, meet certain investment diversification requirements; and (3) annually,
distribute at least 90 percent of our investment company taxable income as a dividend. We may either distribute or retain our net
capital gain from investments, but any net capital gain not distributed will be subject to corporate income tax and the excise
tax described below to the extent not offset by the capital loss carryforward. We currently intend to retain and designate any
net capital gain as “designated undistributed capital gains” under the rules of the Code. We will be subject to a four
percent excise tax to the extent we fail to distribute at least 98 percent of our annual net ordinary income and 98.2 percent of
our capital gain net income and would be subject to income tax to the extent we fail to distribute 100 percent of our investment
company taxable income. Capital gains realized during the nine months ended September 30, 2012, were offset by the capital loss
carryforwards at December 31, 2011, and, accordingly, are not subject to corporate income or excise tax.



54







Because of the specialized
nature of our investment portfolio, we generally can satisfy the diversification requirements under the Code if we receive a certification
from the SEC pursuant to Section 851(e) of the Code that we are "principally engaged in the furnishing of capital to other
corporations which are principally engaged in the development or exploitation of inventions, technological improvements, new processes,
or products not previously generally available."



We have received SEC
certification since 1999, including for 2011, pursuant to Section 851(e) of the Code. We qualified for RIC treatment in 2011 even
without certification, but there can be no assurance that we will qualify for or receive certification for 2012 or subsequent years
(to the extent we need additional certification) or that we will actually qualify for Subchapter M treatment in subsequent years.
In addition, under certain circumstances, even if we qualified for Subchapter M treatment in a given year, we might take action
in a subsequent year to ensure that we would be taxed in that subsequent year as a C Corporation, rather than as a RIC. Because
Subchapter M does not permit deduction of operating expenses against net capital gain, it is not clear that the Company and its
shareholders have paid less in taxes since 1999 than they would have paid had the Company remained a C Corporation.



For the three months
ended September 30, 2012, and 2011, we had expense of $7,161 and $1,250, respectively, in federal, state and local taxes. For the
nine months ended September 30, 2012, and 2011, we had expense of $15,236 and $3,643, respectively, in federal, state and local
taxes. At September 30, 2012, and 2011, we had $0 accrued for federal, state and local taxes payable by the Company.



We pay federal, state
and local taxes on behalf of our wholly owned subsidiary, Ventures, which is taxed as a C Corporation. For the three months ended
September 30, 2012, and 2011, our income tax expense for Ventures was $7,161 and $1,250, respectively. For the nine months ended
September 30, 2012, and 2011, our income tax expense for Ventures was $14,331 and $2,635, respectively.



NOTE 10. CHANGE IN NET ASSETS
PER SHARE



The following table
sets forth the computation of basic and diluted per share net increases (decreases) in net assets resulting from operations for
the three months and nine months ended September 30, 2012, and September 30, 2011.





|                                                                                  |  | For the Three Months Ended September 30 |            |   | For the Nine Months Ended September 30 |  
|--------------------------------------------------------------------------------- |  | --------------------------------------- | ---------- | - | -------------------------------------- | -
|                                                                                  |  | 2012                                    |            |   | 2011                                   |  
|Numerator for (decrease) increase in net assets per share                         |  | $                                       | (3,669,717 | ) |                                        | $
|Denominator for basic weighted average shares                                     |  |                                         | 31,000,601 |   |                                        |  
|Basic net (decrease) increase in net assets per share resulting from operations   |  | $                                       | (0.12      | ) |                                        | $
|Denominator for diluted weighted average shares                                   |  |                                         | 31,000,601 |   |                                        |  
|Diluted net (decrease) increase in net assets per share resulting from operations |  | $                                       | (0.12      | ) |                                        | $



55







For the nine months
ended September 30, 2012, the calculation of net increase in net assets resulting from operations per diluted share includes 80
stock options because such stock options were dilutive. All other stock options and restricted stock awards may be dilutive in
future periods in which there is a net increase in net assets resulting from operations in the event that there are significant
increases in the average stock price in the stock market or significant decreases in the amount of unrecognized compensation cost.



NOTE 11. COMMITMENTS AND CONTINGENCIES



On December 28, 2011,
the Asahi Kasei Group completed its acquisition of Crystal IS, Inc. As of September 30, 2012, approximately $273,000 in proceeds
from the transaction is held in escrow to cover potential indemnity claims and the expenses of the stockholder agent. If claims
are made related to certain intellectual property and patents included in the transaction that exceed the escrow amounts withheld,
additional claims could be made seeking funds from the former stockholders, including the Company. This special indemnity provision
is capped, in aggregate, across all former stockholders at $10,250,000 through March 28, 2013, and is capped at $5 million through
December 28, 2013, when the claim period expires. Our pro rata exposure to potential claims would be up to $487,000 through March
31, 2013, and up to $238,000 through December 31, 2013. As of September 30, 2012, no such claims had been made.



NOTE 12. SUBSEQUENT EVENTS



On
October 1, 2012, the Company made a $200,000 follow-on investment in a privately held, equity-focused portfolio company.



On
October 9, 2012, the Company made a $15,032 follow-on investment in a privately held, equity-focused portfolio company.



On October 12, 2012,
we sold 500 written call option contracts in Solazyme, Inc., expiring on October 20, 2012, with a strike price of $10.00. We received
premiums of approximately $15,520 for these contracts.



On
October 20, 2012, a total of 1,532 written call option contracts in Solazyme, Inc., expired unexercised.



On
October 23, 2012, the Company made a $1,000,000 follow-on investment in a privately held, equity-focused portfolio company.



On October 23, 2012, we sold 1,300 written call option contracts
in Solazyme, Inc., expiring on November 17, 2012, with a strike price of $7.50. We received premiums of approximately $212,500
for these contracts.



On October 23, 2012,
we purchased 1,300 put option positions in Solazyme, Inc., expiring on November 17, 2012, with a strike price of $7.50, for a payment
of approximately $21,400.



56







On October 24, 2012,
we sold 1,500 written call option contracts in NeoPhotonics Corporation, expiring on December 22, 2012, with a strike price of
$5.00. We received premiums of approximately $95,250 for these contracts.



On
October 29, 2012, the Company made a $2,445,000 follow-on investment in a privately held, equity-focused portfolio company.



On
October 29, 2012, the Company made a $29,994 follow-on investment in a privately held, equity-focused portfolio company.



In October 2012, we
sold 9,000 shares of Solazyme for proceeds of approximately $100,931.



As of September 30,
2012, we owned an aggregate of 1,938,190 shares of Solazyme. We valued this position at $22,269,803. The key input to our valuation
of Solazyme was the share price as of the close of trading on September 28, 2012, which was $11.49. At September 30, 2012, this
investment represented $0.72 of our net asset value per share. As of November 7, 2012, Solazyme’s closing price was $7.56
per share, and we owned 1,929,190 shares of Solazyme. At this price, our shares of Solazyme are valued at $14,584,676, or $0.47
of our net asset value per share, as of November 7, 2012.



57







|HARRIS & HARRIS GROUP, INC.
        FINANCIAL HIGHLIGHTS
        (Unaudited)
|----------------------------------------------------------------------------



|                                                                                                    |  | Three Months Ended Sept. 30 |             |    | Nine Months Ended Sept. 30 |  
|--------------------------------------------------------------------------------------------------- |  | --------------------------- | ----------- | -- | -------------------------- | -
|                                                                                                    |  | 2012                        |             |    | 2011                       |  
|                                                                                                    |  |                             |             |    |                            |  
|Per Share Operating Performance                                                                     |  |                             |             |    |                            |  
|                                                                                                    |  |                             |             |    |                            |  
|Net asset value per share, beginning of period                                                      |  | $                           | 4.88        |    |                            | $
|                                                                                                    |  |                             |             |    |                            |  
|Net operating (loss)*                                                                               |  |                             | (0.05       | )  |                            |  
|Net realized gain (loss) on investments*                                                            |  |                             | 0.09        |    |                            |  
|Net (decrease) increase in unrealized appreciation as a result of sales*                            |  |                             | (0.12       | )  |                            |  
|Net (decrease) increase in unrealized appreciation on investments held and written call options*(1) |  |                             | (0.04       | )  |                            |  
|Total from investment operations*                                                                   |  |                             | (0.12       | )  |                            |  
|                                                                                                    |  |                             |             |    |                            |  
|Net increase as a result of stock- based compensation expense*                                      |  |                             | 0.02        |    |                            |  
|Total increase from capital  stock transactions                                                     |  |                             | 0.02        |    |                            |  
|                                                                                                    |  |                             |             |    |                            |  
|Net asset value per share, end of period                                                            |  | $                           | 4.78        |    |                            | $
|Stock price per share, end of period                                                                |  | $                           | 3.79        |    |                            | $
|Total return based on stock price                                                                   |  |                             | (0.26       | )% |                            |  
|                                                                                                    |  |                             |             |    |                            |  
|Supplemental Data:                                                                                  |  |                             |             |    |                            |  
|                                                                                                    |  |                             |             |    |                            |  
|Net assets, end of period                                                                           |  | $                           | 148,160,377 |    |                            | $
|                                                                                                    |  |                             |             |    |                            |  
|Ratio of expenses to average net assets                                                             |  |                             | 1.2         | %  |                            |  
|                                                                                                    |  |                             |             |    |                            |  
|Ratio of net operating loss to average net assets                                                   |  |                             | (1.0        | )% |                            |  
|                                                                                                    |  |                             |             |    |                            |  
|Average debt outstanding                                                                            |  | $                           | 2,000,000   |    |                            | $
|                                                                                                    |  |                             |             |    |                            |  
|Average debt per share                                                                              |  | $                           | 0.06        |    |                            | $
|                                                                                                    |  |                             |             |    |                            |  
|Number of shares outstanding, end of period                                                         |  |                             | 31,000,601  |    |                            |  



*Based on Average Shares Outstanding

(1)Net unrealized gains (losses) includes rounding adjustments to reconcile change in net asset value per share. See "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations" for a description of unrealized losses
on investments.



The accompanying notes are an integral part
of this schedule.



58







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



The information contained
in this section should be read in conjunction with the Company's unaudited September 30, 2012, Consolidated Financial Statements
and the Company's audited 2011 Consolidated Financial Statements and notes thereto.



Background



We incorporated under
the laws of the state of New York in August 1981. In 1983, we completed an initial public offering ("IPO"). In 1984,
we divested all of our assets except Otisville BioTech, Inc., and became a financial services company with the investment in Otisville
as the initial focus of our business activity.



In 1992, we registered
as an investment company under the 1940 Act, commencing operations as a closed-end, non-diversified investment company. In 1995,
we elected to become a BDC subject to the provisions of Sections 55 through 65 of the 1940 Act.



Overview



We believe we provide
five core benefits to our shareholders. First, we are an established firm with a positive track record of investing in venture
capital-backed companies. Second, we provide shareholders with access to emerging nanotechnology-enabled companies that would otherwise
be difficult to access or inaccessible for most current and potential shareholders. Third, we have an existing portfolio of companies
at varying stages of maturity that provide for a potential pipeline of investment returns over time. Fourth, we are able to invest
opportunistically in a range of types of securities to take advantage of market inefficiencies. Fifth, we provide access to venture
capital investments in a vehicle that, unlike private venture capital firms, is both transparent and liquid.



We invest in companies
enabled by nanotechnology and microsystems. We believe companies that leverage breakthroughs at the nanoscale are emerging as leaders
in their respective industries. These companies primarily impact the energy, healthcare and electronics sectors. We focused the
Company on making venture capital investments in companies that commercialize and integrate products enabled by nanotechnology
beginning in 2002. We believe this was the period of time when nanotechnology was beginning to emerge from its gestational phase
and entering its commercial phase. We believe the coming decades will be the period of time when the commercial impact of nanotechnology
will become widespread. We believe that as this impact occurs, our portfolio companies are well positioned to profit and that we
will see investment returns as a result.



