UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549



Form 10-Q



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



For the quarterly period ended March 31, 2013



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



For the transition period from ____________ to _____________



Commission file number: 0-11576



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



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



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



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



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

Yes        x                No         ̈



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

Yes         ̈                No         ̈



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





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



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

Yes         ̈                No        x



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



|Class                                   |  | Outstanding at May 10, 2013
|--------------------------------------- |  | ---------------------------
|Common Stock, $0.01 par value per share |  | 31,116,881shares           











Harris & Harris Group, Inc.

Form 10-Q, March 31, 2013



|                                                                                               | Page Number
|---------------------------------------------------------------------------------------------- | -----------
|                                                                                               |            
|PART I. FINANCIAL INFORMATION                                                                  |            
|                                                                                               |            
|Item 1. Consolidated Financial Statements                                                      | 1          
|                                                                                               |            
|Consolidated Statements of Assets and Liabilities                                              | 2          
|                                                                                               |            
|Consolidated Statements of Operations                                                          | 3          
|                                                                                               |            
|Consolidated Statements of Comprehensive Income (Loss)                                         | 4          
|                                                                                               |            
|Consolidated Statements of Cash Flows                                                          | 5          
|                                                                                               |            
|Consolidated Statements of Changes in Net Assets                                               | 6          
|                                                                                               |            
|Consolidated Schedule of Investments                                                           | 7          
|                                                                                               |            
|Notes to Consolidated Financial Statements                                                     | 37         
|                                                                                               |            
|Financial Highlights                                                                           | 58         
|                                                                                               |            
|Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations | 59         
|                                                                                               |            
|Background                                                                                     | 59         
|                                                                                               |            
|Overview                                                                                       | 59         
|                                                                                               |            
|Maturity of Current Equity-Focused Venture Capital Portfolio                                   | 61         
|                                                                                               |            
|Investment Objective and Strategy                                                              | 62         
|                                                                                               |            
|Involvement with Portfolio Companies                                                           | 63         
|                                                                                               |            
|Investments and Current Investment Pace                                                        | 64         
|                                                                                               |            
|Our Sources of Liquid Capital                                                                  | 65         
|                                                                                               |            
|Potential Pending Liquidity Events from our Portfolio as of March 31, 2013                     | 66         
|                                                                                               |            
|Strategy for Managing Publicly Traded Positions                                                | 67         
|                                                                                               |            
|Portfolio Company Revenue                                                                      | 68         
|                                                                                               |            
|Current Business Environment                                                                   | 68         
|                                                                                               |            
|Valuation of Investments                                                                       | 70         
|                                                                                               |            
|Results of Operations                                                                          | 72         
|                                                                                               |            
|Financial Condition                                                                            | 77         
|                                                                                               |            
|Liquidity                                                                                      | 78         
|                                                                                               |            
|Borrowings                                                                                     | 80         
|                                                                                               |            
|Contractual Obligations                                                                        | 80         
|                                                                                               |            
|Critical Accounting Policies                                                                   | 80         
|                                                                                               |            
|Recent Developments – Portfolio Companies                                                      | 84         
|                                                                                               |            
|Cautionary Statement Regarding Forward-Looking Statements                                      | 85         
|                                                                                               |            
|Item 3.  Quantitative and Qualitative Disclosures About Market Risk                            | 86         
|                                                                                               |            
|Item 4.  Controls and Procedures                                                               | 89         
|                                                                                               |            
|PART II.  OTHER INFORMATION                                                                    |            
|                                                                                               |            
|Item 1A.  Risk Factors                                                                         | 90         
|                                                                                               |            
|Item 6. Exhibits                                                                               | 90         
|                                                                                               |            
|Signatures                                                                                     | 91         
|                                                                                               |            
|Exhibit Index                                                                                  | 92         