We define venture capital
investments as the money and resources made available to privately held and publicly traded small businesses with exceptional growth
potential. We believe that we are the only U.S.-based, publicly traded venture capital company making investments exclusively in
nanotechnology and microsystems. We believe we have invested in more nanotechnology-enabled companies than any other venture capital
firm.



59







Nanotechnology and
microsystems are technologies that allow for the characterization, design, manipulation and manufacture of materials and systems
on the molecular and micro levels, respectively.



Nanotechnology is the
study of technologies measured in nanometers, which are units of measurement in billionths of a meter. Microsystems are measured
in micrometers, which are units of measurement in millionths of a meter. We sometimes use "tiny technology" to describe
both of these disciplines.



We consider a company
to fit our investment thesis if the company employs, or intends to employ, technology that we consider to be at the microscale
or smaller, and if the employment of that technology is material to its business plan. By making these investments, we seek to
provide our shareholders with a specific focus on nanotechnology and microsystems through a portfolio of venture capital investments
that address a variety of industries, markets and products.



We believe nanotechnology
can be classified as a transformative technology. An innovation qualifies as a transformative technology if it has the potential
for pervasive use in a wide range of sectors in ways that change the competitive dynamics in those sectors. Transformative technologies
often take decades to fully diffuse through respective sectors. We believe the period of 2001 through 2010 was the first decade
in the commercial development of nanotechnology products. We believe we are currently in the second decade in the commercial development
of nanotechnology products. We believe it will be this second decade and beyond where large portions of industry come to rely on
nanotechnology as a fundamental enabler of advanced products.



Investment Objective and Strategy



Our principal investment
objective is to achieve long-term capital appreciation by making equity-focused venture capital investments in companies that we
believe have exceptional growth potential. Therefore, a significant portion of our current venture capital investment portfolio
provides little or no income in the form of dividends or interest. Current income is a secondary investment objective. We seek
to reach the point where future growth is financed through reinvestment of our capital gains from our venture capital investments
and where current income offsets significant portions of our annual expenses during periods of time between realizations of capital
gains on our investments. We also plan to implement a strategy to grow assets under management by raising one or more third-party
funds to manage. It is possible that we will invest our capital alongside or through these funds in portfolio companies. These
funds may be focused on investing in nanotechnology-enabled companies, or specific sectors such as life sciences, energy and electronics
that are enabled by nanotechnology. It is also possible these funds will also invest in companies in each of these sectors that
are not directly enabled by nanotechnology. There is no assurance when and if we will be able to raise such fund(s) or, if raised,
whether they will be successful.



60







We have discretion
in the investment of our capital to achieve our objectives. Our venture capital investments are made primarily in equity-related
securities of companies that can range in stage from pre-revenue to generating positive cash flow. These businesses tend to be
thinly capitalized, unproven, small companies that lack management depth, have little or no history of operations and are developing
unproven technologies. These businesses may be privately held or publicly traded. We historically have invested in equity securities
of these companies that are generally illiquid due to restrictions on resale and to the lack of an established trading market.
We refer to our portfolio of investments in equity and equity-related securities in later sections of the Management's Discussion
and Analysis of Financial Condition and Results of Operations ("MD&A") as our "equity-focused" portfolio
of investments. We may take advantage of opportunities to generate near-term cash flow by investing in non-convertible debt securities
of small businesses. These businesses tend to be generating cash or have near-term visibility to reaching positive cash flow. We
refer to our portfolio of investments in non-convertible debt in later sections of the MD&A as our "venture debt"
portfolio of investments.



We are both early-stage
and long-term investors. We seek to identify investment opportunities in industries and markets that will be growth opportunities
three to seven years from the date of our initial investment. We expect to invest capital in these companies at multiple points
in time subsequent to our initial investment. We refer to such investments as "follow-on" investments. Our efforts to
identify and predict future growth industries and markets rely on patient and deep due diligence in nanotechnology-enabled innovations
developed at universities and corporate and government research laboratories, and the examination of macroeconomic and microeconomic
trends and industry dynamics. We believe it is the early identification of and investments in these growth opportunities that will
lead to investment returns for our shareholders, growth of our net assets, and capital for us to invest in tomorrow’s growth
opportunities.



Involvement with Portfolio Companies



The 1940 Act requires
that BDCs offer to "make available significant managerial assistance" to portfolio companies. We are actively involved
with our portfolio companies through membership on boards of directors, as observers to the boards of directors and/or through
frequent communication with management. As of September 30, 2012, we held at least one board seat or observer rights on 23 of our
28 equity-focused portfolio companies (82 percent). We have not held a board seat or observer rights at either Solazyme, Inc.,
or NeoPhotonics Corporation since each company completed an initial public offering in May 2011 and February 2011, respectively.



Investments and Current Investment Pace



Since our investment
in Otisville in 1983 through September 30, 2012, we have made a total of 94 equity-focused venture capital investments. We have
completely exited 66 of these 94 investments and partially exited through the sale of shares and/or the sale of call options covered
by shares of two of these 94 investments, recognizing aggregate net realized gains of $71,772,396 on invested capital of $92,754,150.
For the securities of the 28 companies in our equity-focused portfolio held at September 30, 2012, we have net unrealized appreciation
of $11,435,725 on invested capital of $107,328,018. We have aggregate net realized and unrealized appreciation for our 94 equity-focused
investments of $83,208,121 on invested capital of $200,082,168.



61







The amount of net realized
gains includes:



| | · | $13,992,952 in upfront payments received in 2011 from the sale of BioVex Group, Inc., to Amgen,
Inc., the sale of Innovalight, Inc., to E.I. du Pont de Nemours and Company (“DuPont”) and the sale of Crystal IS,
Inc., to Asahi Kasei Group. We had invested a total of $11,383,299 in these three portfolio companies;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | $953,480 from the portion of our upfront payment held in escrow from the sale of BioVex Group,
Inc., to Amgen, Inc., which was released on March 16, 2012;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | $11,140 from the portion of our upfront payment held in escrow from the sale of Crystal IS, Inc.,
to Asahi Kasei Group, which was released on April 30, 2012;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | $4,112,340 from the sale of shares of Solazyme, Inc., on invested capital of $863,928. $1,926,000
of the total proceeds was generated from the call of shares of Solazyme under option contracts. $2,186,340 in total proceeds was
generated from the sale of 173,359 shares of Solazyme through open market transactions; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | $458,911 in realized gains on our sale of call option covered by our shares of NeoPhotonics Corporation
and Solazyme, Inc.
| | - | --------------------------------------------------------------------------------------------------------------------------



The aggregate net realized
gains and the cumulative invested capital also do not reflect the cost or value of our shares of NeoPhotonics Corporation or Solazyme,
Inc., which completed IPOs on February 2, 2011, and May 27, 2011, respectively, that we owned as of September 30, 2012. The aggregate
net realized gains also do not include potential escrow payments from the sale of Crystal IS, Inc., or Innovalight, Inc., or potential
milestone payments that could occur as part of the acquisition of BioVex Group, Inc., by Amgen, Inc., at points in time in the
future as of September 30, 2012.



From August 2001 through
September 30, 2012, all 52 of our initial equity-focused investments have been in companies commercializing or integrating products
enabled by nanotechnology or microsystems. From August 2001 through September 30, 2012, we have invested a total (before any subsequent
write-ups, write-downs or dispositions) of $153,096,224 in these companies. We currently have 26 equity-focused companies in our
portfolio that have yet to complete liquidity events (e.g., IPO or M&A). At September 30, 2012, from first dollar in, the average
and median holding periods for these 26 investments were 5.3 years and 5.5 years, respectively. Historically, as measured from
first dollar in to last dollar out, the average and median holding periods for the 66 investments we have fully exited were 4.2
years and 3.3 years, respectively.



The following is a
summary of our initial and follow-on equity-focused investments in nanotechnology companies from January 1, 2008, to September
30, 2012. We consider a "round led" to be a round where we were the new investor or the leader of a group of investors
in an investee company. Typically, but not always, the lead investor negotiates the price and terms of the deal with the investee
company.



|Investments in Our Equity-Focused Portfolio of Investments
    in Privately Held and Publicly Traded Companies
|--------------------------------------------------------------------------------------------------------------
|                                                                                                              
|                                                                                                              
|Total Incremental Investments                                                                                 
|No. of New Investments                                                                                        
|No. of Follow-On Investment Rounds                                                                            
|No. of Rounds Led                                                                                             
|Average Dollar Amount – Initial                                                                               
|Average Dollar Amount – Follow-On                                                                             



62







During the first nine
months of 2012, we made one new venture debt investment. The following is a summary of our investments in venture debt to date.



|Investments in Our Venture Debt Portfolio of Investments
    In Privately Held and Publicly Traded Companies
|------------------------------------------------------------------------------------------------------------
|                                                                                                            
|                                                                                                            
|No. of Investments                                                                                          
|Total Dollar Amount                                                                                         



In the fourth quarter
of 2011, we made a $500,000 venture debt investment in an equity-focused portfolio company, Ancora Pharmaceuticals Inc. We note
that all amounts, values and numbers mentioned below regarding our equity-focused portfolio companies include this investment in
those calculations.



Our Sources of Liquid Capital



The sources of liquidity
that we use to make our investments are classified as primary and secondary liquidity. As of September 30, 2012, and December 31,
2011, our total primary and secondary liquidity was $52,912,350 and $65,368,303, respectively. We do not include funds available
from our credit facility as primary or secondary liquidity. We believe it is important to examine both our primary and secondary
liquidity when assessing the strength of our balance sheet and our future investment capabilities.



Primary liquidity
is comprised of cash, U.S. Treasury securities and certain receivables. As of September 30, 2012, we held $10,000,000 in U.S.
government obligations, and we had an additional $16,556,886 in cash, of which $11,905,005 was held in non-interest-bearing,
fully FDIC insured bank accounts. On March 16, 2012, the Company received payment of its portion of the proceeds held in
escrow since the closing of the transaction on March 4, 2011, from Amgen, Inc.’s acquisition of BioVex Group, Inc.,
totaling $953,480. On April 30, 2012, the Company received $11,140 from the portion of our upfront payment held in escrow
from the sale of Crystal IS, Inc., to Asahi Kasei Group. These payments immediately added to our primary liquidity. Payments
upon achieving milestones of the BioVex Group, Inc., sale or expiration of the escrow periods for the Crystal IS, Inc., and
Innovalight, Inc., dispositions would also add to our primary liquidity in future quarters if these milestones are achieved
successfully and escrowed funds are released in part or in full. The probability-adjusted values of the future milestone
payments for the sale of BioVex and of the funds held in escrow from the dispositions of Crystal IS and Innovalight, as
determined at the end of each fiscal quarter, are included as an asset on our Consolidated Statements of Assets and
Liabilities and will be included in primary liquidity only if and when payment is received for achievement of the milestones
and the funds held in escrow are released, respectively. During the three months and nine months ended September 30, 2012,
104,300 and 192,600 shares, respectively, of our investment in Solazyme, Inc., were called under option contracts. In total,
we received $4,112,340 in gross proceeds from these transactions, which added to our primary liquidity. We also sold an
additional 173,359 shares of Solazyme on the open market during this period.