PART
I. FINANCIAL INFORMATION



Item 1. Consolidated Financial Statements



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



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



1







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



|                                                                                                                                                                      |  | March
31, 2013 |             |   | December 31, 2012 |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | - | ----------------- | -
|                                                                                                                                                                      |  | (Unaudited)    |             |   |                   |  
|ASSETS                                                                                                                                                                |  |                |             |   |                   |  
|                                                                                                                                                                      |  |                |             |   |                   |  
|Investments, in portfolio securities at value:                                                                                                                        |  |                |             |   |                   |  
|Unaffiliated privately held companies (cost: $29,753,283 and $29,365,558, respectively)                                                                               |  | $              | 26,379,915  |   |                   | $
|Unaffiliated rights to milestone payments (adjusted cost basis: $3,291,750 and $3,291,750, respectively)                                                              |  |                | 3,404,812   |   |                   |  
|Unaffiliated publicly traded securities (cost: $5,854,604 and $5,070,447, respectively)                                                                               |  |                | 13,614,673  |   |                   |  
|Non-controlled affiliated privately held companies (cost: $54,932,975 and $57,789,263, respectively)                                                                  |  |                | 61,546,927  |   |                   |  
|Non-controlled affiliated publicly traded companies (cost: $0 and $2,000,000, respectively)                                                                           |  |                | 0           |   |                   |  
|Controlled affiliated privately held companies (cost: $14,628,771 and $14,233,804, respectively)                                                                      |  |                | 2,917,174   |   |                   |  
|Total, investments in private portfolio companies, rights to milestone payments and public securities at value    (cost: $108,461,383 and $111,750,822, respectively) |  | $              | 107,863,501 |   |                   | $
|Investments, in put options at value (cost: $5,637 and $0, respectively)                                                                                              |  |                | 5,637       |   |                   |  
|Investments, in U.S. Treasury obligations at value (cost: $13,999,531 and $13,996,136, respectively)                                                                  |  |                | 13,999,720  |   |                   |  
|Cash                                                                                                                                                                  |  |                | 7,060,100   |   |                   |  
|Restricted funds (Note 3)                                                                                                                                             |  |                | 10,020      |   |                   |  
|Funds held in escrow from sales of investments at value (Note 3)                                                                                                      |  |                | 0           |   |                   |  
|Receivable from sales of investments (Note 3)                                                                                                                         |  |                | 273,361     |   |                   |  
|Receivable from portfolio company                                                                                                                                     |  |                | 21,060      |   |                   |  
|Interest receivable                                                                                                                                                   |  |                | 26,960      |   |                   |  
|Prepaid expenses                                                                                                                                                      |  |                | 411,160     |   |                   |  
|Other assets                                                                                                                                                          |  |                | 374,484     |   |                   |  
|Total assets                                                                                                                                                          |  | $              | 130,046,003 |   |                   | $
|                                                                                                                                                                      |  |                |             |   |                   |  
|LIABILITIES & NET ASSETS                                                                                                                                              |  |                |             |   |                   |  
|                                                                                                                                                                      |  |                |             |   |                   |  
|Accounts payable and accrued liabilities                                                                                                                              |  | $              | 1,068,801   |   |                   | $
|Post retirement plan liabilities (Note 8)                                                                                                                             |  |                | 800,939     |   |                   |  
|Deferred rent                                                                                                                                                         |  |                | 359,673     |   |                   |  
|Written call options payable (premiums received:                                                                                                                      |  |                |             |   |                   |  
|$196,597 and $50,000, respectively) (Note 7)                                                                                                                          |  |                | 63,737      |   |                   |  
|Debt interest and other payable                                                                                                                                       |  |                | 3,750       |   |                   |  
|Total liabilities                                                                                                                                                     |  |                | 2,296,900   |   |                   |  
|                                                                                                                                                                      |  |                |             |   |                   |  
|Net assets                                                                                                                                                            |  | $              | 127,749,103 |   |                   | $
|                                                                                                                                                                      |  |                |             |   |                   |  
|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 3/31/13 and 12/31/12; 32,945,621 issued at 3/31/13 and 12/31/12                                        |  |                | 329,456     |   |                   |  
|Additional paid in capital (Note 9)                                                                                                                                   |  |                | 213,509,195 |   |                   |  
|Accumulated net operating and realized loss                                                                                                                           |  |                | (83,276,984 | ) |                   |  
|Accumulated unrealized (depreciation) appreciation of investments                                                                                                     |  |                | (464,833    | ) |                   |  
|Accumulated other comprehensive income (Note 8)                                                                                                                       |  |                | 1,057,800   |   |                   |  
|Treasury stock, at cost (1,828,740 shares at 3/31/13 and 12/31/12)                                                                                                    |  |                | (3,405,531  | ) |                   |  
|                                                                                                                                                                      |  |                |             |   |                   |  
|Net assets                                                                                                                                                            |  | $              | 127,749,103 |   |                   | $
|                                                                                                                                                                      |  |                |             |   |                   |  
|Shares outstanding                                                                                                                                                    |  |                | 31,116,881  |   |                   |  
|Net asset value per outstanding share                                                                                                                                 |  | $              | 4.11        |   |                   | $