63







Our secondary liquidity
is comprised of the stock of publicly traded companies. Although these companies are publicly traded, their stock may not trade
at high volumes and prices may be volatile, which may restrict our ability to sell our positions at any given time. As of September
30, 2012, our secondary liquidity was $26,217,767. NeoPhotonics Corporation and Solazyme, Inc., account for $24,903,100 of this
amount based on the closing price of each company as of September 30, 2012. As of September 30, 2012, shares of NeoPhotonics were
trading below the strike price of the call options that were open and outstanding. The $10.00 Solazyme option contracts were in
the money at September 30, 2012. The fair value of our shares of Champions Oncology, Inc., accounts for $1,314,667 of the total
amount of secondary liquidity. As of September 30, 2012, our shares of each of these companies are freely tradable securities.
A decision to sell our shares would result in the cash received from the sale of these assets being included in primary liquidity.
Until that time, we will continue to include the value of our shares of our publicly traded portfolio companies in secondary liquidity
unless the average trading volume of each company reaches sufficient levels for us to monetize our stock in such companies over
a short period of time.



Potential Pending Liquidity Events from
Our Portfolio as of September 30, 2012



As of the end of the
third quarter of 2012, six of our companies have commenced planning for and/or began the process of pursuing potential sales and/or
IPOs of those companies within the next six to twelve months. These companies have either begun the process of hiring or have hired
bankers and/or advisors to attempt to pursue such liquidity events or are in discussions with potential acquirers of those companies.
As of September 30, 2012, these efforts are ongoing, and there can be no assurance that any of these companies will be able to
consummate either type of transaction within the next six to twelve months, if at all.



As of September 30,
2012, we valued potential milestone payments from the sale of BioVex Group, Inc., at $3,400,488. If all the remaining milestone
payments were to be paid by Amgen, Inc., we would receive $9,526,393. We have not received any milestone payments as of September
30, 2012, and there can be no assurance as to the timing and how much of this amount we will ultimately realize in the future,
if any.



Strategy for Managing Publicly Traded Positions



During the third quarter
of 2012, our strategy for managing our publicly traded positions has generated approximately $297,628 in net cash proceeds from
premiums on call options sold. We also added approximately $1,039,720 in net cash proceeds to our primary liquidity resulting from
the options called during the third quarter that were covered by a portion of our shares of Solazyme, Inc. During the third quarter
of 2012, we sold an additional 173,359 shares of Solazyme for net cash proceeds of $2,178,338. The net increase in our primary
liquidity from these transactions was $3,515,686. The average sale price on assignments under option contracts and open market
sales was $11.59 for the quarter. Our cost basis in Solazyme is $2.36 per share. The proceeds from the premiums received from the
sale of call options and the cash from the sale of shares discussed above have yielded cash that is approximately the same as the
original amount we invested in Solazyme. This increase in primary liquidity is important for our efforts to continue to fund existing
and new portfolio companies that could generate future investment returns.



64







We discuss our assessment
of the benefits of selling covered call options on our publicly traded portfolio companies in detail in our Annual Report on Form
10-K for the year ended December 31, 2011. In addition to this assessment, we note that the shares of NeoPhotonics Corporation
and Solazyme, Inc., remain relatively illiquid compared to the number of shares owned by us and are highly volatile. We may increase
the number of in-the-money call options sold by us to facilitate an orderly liquidation of our positions in these companies. We
may also purchase put options as a method of limiting the downside risk that the price per share of these companies may decrease
substantially from current levels. A put option gives its holder the right to sell a specified number of shares of a specific security
at a specific price (known as the exercise strike price) by a certain date. The buyer of a put option is betting that the price
of the security will decrease before the option expires. The risk for us as the option holder is that the option expires unexercised,
and we have lost the money spent on buying the option.



Maturity of Current Equity-Focused Venture
Capital Portfolio



Our equity-focused
venture capital portfolio is comprised of companies at varying maturities facing different types of risks. We have defined these
levels of maturity and sources of risk as: 1) Early Stage/Technology Risk, 2) Mid Stage/Market Risk and 3) Late Stage/Execution
Risk. We provide detailed descriptions of each of these classifications in our Annual Report on Form 10-K for the year ended December
31, 2011.



We believe a portfolio
of companies focused on a diverse set of industries reduces the potential impact of cyclicality within any one industry. Our current
portfolio is comprised of companies at varying stages of maturity in a diverse set of industries within three sectors. We consider
NanoGram Devices to have been both an energy and a healthcare portfolio company. As our portfolio companies mature, we seek to
invest in new early- and mid-stage companies that may mature into mid- and late-stage companies. This continuous progression creates
a pipeline of investment maturities that may lead to future sources of positive contributions to net asset value per share as these
companies mature and potentially experience liquidity and exit events. This diversity of industries and our pipeline of investment
maturities are demonstrated by the distribution of our current early- and mid-stage portfolio companies within each sector shown
in the table below.







65







During the third quarter
of 2012, we transitioned one company, Adesto Technologies Corporation, from a mid-stage company to a late-stage company.



Portfolio Company Revenue



We
currently have 23 companies in our equity-focused venture capital portfolio that generate revenues ranging from nominal to significant
from commercial sales of products and/or services, from commercial partnerships and/or from government grants. In aggregate, our
portfolio companies had approximately $424 million in revenue in 2011, an 11.6 percent increase from aggregate 2010 revenue of
approximately $380 million and a 58.8 percent increase from aggregate 2009 revenue of $267 million.



Current Business Environment



The third quarter of
2012 ended with increases in value in the public market indices. These increases were not reflected in the number and dollar amounts
of IPOs and M&A transactions, which were both down for the third quarter as compared with the same quarter last year. Ten U.S.
venture-backed companies raised $1.1 billion through IPOs in the third quarter of 2012, which is a slight decline from the second
quarter of 2012 and the third quarter of 2011 (11 companies each), according to Dow Jones VentureSource and Thomson Reuters and
the NVCA. The average disclosed deal value for venture-backed M&A transactions (30 disclosed of 99 deals) in the third quarter
of 2012 was $253.3 million, a 26 percent increase from the second quarter of 2012. The IT sector dominated these deals, with 70
of the 96 deals. Life science companies had 16 deals, with an average disclosed price (9 disclosing of 16) of $105 million. However,
according to Thomson Reuters, the IT industry saw a 50 percent drop in M&A activity from the third quarter of 2011 to the third
quarter of 2012. Fifty-three U.S. venture capital funds raised $5.0 billion in the third quarter of 2012 according to Thomson Reuters
and the National Venture Capital Association (NVCA). This is a 23 percent increase in the number of funds (up from 38) and a 17
percent decrease in the amount of capital raised (down from $5.9 billion). The top five venture capital funds accounted for 55
percent of the total fundraising in the third quarter, which is down from 80 percent in the second quarter. Fundraising for all
but the top-tier venture capital funds continues to be difficult owing in part to the closely watched 10-year benchmark for venture
capital returns that stood at only 5.28 percent as of June 30, 2012, which is the most recent data available for this statistic
from Cambridge Associates, LLC.



The current business
environment is also complicated by global economic uncertainty and regional unrest. It remains unclear if and how the debt crisis
in Europe will develop and whether it will result in a slowing of worldwide economic growth or even trigger a further global financial
crisis. It is unclear if the rising budget deficits in the United States will result in further downgrades in its credit rating.
Any outcome could be heightened potentially should an alternative to U.S. Treasury securities emerge as the global safe-haven for
invested capital or should large holders of these securities, such as China, decide to divest of them in large quantities or in
full. All of this uncertainty could lead to a further broad reduction in risk taken by investors and corporations, which could
reduce further the capital available to our portfolio companies, could affect the ability of our portfolio companies to build and
grow their respective businesses, and could decrease the liquidity options available to our portfolio companies.



66













Historically, difficult
venture environments have resulted in a higher than normal number of companies not receiving financing and being subsequently closed
down with a loss to venture investors, and other companies receiving financing but at significantly lower valuations than the preceding
financing rounds. This issue is compounded by the fact that many existing venture capital firms have few remaining years of investment
and available capital owing to the finite lifetime of the funds managed by these firms. Additionally, even if a firm was able to
raise a new fund, commonly venture capital firms are not permitted to invest new funds in existing investments. This limitation
of available capital can lead to fractured syndicates of investors. A fractured syndicate can result in a portfolio company being
unable to raise additional capital to fund operations; this issue is especially acute in capital-intensive sectors that are enabled
by nanotechnology, such as energy, healthcare and electronics, which are generally not in favor among venture capital firms. The
result of these difficulties is that the portfolio company may be forced to sell before reaching its full potential or be shut
down entirely if the remaining investors cannot financially support the company. As such, improvements in the exit environment
for venture-backed companies through IPOs and M&A transactions may not translate to an increase in the available capital to
venture-backed companies, particularly those that have investments from funds that are in the latter stage of life unless the markets
improve for some time into the future.



Our overall goal remains
unchanged. We want to maintain our leadership position in investing in nanotechnology and microsystems and to increase our net
asset value. The current environment for venture capital financings continues to favor those firms that have capital to invest
regardless of the stage of the investee company. We continue to finance our new and follow-on equity and convertible debt investments
from our cash reserves held in bank accounts. We have historically held, and may in the future again hold, our cash in U.S. Treasury
securities. We believe the current status of the venture capital industry and the current economic climate provide opportunities
to invest this capital at historically low valuations in equity and convertible debt securities and at high yields in non-convertible
debt securities of new and existing privately held and publicly traded companies of varying maturities.



Valuation of Investments



We value our privately
held venture capital investments each quarter as determined in good faith by our Valuation Committee, a committee of all the independent
directors, within guidelines established by our Board of Directors in accordance with the 1940 Act. (See "Footnote to Consolidated
Schedule of Investments" contained in "Consolidated Financial Statements.")



The values of privately
held, venture capital-backed companies are inherently more difficult than publicly traded companies to assess at any single point
in time because securities of these types of companies are not actively traded. We believe, perhaps even more than in the past,
that illiquidity, and the perception of illiquidity, can affect value. Management believes further that the long-term effects of
the difficult venture capital market and difficult exit environments will continue to affect negatively the fundraising ability
of weak companies regardless of near-term improvements in the overall global economy and public markets, and that these factors
can also affect value.



In each of the years
in the period 2008 through 2011, and for the nine months ended September 30, 2012, the Company recorded the following gross write-ups
in privately held securities as a percentage of net assets at the beginning of the year ("BOY"), gross write-downs in
privately held securities as a percentage of net assets at the beginning of the year, and change in value of private portfolio
securities as a percentage of net assets at the beginning of the year.



67







|Gross Write-Ups and Write-Downs of the Privately Held Portfolio
|---------------------------------------------------------------
|                                                               
|                                                               
|Net Asset Value, BOY                                           
|                                                               
|Gross Write-Downs During Year                                  
|                                                               
|Gross Write-Ups During Year                                    
|                                                               
|Gross Write-Downs as a Percentage of Net Asset Value, BOY      
|                                                               
|Gross Write-Ups as a Percentage of Net  Asset Value, BOY       
|                                                               
|Net Change as a Percentage of Net Asset Value, BOY             



From June 30, 2012,
to September 30, 2012, the value of our equity-focused venture capital portfolio, including our rights to potential future milestone
payments from the sale of BioVex Group, Inc., to Amgen, Inc., decreased by $2,954,920, from $125,119,150 to $122,164,230.



Not including our rights
to potential future milestone payments from the sale of BioVex Group, Inc., to Amgen, Inc., our equity-focused portfolio companies
decreased in value by $2,969,184. This decrease was primarily owing to a net decrease in the valuations of two of our publicly
traded portfolio companies of $8,124,682, a net decrease in the values of comparables and indications of value from potential acquirers
of $2,007,078, an increase in currency fluctuations, which was offset by a decrease in the value of warrants, in aggregate, of
$2,870. These changes were offset by new and follow-on investments of $3,574,641, a net increase in value owing to the terms and
pricing of new rounds of financing of $1,073,878, a net decrease in discounts for non-performance risk of $2,228,744 and net accrued
bridge note interest of $288,183.



We note that our Valuation
Committee and ultimately our Board of Directors take into account multiple sources of quantitative and qualitative inputs to determine
the value of our privately held portfolio companies and our publicly traded portfolio company whose value is not derived solely
from the closing price on the last day of the quarter.



We also note that our
Valuation Committee does not set the value of our freely tradable publicly traded portfolio companies, Solazyme, Inc., and NeoPhotonics
Corporation. Even though our position in Champions Oncology, Inc., is freely tradable as of September 30, 2012, subjective inputs
are also included in the determination of value. Therefore, our Valuation Committee sets the value of this position.



68







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.  Our best estimates of non-performance
risk of our portfolio companies during the third quarter of 2012 are included in the valuation of the companies as of September
30, 2012. Changes in non-performance risk led to a net increase in value of $2,228,744. In the future, as these companies receive
terms for additional financings or if they are unable to receive additional financing and, therefore, proceed with sales or shutdowns
of the business, we expect the contribution of the discount for non-performance risk to vary in importance in determining the fair
values of our securities of these companies. Changes in discounts for non-performance risk could positively or negatively affect
the value of our portfolio companies in future quarters. As of September 30, 2012, non-performance risk was a significant factor
in determining the values of eight of our 26 equity-focused portfolio companies that are fair valued by our Board of Directors.
These eight companies accounted for approximately $23.0 million, or 19.0 percent, of the total
value of our equity-focused venture capital portfolio, not including our rights to milestone payments from the sale of BioVex Group,
Inc., to Amgen, Inc. As of June 30, 2012, non-performance risk was a significant factor in determining the values of eight of our
26 equity-focused portfolio companies that are fair valued by our Board of Directors. These eight companies accounted for approximately
$27.4 million, or 22.5 percent, of the total value of our equity-focused venture capital portfolio,
not including our rights to milestone payments from the sale of BioVex Group, Inc., to Amgen, Inc.



We also note that our
valuation of our securities of Molecular Imprints, Inc., includes $3,033,338 that is ascribed to a non-convertible bridge note.
The principal plus interest of this note was repaid in full in the third quarter of 2011. The remaining value results from a liquidation
preference that survived the repayment of the note and, as currently written, would pay the Company $4,044,450 should the company
be sold for more than its outstanding debt and a contractual payment to management of Molecular Imprints. Our value of this portion
of our securities of Molecular Imprints as of September 30, 2012, reflects a probability-weighted discount applied to the total
amount of the preference.



As of September 30,
2012, our top ten investments by value accounted for approximately 73 percent of the value of our equity-focused venture capital
portfolio.





TOPTENEQUITY-FOCUSED

INVESTMENTS
BYVALUE



|                             |  |                |            |  | Cumulative % of        | 
|---------------------------- |  | -------------- | ---------- |  | ---------------------- | 
|                             |  | Value as of    |            |  | Equity-Focused Venture | 
|Company Name                 |  | Sept. 30, 2012 |            |  | Capital Portfolio      | 
|                             |  |                |            |  |                        | 
|Solazyme, Inc.               |  | $              | 22,269,803 |  |                        | 
|                             |  |                |            |  |                        | 
|Adesto Technologies Corp.    |  | $              | 15,284,226 |  |                        | 
|                             |  |                |            |  |                        | 
|Xradia, Inc                  |  | $              | 7,968,166  |  |                        | 
|                             |  |                |            |  |                        | 
|SiOnyx, Inc.                 |  | $              | 7,742,693  |  |                        | 
|                             |  |                |            |  |                        | 
|Molecular Imprints, Inc.     |  | $              | 6,960,944  |  |                        | 
|                             |  |                |            |  |                        | 
|Bridgelux, Inc.              |  | $              | 6,264,847  |  |                        | 
|                             |  |                |            |  |                        | 
|Metabolon, Inc.              |  | $              | 6,081,807  |  |                        | 
|                             |  |                |            |  |                        | 
|D-Wave Systems, Inc.         |  | $              | 5,709,600  |  |                        | 
|                             |  |                |            |  |                        | 
|Ancora Pharmaceuticals, Inc. |  | $              | 4,110,644  |  |                        | 
|                             |  |                |            |  |                        | 
|Nanosys, Inc.                |  | $              | 3,903,560  |  |                        | 



73 Percent of Value of Equity-Focused Venture Capital Portfolio





69







Results of Operations



We present the financial
results of our operations utilizing GAAP for investment companies. On this basis, the principal measure of our financial performance
during any period is the net increase (decrease) in our net assets resulting from our operating activities, which is the sum of
the following three elements:



Net Operating Income (Loss)-
the difference between our income from interest, dividends, and fees and our operating expenses.



Net Realized Gain (Loss) on Investments
- the difference between the net proceeds of sales of portfolio securities and their stated cost, plus income from interests in
limited liability companies.



Net Increase (Decrease) in Unrealized
Appreciation or Depreciation on Investments - the net unrealized change in the value of our investment portfolio.



Owing to the structure
and objectives of our business, we generally expect to experience net operating losses and seek to generate increases in our net
assets from operations through the long-term appreciation and monetization of our venture capital investments. We have relied,
and continue to rely, primarily on proceeds from sales of investments, rather than on investment income, to defray a significant
portion of our operating expenses. Because such sales are unpredictable, we attempt to maintain adequate working capital to provide
for fiscal periods when there are no such sales. During 2011 and through the third quarter of 2012, we made three and one venture
debt investments, respectively. While the interest income generated from these investments did not defray a significant portion
of our operating expenses in 2011 or through the third quarter of 2012, further investments in venture debt could generate more
substantial investment income in future years.



The
potential for, or occurrence of, inflation could result in rising interest rates for government-backed debt.  This trend would
have two effects on our business.  First, the spread between the interest rates we can obtain from investing in low-risk government
debt versus high-risk venture debt will compress, which would result in a reduction of the risk premium associated with investments
in venture debt.  We may reduce the number and amount invested in venture debt should this risk premium decrease substantially
as to not compensate us adequately for the risk associated with such investments. Second, funds drawn from our line of credit will
accrue interest at a rate that fluctuates with either the London Interbank Offered Rate (LIBOR) or the prime rate. LIBOR and the
prime rate are expected to increase in times of inflation.  Our venture debt investmentsmay include both fixed and floating interest rates.  Our net interest income would decrease
if the spread between the interest rate on funds from our line of credit and our venture debt investments decrease.



Three months
ended September 30, 2012, as compared with the three months ended September 30, 2011



In the three months
ended September 30, 2012, and September 30, 2011, we had net decreases in net assets resulting from operations of $3,669,717 and
$33,084,607, respectively.



70







Investment Income
and Expenses:



We had net operating
losses of $1,450,334 and $2,118,158 for the three months ended September 30, 2012, and September 30, 2011, respectively. The variation
in these results is primarily owing to the changes in investment income and operating expenses, including non-cash stock-based
compensation expense of $472,304 in 2012 and $442,201 in 2011. During the three months ended September 30, 2012, and 2011, total
investment income was $396,246 and $202,527, respectively. During the three months ended September 30, 2012, and 2011, total operating
expenses were $1,846,580 and $2,320,685, respectively.



During the three months
ended September 30, 2012, as compared with the same period in 2011, investment income increased, reflecting an increase in interest
income from convertible bridge notes, non-convertible promissory notes, subordinated and senior secured debt, and senior secured
debt through a participation agreement, offset by a decrease in our average holdings of U.S. government securities. During the
three months ended September 30, 2012, our average holdings of U.S. government securities were $2,500,000, as compared with $21,498,938
during the three months ended September 30, 2011, primarily owing to the decrease in yield available over the durations of maturities
in which we were willing to invest and the availability of fully FDIC insured demand deposit bank accounts. The average yield on
our U.S. government securities for the three months ended September 30, 2012, and 2011, was 0.09 percent and 0.04 percent, respectively.



Operating
expenses, including non-cash, stock-based compensation expense, were $1,846,580 and $2,320,685 for the three months ended
September 30, 2012, and September 30, 2011, respectively. The decrease in operating expenses for the three months ended
September 30, 2012, as compared with the three months ended September 30, 2011, was primarily owing to decreases in salaries,
benefits and stock-based compensation expense, professional fees and directors' fees and expenses, offset by increases in
administration and operations expense, rent expense and custody fees. Salaries, benefits and stock-based compensation expense
decreased by $289,214, or 19.4 percent, for the three months ended September 30, 2012, as compared with the three months
ended September 30, 2011, primarily as a result of a decrease in year-end employee bonus accruals of $470,750, offset by
increases in salaries of employees owing to cost of living adjustments and costs associated with the addition of one
full-time employee and two part-time employees, an increase of $19,795 in the projected benefit obligation expense accrual
for medical retirement benefits and an increase in non-cash expense of $30,103 associated with the Amended Stock Plan. While
the non-cash, stock-based compensation expense for the Amended Stock Plan increased our operating expenses by $472,304, this
increase was offset by a corresponding increase to our additional paid-in capital, resulting in no net impact to our net
asset value. Professional fees decreased by $190,689, or 46.2 percent, through September 30, 2012, as compared with September
30, 2011, primarily as a result of decreases in certain legal and consulting fees associated with investor outreach and
marketing efforts, offset by an increase in accounting fees. Directors' fees and expenses decreased by $17,372, or 21.6
percent, through September 30, 2012, as compared with September 30, 2011, primarily owing to the retirement of two members of
our Board of Directors in 2012. Administration and operations expense increased by $5,426, or 2.6 percent, through September
30, 2012, as compared with September 30, 2011. Rent expense increased by $6,382, or 6.4 percent, for the three months ended
September 30, 2012, as compared with the three months ended September 30, 2011. Our rent expense of $105,705 for the three
months ended September 30, 2012, includes $91,980 of rent paid in cash and $13,725 non-cash rent expense, credits and
abatements that we recognize on a straight-line basis over the lease term. Our rent paid in cash of $91,980 includes $4,373
of real estate tax escalation charges on our corporate headquarters located at 1450 Broadway in New York City. Custody fees
increased by $9,273, or 211.7 percent, for the three months ended September 30, 2012, as compared with September 30,
2011.



71







Realized Income and Losses from Investments:



During the three months
ended September 30, 2012, we realized net gains on investments of $2,776,048. During the three months ended September 30, 2011,
we realized net losses on investments of $2,683,218.



During the three months
ended September 30, 2012, we realized net gains of $2,776,048, consisting primarily of a realized gain of $2,695,339 on the sale
of 277,659 shares of Solazyme, Inc., including the sale of 104,300 shares that were called subject to the terms of call option
contracts. At September 30, 2012, we still owned 1,938,190 shares of Solazyme. We also had a realized gain of $80,573 on the repurchase
and expiration of certain Solazyme and NeoPhotonics Corporation written call option contracts.



During the three months
ended September 30, 2011, we realized net losses of $2,683,218, consisting primarily of realized losses in our investment in Innovalight,
Inc., of $665,269 and in Polatis, Inc., of $2,018,278. A portion of the proceeds from the sale of Innovalight are held in escrow
and valued at $462,839. Should the full amount of the escrow of $927,713 be released, the realized loss on the transaction will
decrease.



Net Unrealized Appreciation
and Depreciation of Portfolio Securities:



During the three months
ended September 30, 2012, net unrealized appreciation on total investments decreased by $4,988,270, or 28.7 percent, from net unrealized
appreciation of $17,361,078 at June 30, 2012, to net unrealized appreciation of $12,372,808 at September 30, 2012. During the three
months ended September 30, 2011, net unrealized appreciation on total investments decreased by $28,281,981, or 109.3 percent, from
net unrealized appreciation of $25,882,386 at June 30, 2011, to net unrealized depreciation of $2,399,595 at September 30, 2011.