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



2







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



|                                                                   |  | Three Months Ended |            |   | Three Months Ended |  
|------------------------------------------------------------------ |  | ------------------ | ---------- | - | ------------------ | -
|                                                                   |  | March 31, 2013     |            |   | March 31, 2012     |  
|Investment income:                                                 |  |                    |            |   |                    |  
|Interest from:                                                     |  |                    |            |   |                    |  
|Unaffiliated companies                                             |  | $                  | 74,995     |   |                    | $
|Non-controlled affiliated companies                                |  |                    | 15,305     |   |                    |  
|Controlled affiliated companies                                    |  |                    | 46,804     |   |                    |  
|Cash and U.S. Treasury obligations and other                       |  |                    | 5,659      |   |                    |  
|Miscellaneous income                                               |  |                    | 42,327     |   |                    |  
|Total investment income                                            |  |                    | 185,090    |   |                    |  
|                                                                   |  |                    |            |   |                    |  
|Expenses:                                                          |  |                    |            |   |                    |  
|Salaries, benefits and stock-based compensation (Notes 8 & 9)      |  |                    | 1,317,685  |   |                    |  
|Administration and operations                                      |  |                    | 210,215    |   |                    |  
|Professional fees                                                  |  |                    | 385,730    |   |                    |  
|Rent (Note 3)                                                      |  |                    | 101,215    |   |                    |  
|Directors' fees and expenses                                       |  |                    | 72,470     |   |                    |  
|Custody fees                                                       |  |                    | 13,793     |   |                    |  
|Depreciation                                                       |  |                    | 13,724     |   |                    |  
|Interest and other debt expense                                    |  |                    | 5,831      |   |                    |  
|Total expenses                                                     |  |                    | 2,120,663  |   |                    |  
|                                                                   |  |                    |            |   |                    |  
|Net operating loss                                                 |  |                    | (1,935,573 | ) |                    |  
|                                                                   |  |                    |            |   |                    |  
|Net realized (loss) gain:                                          |  |                    |            |   |                    |  
|Realized (loss) gain from investments:                             |  |                    |            |   |                    |  
|Unaffiliated companies                                             |  |                    | 0          |   |                    |  
|Non-controlled affiliated companies                                |  |                    | (4,236,033 | ) |                    |  
|Publicly traded companies                                          |  |                    | 893,004    |   |                    |  
|Written call options                                               |  |                    | 23,948     |   |                    |  
|Purchased put options                                              |  |                    | (57,082    | ) |                    |  
|Realized (loss) gain from investments                              |  |                    | (3,376,163 | ) |                    |  
|Income tax expense (Note 10)                                       |  |                    | 22,010     |   |                    |  
|Net realized (loss) gain from investments                          |  |                    | (3,398,173 | ) |                    |  
|                                                                   |  |                    |            |   |                    |  
|Net increase (decrease) in unrealized appreciation on investments: |  |                    |            |   |                    |  
|Change as a result of investment sales                             |  |                    | 3,534,350  |   |                    |  
|Change on investments held                                         |  |                    | (386,156   | ) |                    |  
|Change on written call options                                     |  |                    | 125,360    |   |                    |  
|Net increase (decrease) in unrealized appreciation on investments  |  |                    | 3,273,554  |   |                    |  
|                                                                   |  |                    |            |   |                    |  
|Net realized and unrealized (loss) gain on investments             |  |                    | (124,619   | ) |                    |  
|                                                                   |  |                    |            |   |                    |  
|Net (decrease) increase in net assets resulting from operations:   |  |                    |            |   |                    |  
|                                                                   |  |                    |            |   |                    |  
|Total                                                              |  | $                  | (2,060,192 | ) |                    | $
|                                                                   |  |                    |            |   |                    |  
|Per average basic and diluted outstanding share                    |  | $                  | (0.07      | ) |                    | $
|                                                                   |  |                    |            |   |                    |  
|Average outstanding shares - basic                                 |  |                    | 31,116,881 |   |                    |  
|                                                                   |  |                    |            |   |                    |  
|Average outstanding shares - diluted                               |  |                    | 31,116,881 |   |                    |  