During the three months
ended September 30, 2012, net unrealized appreciation on our venture capital investments decreased by $6,099,871, from net unrealized
appreciation of $17,825,260 at June 30, 2012, to net unrealized appreciation of $11,725,389 at September 30, 2012, owing primarily
to write-downs in the valuations of the following investments held:



|Investment                        |  | Amount of Write-Down |          
|--------------------------------- |  | -------------------- | ---------
|                                  |  |                      |          
|Solazyme, Inc.                    |  | $                    | 7,875,223
|Bridgelux, Inc.                   |  |                      | 2,103,770
|Contour Energy Systems, Inc.      |  |                      | 1,279,064
|Ancora Pharmaceuticals Inc.       |  |                      | 1,238,523
|Laser Light Engines, Inc.         |  |                      | 1,069,528
|Champions Oncology, Inc.          |  |                      | 658,667  
|Senova Systems, Inc.              |  |                      | 302,901  
|Mersana Therapeutics, Inc.        |  |                      | 227,948  
|SiOnyx, Inc.                      |  |                      | 111,459  
|Ensemble Therapeutics Corporation |  |                      | 29,380   
|Metabolon, Inc.                   |  |                      | 16,346   



72







The write-downs for
the three months ended September 30, 2012, were offset by write-ups in the valuations of the following investments held:



|Investment                      |  | Amount of Write-Up |          
|------------------------------- |  | ------------------ | ---------
|                                |  |                    |          
|Adesto Technologies Corporation |  | $                  | 3,655,548
|Nanosys, Inc.                   |  |                    | 2,639,847
|Nantero, Inc.                   |  |                    | 1,210,298
|Cobalt Technologies, Inc.       |  |                    | 569,334  
|NeoPhotonics Corporation        |  |                    | 405,816  
|Xradia, Inc.                    |  |                    | 34,332   
|GEO Semiconductor, Inc.         |  |                    | 25,824   
|NanoTerra, Inc.                 |  |                    | 20,625   
|OHSO Clean, Inc.                |  |                    | 16,151   
|D-Wave Systems, Inc.            |  |                    | 4,650    



We had an increase
in unrealized appreciation of $14,264 on the rights to milestone payments from Amgen, Inc.’s acquisition of BioVex Group,
Inc.



We had an increase
in unrealized appreciation owing to foreign currency translation of $216,249 on our investment in D-Wave Systems, Inc.



During the three months
ended September 30, 2011, net unrealized appreciation on our venture capital investments decreased by $28,280,928, from net unrealized
appreciation of $25,881,123 at June 30, 2011, owing primarily to decreases in the valuations of the following investments held:



|Investment                        |  | Amount of Write-Down |           
|--------------------------------- |  | -------------------- | ----------
|                                  |  |                      |           
|Solazyme, Inc.                    |  | $                    | 23,548,403
|Bridgelux, Inc.                   |  |                      | 3,004,179 
|Mersana Therapeutics, Inc.        |  |                      | 1,402,427 
|Xradia, Inc.                      |  |                      | 1,086,767 
|Ensemble Therapeutics Corporation |  |                      | 866,697   
|Nanosys, Inc.                     |  |                      | 725,249   
|Nantero, Inc.                     |  |                      | 490,811   
|Cobalt Technologies, Inc.         |  |                      | 250,590   
|Nextreme Thermal Solutions, Inc.  |  |                      | 137,664   
|Metabolon, Inc.                   |  |                      | 12,240    
|D-Wave Systems, Inc.              |  |                      | 3,685     
|SiOnyx, Inc.                      |  |                      | 2,281     



The write-downs for
the three months ended September 30, 2011, were offset by increases in the valuations of the following investments held:



73







|Investment               |  | Amount of Write-Up |        
|------------------------ |  | ------------------ | -------
|                         |  |                    |        
|HzO, Inc.                |  | $                  | 361,046
|ABSMaterials, Inc.       |  |                    | 187,500
|NeoPhotonics Corporation |  |                    | 161,835
|Molecular Imprints, Inc. |  |                    | 76,317 
|GEO Semiconductor, Inc.  |  |                    | 15,264 
|NanoTerra, Inc.          |  |                    | 11,728 



We had an increase
in unrealized appreciation for Innovalight, Inc., of $644,762 and for Polatis, Inc., of $2,018,288 owing to the sale of these securities
and the reversal of previously recorded unrealized depreciation on these holdings.



We had an increase
in unrealized appreciation of $27,891 on the rights to milestone payments from Amgen from its acquisition of BioVex in the first
quarter of 2011.



We had a decrease in
unrealized appreciation owing to foreign currency translation of $254,566 on our investment in D-Wave Systems, Inc.



Nine months ended
September 30, 2012, as compared with the nine months ended September 30, 2011



In the nine months
ended September 30, 2012, we had a net increase in net assets resulting from operations of $4,547. In the nine months ended September
30, 2011, we had a net decrease in net assets resulting from operations of $12,988,545.



Investment Income
and Expenses:



We had net operating
losses of $6,814,995 and $5,759,854 for the nine months ended September 30, 2012, and September 30, 2011, respectively. During
the nine months ended September 30, 2012, and 2011, total investment income was $528,690 and $527,177, respectively. During the
nine months ended September 30, 2012, and 2011, total operating expenses were $7,343,685 and $6,287,031, respectively, including
non-cash stock-based compensation expense of $2,457,423 in 2012 and $1,427,321 in 2011. The increase in non-cash stock-based compensation
is primarily associated with the voluntary cancellation of stock options and compensation cost for restricted stock during the
second quarter of 2012.



During the nine months
ended September 30, 2012, as compared with the same period in 2011, investment income increased, reflecting an increase in interest
income from non-convertible promissory notes, subordinated and senior secured debt, and senior secured debt through a participation
agreement, offset by a decrease in interest income from convertible bridge notes and a decrease in our average holdings of U.S.
government securities. During the nine months ended September 30, 2012, we accrued net bridge note interest of $190,466, as compared
with $274,045 during the nine months ended September 30, 2011. During the nine months ended September 30, 2012, our average holdings
of U.S. government securities were $1,000,000, as compared with $30,834,769 during the nine months ended September 30, 2011, primarily
owing to the decrease in yield available over the durations of maturities in which we were willing to invest and the availability
of fully FDIC insured demand deposit bank accounts. The average yield on our U.S. government securities for the nine months ended
September 30, 2012, and 2011, was 0.07 percent and 0.08 percent, respectively.



74







Operating expenses,
including non-cash, stock-based compensation expense, were $7,343,685 and $6,287,031 for the nine months ended September 30, 2012,
and September 30, 2011, respectively. The increase in operating expenses for the nine months ended September 30, 2012, as compared
with the nine months ended September 30, 2011, was primarily owing to increases in salaries, benefits and stock-based compensation
expense, administration and operations expense and rent expense, offset by decreases in professional fees, directors' fees and
expenses and custody fees. Salaries, benefits and stock-based compensation expense increased by $1,074,298, or 26.4 percent, through
September 30, 2012, as compared with September 30, 2011, primarily as a result of an increase in non-cash expense of $1,030,102
associated with the Amended Stock Plan. In May 2012, the executive officers of the Company voluntarily cancelled all of their outstanding
stock options for no consideration. This resulted in a one-time charge of $1,365,242 to recognize all of the previously unrecognized
compensation cost related to these options. While the non-cash, stock-based compensation expense for the Amended Stock Plan increased
our operating expenses by $2,457,423, this increase was offset by a corresponding increase to our additional paid-in capital, resulting
in no net impact to our net asset value. We also had increases in salaries of employees owing to cost of living adjustments and
costs associated with the hiring of one full-time employee and two part-time employees and an increase of $59,387 in the projected
benefit obligation expense accrual for medical retirement benefits, offset by a decrease in year-end employee bonus accruals of
$326,250. Administration and operations expense increased by $111,851, or 16.4 percent, through September 30, 2012, as compared
with September 30, 2011, primarily as a result of increases in expenses associated with investor outreach expenses and costs of
approximately $37,668 related to Meet the Portfolio Day. We did not hold a Meet the Portfolio Day during the comparable period
in 2011. Rent expense increased by $25,079, or 9.0 percent, for the period ended September 30, 2012, as compared with the nine
months ended September 30, 2011. Our rent expense of $303,402 for the nine months ended September 30, 2012, includes $305,382 of
rent paid in cash, net of $1,980 non-cash rent expense, credits and abatements that we recognize on a straight-line basis over
the lease term. Our rent paid in cash of $305,382 includes $5,137 of real estate tax escalation charges on our corporate headquarters
located at 1450 Broadway in New York City. Professional fees decreased by $129,611, or 14.9 percent, through September 30, 2012,
as compared with September 30, 2011, primarily as a result of decreases in certain legal and consulting fees associated with investor
outreach and marketing efforts, offset by an increase in accounting fees. Directors' fees and expenses decreased by $23,812, or
9.0 percent, through September 30, 2012, as compared with September 30, 2011, primarily owing to the retirement of two members
of our Board of Directors in 2012. Custody fees decreased by $16,745, or 32.0 percent, for the nine months ended September 30,
2012, as compared with September 30, 2011, owing to the lower fees charged by our new custodian, Union Bank.



Realized Income and Losses from Investments:



During the nine months
ended September 30, 2012, and September 30, 2011, we realized net gains on investments of $4,313,573 and $2,678,853, respectively.



75







During the nine months
ended September 30, 2012, we realized net gains of $4,313,573, consisting primarily of a realized gain of $3,366,218 on the sale
of 365,959 shares of Solazyme, Inc., including the sale of 192,600 shares that were called subject to the terms of call option
contracts and a realized gain of $458,911 on the repurchase and expiration of certain Solazyme and NeoPhotonics Corporation written
call option contracts. At September 30, 2012, we still owned 1,938,190 shares of Solazyme. We also had realized gains on
our escrow payments from the sales of BioVex Group, Inc., and Crystal IS, Inc.,



During the nine months
ended September 30, 2011, we realized net gains of $2,678,853, consisting primarily of realized gains on our investments in BioVex
Group, Inc., of $7,508,279 and in Siluria Technologies, Inc., of $25,000, offset by realized losses on our investments in Innovalight,
Inc., of $665,269, Polatis, Inc., of $2,018,278, PolyRemedy, Inc., of $204,206 and in Questech Corporation of $1,966,591. A portion
of the proceeds from the sale of Innovalight are held in escrow and valued at $462,839. Should the full amount of the escrow of
$927,713 be released, the realized loss on the transaction will decrease to $200,395.



Net Unrealized Appreciation
and Depreciation of Portfolio Securities:



During the nine months
ended September 30, 2012, net unrealized appreciation on total investments increased by $2,521,205, or 25.6 percent, from net unrealized
appreciation of $9,851,603 at December 31, 2011, to net unrealized appreciation of $12,372,808 at September 30, 2012. During the
nine months ended September 30, 2011, net unrealized appreciation on total investments decreased by $9,903,901, or 131.9 percent,
from net unrealized appreciation of $7,504,306 at December 31, 2010, to net unrealized depreciation of $2,399,595 at September
30, 2011.