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



3







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED STATEMENTS OF COMPREHENSIVE
        INCOME (LOSS)
        (Unaudited)
|----------------------------------------------------------------------------------------------------------------------



|                                                  |  | Three Months Ended |            |   | Three Months Ended |  
|------------------------------------------------- |  | ------------------ | ---------- | - | ------------------ | -
|                                                  |  | March 31, 2013     |            |   | March 31, 2012     |  
|                                                  |  |                    |            |   |                    |  
|Net (decrease) increase resulting from operations |  | $                  | (2,060,192 | ) |                    | $
|                                                  |  |                    |            |   |                    |  
|Other comprehensive income (loss):                |  |                    |            |   |                    |  
|                                                  |  |                    |            |   |                    |  
|Amendment to medical retirement plan              |  |                    | 1,101,338  |   |                    |  
|Amortization of prior service cost                |  |                    | (43,538    | ) |                    |  
|                                                  |  |                    |            |   |                    |  
|Other comprehensive income                        |  |                    | 1,057,800  |   |                    |  
|                                                  |  |                    |            |   |                    |  
|Comprehensive (loss) income                       |  | $                  | (1,002,392 | ) |                    | $



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



4







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



|                                                                                                                                                 |  | Three Months Ended |             |   | Three Months Ended |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ----------- | - | ------------------ | -
|                                                                                                                                                 |  | March 31, 2013     |             |   | March 31, 2012     |  
|                                                                                                                                                 |  |                    |             |   |                    |  
|Cash flows (used in) provided by operating activities:                                                                                           |  |                    |             |   |                    |  
|Net (decrease) increase in net assets resulting from operations                                                                                  |  | $                  | (2,060,192  | ) |                    | $
|Adjustments to reconcile net (decrease) increase in net assets resulting from operations to net cash provided by (used in) operating activities: |  |                    |             |   |                    |  
|Net realized loss (gain) and unrealized appreciation on investments                                                                              |  |                    | 102,609     |   |                    |  
|Depreciation of fixed assets, amortization of premium or discount on U.S. government securities, and bridge note interest                        |  |                    | (58,495     | ) |                    |  
|Stock-based compensation expense                                                                                                                 |  |                    | 314,721     |   |                    |  
|Purchase of U.S. government securities                                                                                                           |  |                    | (13,999,456 | ) |                    |  
|Sale of U.S. government securities                                                                                                               |  |                    | 14,000,000  |   |                    |  
|Purchase of affiliated portfolio companies                                                                                                       |  |                    | (2,063,170  | ) |                    |  
|Purchase of unaffiliated portfolio companies                                                                                                     |  |                    | (452,540    | ) |                    |  
|Principal payments received on debt investments                                                                                                  |  |                    | 76,751      |   |                    |  
|Proceeds from sale of investments and conversion of bridge notes                                                                                 |  |                    | 3,077,920   |   |                    |  
|Proceeds from call option premiums                                                                                                               |  |                    | 352,809     |   |                    |  
|Payments for put and call option purchases                                                                                                       |  |                    | 64,578      |   |                    |  
|                                                                                                                                                 |  |                    |             |   |                    |  
|Changes in assets and liabilities:                                                                                                               |  |                    |             |   |                    |  
|Restricted funds                                                                                                                                 |  |                    | (5          | ) |                    |  
|Receivable from sale of portfolio company                                                                                                        |  |                    | (148,729    | ) |                    |  