During the nine months
ended September 30, 2012, net unrealized appreciation on our venture capital investments increased by $1,993,786, from net unrealized
appreciation of $9,731,603 at December 31, 2011, to net unrealized appreciation of $11,725,389 at September 30, 2012, owing primarily
to increases in the valuations of the following investments held:



|Investment                        |  | Amount of Write-Up |          
|--------------------------------- |  | ------------------ | ---------
|                                  |  |                    |          
|Adesto Technologies Corporation   |  | $                  | 6,214,431
|Nanosys, Inc.                     |  |                    | 2,408,883
|Nantero, Inc.                     |  |                    | 1,210,298
|Ensemble Therapeutics Corporation |  |                    | 1,085,952
|Xradia, Inc.                      |  |                    | 989,389  
|Cobalt Technologies, Inc.         |  |                    | 819,921  
|Cambrios Technologies Corporation |  |                    | 800,546  
|NeoPhotonics Corporation          |  |                    | 568,143  
|D-Wave Systems, Inc.              |  |                    | 463,222  
|Enumeral Biomedical Corp.         |  |                    | 215,343  
|NanoTerra, Inc.                   |  |                    | 38,543   
|OHSO Clean, Inc.                  |  |                    | 28,859   
|GEO Semiconductor, Inc.           |  |                    | 15,204   



The write-ups for the
nine months ended September 30, 2012, were offset by write-downs in the valuations of the following investments held:



76







|Investment                   |  | Amount of Write-Down |          
|---------------------------- |  | -------------------- | ---------
|                             |  |                      |          
|Solazyme, Inc.               |  | $                    | 4,285,642
|Bridgelux, Inc.              |  |                      | 2,192,389
|Mersana Therapeutics, Inc.   |  |                      | 1,460,480
|Contour Energy Systems, Inc. |  |                      | 1,279,064
|Ancora Pharmaceuticals Inc.  |  |                      | 1,234,747
|Laser Light Engines, Inc.    |  |                      | 1,110,977
|Champions Oncology, Inc.     |  |                      | 658,667  
|Senova Systems, Inc.         |  |                      | 441,363  
|ABSMaterials, Inc.           |  |                      | 390,000  
|SiOnyx, Inc.                 |  |                      | 32,993   
|Metabolon, Inc.              |  |                      | 16,255   



We had an increase
in unrealized appreciation of $37,697 on the rights to milestone payments from Amgen, Inc.’s acquisition of BioVex Group,
Inc.



We had an increase
in unrealized appreciation owing to foreign currency translation of $199,932 on our investment in D-Wave Systems, Inc.



During the nine months
ended September 30, 2011, net unrealized appreciation on our venture capital investments decreased by $9,902,843, from net unrealized
appreciation of $7,503,038 at December 31, 2010, to net unrealized depreciation of $2,399,805 at September 30, 2011, owing primarily
to decreases in the valuations of the following investments held:



|Investment                        |  | Amount of Write-Down |          
|--------------------------------- |  | -------------------- | ---------
|                                  |  |                      |          
|Solazyme, Inc.                    |  | $                    | 2,419,357
|Xradia, Inc.                      |  |                      | 3,152,309
|Mersana Therapeutics, Inc.        |  |                      | 1,869,902
|NeoPhotonics Corporation          |  |                      | 1,697,375
|SiOnyx, Inc.                      |  |                      | 1,631,339
|Ensemble Therapeutics Corporation |  |                      | 1,466,337
|Nanosys, Inc.                     |  |                      | 1,450,495
|D-Wave Systems, Inc.              |  |                      | 1,133,259
|BridgeLux, Inc.                   |  |                      | 743,562  
|Ancora Pharmaceuticals Inc.       |  |                      | 955,432  
|Nextreme Thermal Solutions, Inc.  |  |                      | 550,657  
|Nantero, Inc.                     |  |                      | 490,811  
|Laser Light Engines, Inc.         |  |                      | 421,945  
|Contour Energy Systems, Inc.      |  |                      | 206,118  
|Champions Oncology, Inc.          |  |                      | 53,333   



The write-downs for the nine months ended
September 30, 2011, were offset by increases in the valuations of the following investments held:



77







|Investment                       |  | Amount of Write-Up |          
|-------------------------------- |  | ------------------ | ---------
|                                 |  |                    |          
|Adesto Technologies Corporation  |  | $                  | 4,130,000
|Metabolon, Inc.                  |  |                    | 2,085,783
|CambriosTechnologies Corporation |  |                    | 1,554,890
|ABSMaterials, Inc.               |  |                    | 1,125,000
|Kovio, Inc.                      |  |                    | 620,397  
|Molecular Imprints, Inc.         |  |                    | 375,517  
|HzO, Inc.                        |  |                    | 361,046  
|Enumeral Biomedical Corp.        |  |                    | 83,333   
|GEO Semiconductor, Inc.          |  |                    | 64,997   
|NanoTerra, Inc.                  |  |                    | 12,523   
|Cobalt Technologies, Inc.        |  |                    | 4,103    



We had an increase
in unrealized appreciation for Innovalight, Inc., of $1,489,110, Polatis, Inc., of $2,018,288, PolyRemedy, Inc., of $312,313 and
for Questech Corporation of $1,632,310, owing to realized losses on the sale of these securities.



We had an increase
in unrealized appreciation of $52,722 on the rights to milestone payments from Amgen from its acquisition of BioVex in the first
quarter of 2011.



We had a decrease in
unrealized appreciation for BioVex of $7,467,615, which resulted from a realized gain on the sale of its securities.



We had a decrease in
unrealized appreciation owing to foreign currency translation of $115,329 on our investment in D-Wave Systems, Inc.



Financial Condition



September
30, 2012



At September 30, 2012,
our total assets and net assets were $153,696,713 and $148,160,377, respectively. At December 31, 2011, they were $150,343,653
and $145,698,407, respectively.



At September 30, 2012,
our net asset value per share was $4.78, as compared with $4.70 at December 31, 2011. At September 30, 2012, and December 31, 2011,
our shares outstanding were 31,000,601.



Significant developments
in the nine months ended September 30, 2012,included an increase in the holdings of our venture capital investments of
$10,828,706 and a decrease in our cash of $7,284,508. The increase in the value of our venture capital investments from $113,048,250
at December 31, 2011, to $123,876,956 at September 30, 2012, resulted primarily from an increase in the net value of our venture
capital investments of $1,993,786 and by two new and 19 follow-on investments of $9,817,840. The decrease in our cash and treasury
holdings from $33,841,394 at December 31, 2011, to $26,556,886 at September 30, 2012, is primarily owing to the payment of cash
for operating expenses of $4,653,646 and to new and follow-on venture capital investments totaling $9,817,840, offset by net proceeds
of $4,097,590 received from the sale of certain of our shares of Solazyme, Inc., net premium proceeds of $1,287,571 received from
certain Solazyme and NeoPhotonics Corporation written call option contracts, $953,480 from the portion of our upfront payment held
in escrow from the sale of BioVex Group, Inc., to Amgen, Inc., and $11,140 from the portion of our upfront payment held in escrow
from the sale of Crystal IS, Inc., to Asahi Kasei Group.



78







The following table
is a summary of additions to our portfolio of venture capital investments made during the nine months ended September 30, 2012:



|New Investments  |  | Amount of Investment |        
|---------------- |  | -------------------- | -------
|                 |  |                      |        
|OpGen, Inc.      |  | $                    | 815,000
|OhSo Clean, Inc. |  | $                    | 720,000



|Follow-On Investments             |  |   | Amount of Investment | 
|--------------------------------- |  | - | -------------------- | 
|                                  |  |   |                      | 
|Adesto Technologies Corporation   |  | $ | 1,393,147            | 
|SiOnyx, Inc.                      |  |   | 1,255,523            | 
|Ancora Pharmaceuticals Inc.       |  |   | 1,000,000            | 
|Enumeral Biomedical Corp.         |  |   | 750,000              | 
|Senova Systems, Inc.              |  |   | 657,692              | 
|Kovio, Inc.                       |  |   | 588,000              | 
|Contour Energy Systems, Inc.      |  |   | 480,000              | 
|D-Wave Systems, Inc.              |  |   | 440,999              | 
|Laser Light Engines, Inc.         |  |   | 434,784              | 
|Mersana Therapeutics, Inc.        |  |   | 316,453              | 
|Cambrios Technologies Corporation |  |   | 216,168              | 
|Laser Light Engines, Inc.         |  |   | 186,955              | 
|Mersana Therapeutics, Inc.        |  |   | 124,542              | 
|Ensemble Therapeutics Corporation |  |   | 109,433              | 
|Ultora, Inc.                      |  |   | 107,753              | 
|Ultora, Inc.                      |  |   | 67,821               | 
|Ultora, Inc.                      |  |   | 64,652               | 
|Cobalt Technologies, Inc.         |  |   | 45,097               | 
|Nanosys, Inc.                     |  |   | 43,821               | 
|                                  |  |   |                      | 
|Total                             |  | $ | 9,817,840            | 



The following tables
summarize the values of our portfolios of venture capital investments and U.S. government obligations, as compared with their cost,
at September 30, 2012, and December 31, 2011:



|                                      |  | September 30, 2012 |             |  | December 31, 2011 |  
|------------------------------------- |  | ------------------ | ----------- |  | ----------------- | -
|                                      |  |                    |             |  |                   |  
|Venture capital investments, at cost  |  | $                  | 112,151,567 |  |                   | $
|Net unrealized appreciation(1)        |  |                    | 11,725,389  |  |                   |  
|Venture capital investments, at value |  | $                  | 123,876,956 |  |                   | $



79







|                                      |  | September 30, 2012 |            |  | December 31, 2011 |  
|------------------------------------- |  | ------------------ | ---------- |  | ----------------- | -
|                                      |  |                    |            |  |                   |  
|U.S. government obligations, at cost  |  | $                  | 9,999,914  |  |                   | $
|Net unrealized appreciation(1)        |  |                    | 86         |  |                   |  
|U.S. government obligations, at value |  | $                  | 10,000,000 |  |                   | $



(1)At
September 30, 2012, and December 31, 2011, the net accumulated unrealized appreciation on investments was $12,372,808 and $9,851,603,
respectively.



Liquidity



Our liquidity
and capital resources are generated and are generally available through our cash holdings, interest earned on our investments on
U.S. government securities, cash flows from the sales of U.S. government securities and payments received on our venture debt investments,
proceeds from periodic follow-on equity offerings and realized capital gains retained for reinvestment.



We fund our day-to-day
operations using interest earned and proceeds from our cash holdings, the sales of our investments in U.S. government securities,
when applicable, and interest earned from our venture debt securities. We believe the increase or decrease in the value of our
venture capital investments does not materially affect the day-to-day operations of the Company or our daily liquidity. As of September
30, 2012, and December 31, 2011, we had no investments in money market mutual funds.



We have a $10 million
three-year revolving credit facility with TD Bank, N.A. This credit facility is used to fund our venture debt investments and not
for the payment of day-to-day operating expenses. As of September 30, 2012, we had debt outstanding of $2,000,000, which is approximately
1.3 percent of our net assets. This debt is collateralized with cash held in a restricted account on a one-for-one basis with the
amount of debt outstanding from the credit facility. Therefore, repayment of the outstanding debt as of September 30, 2012, would
not have a significant impact on our daily liquidity. We have not issued any debt securities, and, therefore, are not subject to
credit agency downgrades.



As a venture capital
company, it is critical that we have capital available to support our best companies until we have an opportunity for liquidity
in our investments. As such, we will continue to maintain a substantial amount of liquid capital on our balance sheet. However,
to complement our equity-focused portfolio investing, we seek to invest some of this capital in venture debt where we will have
more defined investment return timelines than we currently have in our existing portfolio. In addition, we may, from time to time,
opt to borrow money to make investments in debt securities that generate cash flow and have a known timeframe for return on investment.



At September 30, 2012,
and December 31, 2011, our total net primary liquidity was $26,694,583 and $33,910,442, respectively. Our primary liquidity is
principally comprised of our cash, U.S. government securities, when applicable, and certain receivables. The decrease in our primary
liquidity from December 31, 2011, to September 30, 2012, is primarily owing to the use of funds for investments and payment of
net operating expenses, offset by the receipt of $953,480 from the portion of our upfront payment held in escrow from the sale
of BioVex Group, Inc., to Amgen, Inc., which was released on March 16, 2012, the receipt of $11,140 from the portion of our upfront
payment held in escrow from the sale of Crystal IS, Inc., to Asahi Kasei Group, which was released on April 30, 2012, and $4,097,590
received from the sale of a portion of our shares of Solazyme. During the first nine months of 2012, we also purchased and sold
call option contracts on our publicly traded positions generating net premiums of $1,287,571.



80







At September 30, 2012,
and December 31, 2011, our secondary liquidity was $26,217,767 and $31,457,861, respectively. Our secondary liquidity consists
of our publicly traded securities. 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 at any given time. We may also be restricted for a
period of time in selling our positions in these companies due to our shares being unregistered. As of September 30, 2012, none
of our publicly traded securities were restricted from sale.



We do not include funds
held in escrow from the sale of investments in primary or secondary liquidity. These funds will become primary liquidity if and
when they are received at the expiration of the escrow period.



We believe that the
current and future venture capital environment may adversely affect the valuation of investment portfolios, lead to tighter lending
standards and result in reduced access to capital. These conditions may lead to a decline in net asset value and/or decline in
valuations of our portfolio companies in future quarters. Although we cannot predict future market conditions, we continue to believe
that our current cash and U.S. government security holdings and our ability to adjust our investment pace will provide us with
adequate liquidity to execute our current business strategy.



Except for a rights
offering, we are generally not able to issue and sell our common stock at a price below our net asset value per share, exclusive
of any distributing commission or discount, without shareholder approval. As of September 30, 2012, our net asset value per share
was $4.78 per share and our closing market price was $3.79 per share. We do not currently have shareholder approval to issue or
sell shares below our net asset value per share.



Borrowings



On February 24, 2011,
we established a $10 million three-year revolving credit facility with TD Bank, N.A., to be used in conjunction with our venture
debt investments.



The credit facility,
among other things, 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 to be held in a non-interest bearing account at TD Bank. 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.



81







The Company’s
outstanding debt balance was $2,000,000 and $1,500,000 at September 30, 2012, and December 31, 2011, respectively. The annual weighted
average interest cost for the nine months ended September 30, 2012, was 1.6 percent, exclusive of amortization of closing fees
and other expenses related to establishing the credit facility. The remaining capacity under the credit facility was $8,000,000
at September 30, 2012. At September 30, 2012, the Company was in compliance with all financial covenants required by the credit
facility.



Contractual Obligations



A summary of our significant contractual
payment obligations is as follows:



Payments Due by Period



|                             |  | Total |           |  | Less than 1 Year |   |         | 1-3 Years |  |   | 3-5 Years |  |  | More Than 5 Years |        
|---------------------------- |  | ----- | --------- |  | ---------------- | - | ------- | --------- |  | - | --------- |  |  | ----------------- | -------
|Revolving credit facility(1) |  | $     | 2,000,000 |  |                  | $ | —       |           |  | $ | 2,000,000 |  |  | $                 | —      
|                             |  |       |           |  |                  |   |         |           |  |   |           |  |  |                   |        
|Operating leases             |  | $     | 2,188,493 |  |                  | $ | 395,876 |           |  | $ | 527,718   |  |  | $                 | 579,016



As of September 30, 2012, we had $8,000,000 of unused
borrowing capacity under our credit facility.



Critical Accounting Policies



The Company's significant
accounting policies are described in Note 3 to the Consolidated Financial Statements and in the Footnote to the Consolidated Schedule
of Investments. Critical accounting policies are those that are both important to the presentation of our financial condition and
results of operations and those that require management’s most difficult, complex or subjective judgments. The Company considers
the following accounting policies and related estimates to be critical:



Valuation of Portfolio Investments



The most significant
estimate inherent in the preparation of our consolidated financial statements is the valuation of investments and the related amounts
of unrealized appreciation and depreciation of investments recorded. As a BDC, we invest in primarily illiquid securities that
generally have no established trading market.



Investments are stated
at "value" as defined in the 1940 Act and in the applicable regulations of the SEC and U.S. GAAP. ASC 820 defines fair
value, establishes a framework for measuring fair value and expands disclosures about assets and liabilities measured at fair value.
ASC 820 provides a consistent definition of fair value that focuses on exit price in the principal, or most advantageous, market
and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes
the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset
or liability as of the measurement date.



82







| | • | Level 1- inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets;
| | - | ----------------------------------------------------------------------------------------------------------------------------------



| | • | Level 2- inputs to the valuation methodology include quoted prices for similar assets
and liabilities in active markets, and inputs 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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See "Note 6. Fair
Value of Investments" in the accompanying notes to our Consolidated Financial Statements for additional information regarding
fair value measurements.



Value, as defined in
Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available
and (ii) the fair value as determined in good faith by, or under the direction of, the Board of Directors for all other assets.
(See "Valuation Procedures" in the "Footnote to Consolidated Schedule of Investments.") As of September 30,
2012, our financial statements include venture capital investments valued at $98,973,856, the fair values of which were determined
in good faith by, or under the direction of, the Board of Directors. As of September 30, 2012, approximately 66.8 percent of our
net assets represent investments in portfolio companies at fair value by the Board of Directors.



Determining fair value
requires that judgment be applied to the specific facts and circumstances of each portfolio investment, although our valuation
policy is intended to provide a consistent basis for determining fair value of the portfolio investments. Factors that may be considered
include, but are not limited to, the cost of the Company’s investment; transactions in the portfolio company’s securities
or unconditional firm offers by responsible parties; the financial condition and operating results of the company; 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 revenues, 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 the applicable securities laws; management's assessment of non-performance risk; the achievement of milestones; discounts
for restrictions on transfers of publicly traded securities; and the rights and preferences of the class of securities we own as
compared with other classes of securities the portfolio has issued.



In addition, with respect
to our debt investments for which no readily available market quotations are available, we will generally consider the financial
condition and current and expected future cash flows of the portfolio company; the creditworthiness of the portfolio company and
its ability to meet its current debt obligations; the relative seniority of our debt investment within the portfolio company’s
capital structure; the availability and value of any available collateral; and changes in market interest rates and credit spreads
for similar debt investments.



83







Historically, difficult
venture capital environments have resulted in companies not receiving financing and being subsequently closed down with a loss
of investment to venture investors, and other companies receiving financing but at significantly lower valuations than the preceding
rounds, leading to very deep dilution for those who do not participate in the new rounds of investment. Our best estimate of this
non-performance risk has been quantified and included in the valuation of our portfolio companies as of September 30, 2012.



As of September 30,
2012, 79.9 percent of our portfolio company investments by value were classified as Level 3 in the hierarchy, indicating a high
level of judgment required in their valuation.



The values assigned
to our assets are based on available information and do not necessarily represent amounts that might ultimately be realized, as
these amounts depend on future circumstances and cannot be reasonably determined until the individual investments are actually
liquidated or become readily marketable. Upon sale of investments, the values that are ultimately realized may be materially different
from what is presently estimated.



Stock-Based Compensation



Determining the appropriate
fair-value model and calculating the fair value of share-based awards on the date of grant requires judgment. Historically, we
have used the Black-Scholes-Merton option pricing model to estimate the fair value of employee stock options.



Management uses the
Black-Scholes-Merton option pricing model in instances where we lack historical data necessary for more complex models and when
the share award terms can be valued within the model. Other models may yield fair values that are significantly different from
those calculated by the Black-Scholes-Merton option pricing model.



Management uses a binomial
lattice option pricing model in instances where it is necessary to include a broader array of assumptions. We used the binomial
lattice model for the 10-year NQSOs granted on March 18, 2009, and for performance-based restricted stock awards. These awards
included accelerated vesting provisions or target stock prices that were based on market conditions.



Option pricing models
require the use of subjective input assumptions, including expected volatility, expected life, expected dividend rate, and expected
risk-free rate of return. Variations in the expected volatility or expected term assumptions have a significant impact on fair
value. As the volatility or expected term assumptions increase, the fair value of the stock option increases. The expected dividend
rate and expected risk-free rate of return are not as significant to the calculation of fair value. A higher assumed dividend rate
yields a lower fair value, whereas higher assumed interest rates yield higher fair values for stock options.



In the Black-Scholes-Merton
model, we use the simplified calculation of expected term as described in the SEC’s Staff Accounting Bulletin 107 because
of the lack of historical information about option exercise patterns. In the binomial lattice model, we use an expected term that
assumes the options will be exercised at two-times the strike price because of the lack of option exercise patterns. Future exercise
behavior could be materially different than that which is assumed by the model.



Expected volatility
is based on the historical fluctuations in the Company's stock. The Company's stock has historically been volatile, which increases
the fair value of the underlying share-based awards.



84







GAAP requires us to
develop an estimate of the number of share-based awards that will be forfeited owing to employee turnover. Quarterly changes in
the estimated forfeiture rate can have a significant effect on reported share-based compensation, as the effect of adjusting the
rate for all expense amortization after the grant date is recognized in the period the forfeiture estimate is changed. If the actual
forfeiture rate proves to be higher than the estimated forfeiture rate, then an adjustment will be made to increase the estimated
forfeiture rate, which would result in a decrease to the expense recognized in the financial statements. If the actual forfeiture
rate proves to be lower than the estimated forfeiture rate, then an adjustment will be made to decrease the estimated forfeiture
rate, which would result in an increase to the expense recognized in the financial statements. Such adjustments would affect our
operating expenses and additional paid-in capital, but would have no effect on our net asset value.



Pension and Post-Retirement Benefit Plan Assumptions



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. Our former President accrued benefits under this plan prior to his retirement, and the
termination of the plan has no impact on his accrued benefits. Several statistical and other factors that attempt to anticipate
future events are used in calculating the expense and liability values related to our post-retirement benefit plans. These factors
include assumptions we make about the discount rate, the rate of increase in healthcare costs, and mortality, among others.



The discount rate reflects
the current rate at which the post-retirement medical benefit and pension liabilities could be effectively settled considering
the timing of expected payments for plan participants. In estimating this rate, we consider the Citigroup Pension Liability Index
in the determination of the appropriate discount rate assumptions. The weighted average rate we utilized to measure our post retirement
medical benefit obligation as of December 31, 2011, and to calculate our 2012 expense was 4.53 percent. We used a discount
rate of 3.57 percent to calculate our pension obligation for the Executive Mandatory Retirement Benefit Plan.



Recent Developments - Portfolio Companies



On
October 1, 2012, the Company made a $200,000 follow-on investment in a privately held, equity-focused portfolio company.



On
October 9, 2012, the Company made a $15,032 follow-on investment in a privately held, equity-focused portfolio company.



On October 12, 2012,
we sold 500 written call option contracts in Solazyme, Inc., expiring on October 20, 2012, with a strike price of $10.00. We received
premiums of approximately $15,520 for these contracts.



On
October 20, 2012, a total of 1,532 written call option contracts in Solazyme, Inc., expired unexercised.



85







On
October 23, 2012, the Company made a $1,000,000 follow-on investment in a privately held, equity-focused portfolio company.



On October 23, 2012,
we sold 1,300 written call option contracts in Solazyme, Inc., expiring on November 17, 2012, with a strike price of $7.50. We
received premiums of approximately $212,500 for these contracts.



On October 23, 2012,
we purchased 1,300 put option positions in Solazyme, Inc., expiring on November 17, 2012, with a strike price of $7.50, for a payment
of approximately $21,400.



On October 24, 2012,
we sold 1,500 written call option contracts in NeoPhotonics Corporation, expiring on December 22, 2012, with a strike price of
$5.00. We received premiums of approximately $95,250 for these contracts.



On
October 29, 2012, the Company made a $2,445,000 follow-on investment in a privately held, equity-focused portfolio company.



On
October 29, 2012, the Company made a $29,994 follow-on investment in a privately held, equity-focused portfolio company.



In October 2012, we
sold 9,000 shares of Solazyme for proceeds of approximately $100,931.



As of September 30,
2012, we owned an aggregate of 1,938,190 shares of Solazyme. We valued this position at $22,269,803. The key input to our valuation
of Solazyme was the share price as of the close of trading on September 28, 2012, which was $11.49. At September 30, 2012, this
investment represented $0.72 of our net asset value per share. As of November 7, 2012, Solazyme’s closing price was $7.56
per share, and we owned 1,929,190 shares of Solazyme. At this price, our shares of Solazyme are valued at $14,584,676, or $0.47
of our net asset value per share, as of November 7, 2012.



Cautionary Statement Regarding Forward-Looking Statements



This Quarterly Report
on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements
are not historical facts, but rather are based on current expectations, estimates and projections about the Company, our current
and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as "anticipates," "expects,"
"intends," "plans," "will," "may," "continue," "believes," "seeks,"
"estimates," "would," "could," "should," "targets," "projects," and
variations of these words and similar expressions are intended to identify forward-looking statements. The forward-looking statements
contained in this Quarterly Report involve risks and uncertainties, including statements as to:



| | • |  | our future operating results;
| | - |  | -----------------------------



| | • |  | our business prospects and the prospects of our portfolio companies;
| | - |  | --------------------------------------------------------------------



| | • |  | the impact of investments that we expect to make;
| | - |  | -------------------------------------------------



86







| | • |  | our contractual arrangements and relationships with third parties;
| | - |  | ------------------------------------------------------------------



| | • |  | the dependence of our future success on the general economy and its impact on the industries in which we invest;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| | • |  | the ability of our portfolio companies to achieve their objectives;
| | - |  | -------------------------------------------------------------------



| | • |  | our expected financings and investments;
| | - |  | ----------------------------------------



| | • |  | the adequacy of our cash resources and working capital; and
| | - |  | -----------------------------------------------------------



| | • |  | the timing of cash flows, if any, from the operations and/or monetization of our positions in our portfolio companies.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



These statements are
not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control
and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking
statements, including without limitation:



| | • |  | an economic downturn could impair our portfolio companies’ ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • |  | a contraction of available credit and/or an inability to access the equity markets could impair our investment activities;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| | • |  | interest rate volatility could adversely affect our results, particularly if we elect to use leverage as material part of our venture debt investment strategy;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • |  | currency fluctuations could adversely affect the results of our investments in foreign companies, particularly to the extent that we receive payments denominated in foreign currency rather than U.S. dollars; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • |  | the risks, uncertainties and other factors we identify in "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the SEC.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



Although we believe
that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to
be inaccurate, and, as a result, the forward-looking statements based on those assumptions also could be inaccurate. Important
assumptions include our ability to originate new investments, certain margins and levels of profitability and the availability
of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in
this Quarterly Report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved.
These risks and uncertainties include those described or identified in "Risk Factors" and elsewhere in this Quarterly
Report on Form 10-Q. You should not place undue reliance on these forward-looking statements, which apply only as of the date of
this Quarterly Report on Form 10-Q.



87







Item 3. Quantitative and Qualitative
Disclosures About Market Risk.



Our business activities
contain elements of risk. We consider the principal types of market risk to be valuation risk, interest rate risk and foreign currency
risk. Although we are risk-seeking rather than risk-averse in our investments, we consider the management of risk to be essential
to our business.



Valuation Risk



Value, as defined in
Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which market quotations are readily available
and (ii) fair value as determined in good faith by, or under the direction of, the Board of Directors for all other assets. (See
the "Valuation Procedures" in the "Footnote to Consolidated Schedule of Investments" contained in "Item
1. Consolidated Financial Statements.")



Because there is typically
no public market for our interests in the privately held small businesses in which we invest, the valuation of the equity interests
in that portion of our portfolio is determined in good faith by our Board of Directors with the assistance of our Valuation Committee,
comprised of the independent members of our Board of Directors, in accordance with our Valuation Procedures. In the absence of
a readily ascertainable market value, the determined value of our portfolio of equity interests may differ significantly from the
values that would be placed on the portfolio if a ready market for the equity interests existed. Determining fair value requires
that judgment be applied to the specific facts and circumstances of each portfolio investment, although our valuation policy is
intended to provide a consistent basis for determining fair value of the portfolio investments. Factors that may be considered
include, but are not limited to, readily available public market quotations; the cost of the Company’s investment; transactions
in the portfolio company’s securities or unconditional firm offers by responsible parties; the financial condition and operating
results of the company; 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 revenues, 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 the applicable securities laws; management's assessment of non-performance
risk; the achievement of milestones; and the rights and preferences of the class of securities we own as compared with other classes
of securities the portfolio has issued. In addition, with respect to our debt investments for which no readily available market
quotations are available, we will generally consider the financial condition and current and expected future cash flows of the
portfolio company; the creditworthiness of the portfolio company and its ability to meet its current debt obligations; the relative
seniority of our debt investment within the portfolio company’s capital structure; the availability and value of any available
collateral; and changes in market interest rates and credit spreads for similar debt investments. Any changes in valuation are
recorded in our Consolidated Statements of Operations as "Net increase (decrease) in unrealized appreciation on investments."
Changes in valuation of any of our investments in privately held companies from one period to another may be volatile.



88







Investments in privately
held, immature companies are inherently more volatile than investments in more mature businesses.  Such immature businesses
are inherently fragile and easily affected by both internal and external forces.  Our investee companies can lose much or
all of their value suddenly in response to an internal or external adverse event.  Conversely, these immature businesses can
gain suddenly in value in response to an internal or external positive development.



The values assigned
to our assets are based on available information and do not necessarily represent amounts that might ultimately be realized, as
these amounts depend on future circumstances and cannot be reasonably determined until the individual investments are actually
liquidated or become readily marketable. Upon sale of investments, the values that are ultimately realized may be materially different
from what is presently estimated.



Interest Rate Risk



Interest rate sensitivity
refers to the change in earnings that may result from changes in the level of interest rates. Because we intend to fund a portion
of our venture debt investments with borrowings, our net investment income will be affected by the difference between the rate
at which we invest and the rate at which we borrow. Our borrowings under our credit facility bear interest, at our option, based
on either (a) LIBOR plus 1.25 percent or (2) the higher of the federal funds rate plus 50 basis points or the U.S. prime rate.
The interest rates are fixed for the interest period selected. However, these interest periods renew approximately every three
months. Therefore, variations in interest rates affect the rates at which we can borrow and may increase our interest expense during
any given period. In the future, some of our venture debt investments may be at variable rates. As a result, there can be no assurance
that a significant change in market interest rates will not have a material adverse effect on our net investment income in future
quarters.



We may also invest
in both short- and long-term U.S. government and agency securities. To the extent that we invest in short- and long-term U.S. government
and agency securities, changes in interest rates result in changes in the value of these obligations that result in an increase
or decrease of our net asset value. The level of interest rate risk exposure at any given point in time depends on the market environment,
the expectations of future price and market movements, and the quantity and duration of long-term U.S. government and agency securities
held by the Company, and it will vary from period to period. If the average interest rate on U.S. government securities at September
30, 2012, were to increase by 25, 75 and 150 basis points, the average value of these securities held by us at September 30, 2012,
would decrease by approximately $25,000, $75,000 and $150,000, respectively, and the portion of our net asset value attributable
to such securities would decrease correspondingly.



In addition, market
interest rates for high-yield corporate debt are an input in determining value of our investments in debt securities of privately
held and publicly traded companies. Significant changes in these market rates could affect the value of our debt securities as
of the date of measurement of value. Our investment income could be adversely affected should such debt securities include floating
interest rates. We do not currently have any investments in debt securities with floating interest rates.



89







Foreign Currency Risk



Most of our investments
are denominated in U.S. dollars. We currently have one investment denominated in Canadian dollars. We are exposed to foreign currency
risk related to potential changes in foreign currency exchange rates. The potential loss in fair value on this investment resulting
from a 10 percent adverse change in quoted foreign currency exchange rates was $472,739 at September 30, 2012.



Item 4. Controls and Procedures



(a) Disclosure Controls
and Procedures.As of the end of the period covered by this report, the Company’s management, under the supervision and
with the participation of our chief executive officer and chief financial officer, conducted an evaluation of the effectiveness
of the design and operation of our disclosure controls and procedures (as required by Rules 13a-15 of the 1934 Act). Disclosure
controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required
to be disclosed by the issuer in the reports that it files or submits under the 1934 Act is recorded, processed, summarized and
reported, within time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated
to the issuer's management, as appropriate, to allow timely decisions regarding required disclosures. As of September 30, 2012,
based upon this evaluation of our disclosure controls and procedures, our chief executive officer and chief financial officer concluded
that our disclosure controls and procedures were effective.



(b) Changes in Internal
Control Over Financial Reporting.There have not been any changes in the Company's internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the 1934 Act) during the third quarter of 2012 to which this report
relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over
financial reporting.



90







PART II. OTHER INFORMATION



Item 1A. 	Risk Factors



Investing in our common
stock involves significant risks relating to our business and investment objective. You should carefully consider the risks and
uncertainties described in our Annual Report on Form 10-K for the year ended December 31, 2011, before you purchase any of our
common stock.



The risks described
in our Annual Report on Form 10-K are not the only risks facing our Company. Unknown additional risks and uncertainties, or ones
that we currently consider immaterial, may also impair our business. If any of these risks or uncertainties materialize, our business,
financial condition or results of operations could be materially adversely affected. In this event, the trading price of our common
stock could decline, and you could lose all or part of your investment.



Approximately 12.9
percent of the net asset value attributable to our equity-focused venture capital investment portfolio, or 10.3 percent of our
net asset value, as of September 30, 2012, is concentrated in one company, Adesto Technologies Corporation.



At September 30, 2012,
we valued our investment in Adesto Technologies Corporation, which had a historical cost to us of $7,278,678, at $15,284,226, or
12.9 percent of the net asset value attributable to our equity-focused venture capital investment portfolio, excluding our rights
to potential future milestone payments from the sale of BioVex to Amgen, or 10.3 percent of our net asset value. Any downturn in
the business outlook of Adesto could have a significant effect on our specific investment in Adesto, and the overall value of our
portfolio, and could have a significant adverse effect on the value of our common stock.



Item 6. Exhibits



| | 3.2    |  | Amended and Restated Bylaws, incorporated by reference as Exhibit 3.1 to the Company's Form 8-K (File No. 814-00176) filed on August 3, 2012.
| | ------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------
| |        |  |                                                                                                                                              
| | 31.01* |  | Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                              
| |        |  |                                                                                                                                              
| | 31.02* |  | Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                              
| |        |  |                                                                                                                                              
| | 32*    |  | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.       



*filed herewith



91







SIGNATURES



Pursuant to the requirements
of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.



| | Harris & Harris Group, Inc.
| | ---------------------------
| |                            
| | /s/                        
| | By:                        
| |                            
| |                            
| | /s/                        
| | By:                        
| |                            
| |                            



Date: November 8, 2012



92







EXHIBIT INDEX



|Exhibit No. |  | Description                                                                                                                                  
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                              
|3.2         |  | Amended and Restated Bylaws, incorporated by reference as Exhibit 3.1 to the Company's Form 8-K (File No. 814-00176) filed on August 3, 2012.
|            |  |                                                                                                                                              
|31.01       |  | Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                              
|            |  |                                                                                                                                              
|31.02       |  | Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                              
|            |  |                                                                                                                                              
|32          |  | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.       



93