|Receivable from portfolio company                                                                                                                |  |                    | 2,770       |   |                    |  
|Interest receivable                                                                                                                              |  |                    | 22,108      |   |                    |  
|Prepaid expenses                                                                                                                                 |  |                    | (313,750    | ) |                    |  
|Other assets                                                                                                                                     |  |                    | (9,418      | ) |                    |  
|Post retirement plan liabilities                                                                                                                 |  |                    | (17,708     | ) |                    |  
|Accounts payable and accrued liabilities                                                                                                         |  |                    | (199,438    | ) |                    |  
|Deferred rent                                                                                                                                    |  |                    | (9,304      | ) |                    |  
|Other liabilities                                                                                                                                |  |                    | 400         |   |                    |  
|                                                                                                                                                 |  |                    |             |   |                    |  
|Net cash used in operating activities                                                                                                            |  |                    | (1,317,539  | ) |                    |  
|                                                                                                                                                 |  |                    |             |   |                    |  
|Cash flows from investing activities:                                                                                                            |  |                    |             |   |                    |  
|Purchase of fixed assets                                                                                                                         |  |                    | (1,472      | ) |                    |  
|Net cash used in investing activities                                                                                                            |  |                    | (1,472      | ) |                    |  
|                                                                                                                                                 |  |                    |             |   |                    |  
|Net decrease in cash                                                                                                                             |  |                    | (1,319,011  | ) |                    |  
|                                                                                                                                                 |  |                    |             |   |                    |  
|Cash at beginning of the period                                                                                                                  |  |                    | 8,379,111   |   |                    |  
|Cash at end of the period                                                                                                                        |  | $                  | 7,060,100   |   |                    | $
|                                                                                                                                                 |  |                    |             |   |                    |  
|Supplemental disclosures of cash flow information:                                                                                               |  |                    |             |   |                    |  
|Income taxes paid                                                                                                                                |  | $                  | 22,010      |   |                    | $
|Interest paid                                                                                                                                    |  | $                  | 0           |   |                    | $



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



5







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



|                                                                                       |  | Three Months Ended |             |   | Year Ended        |  
|-------------------------------------------------------------------------------------- |  | ------------------ | ----------- | - | ----------------- | -
|                                                                                       |  | March 31, 2013     |             |   | December 31, 2012 |  
|                                                                                       |  | (Unaudited)        |             |   |                   |  
|                                                                                       |  |                    |             |   |                   |  
|Changes in net assets from operations:                                                 |  |                    |             |   |                   |  
|                                                                                       |  |                    |             |   |                   |  
|Net operating loss                                                                     |  | $                  | (1,935,573  | ) |                   | $
|Net realized (loss) gain on investments                                                |  |                    | (3,398,173  | ) |                   |  
|Net increase (decrease) in unrealized appreciation on investments as a result of sales |  |                    | 3,534,350   |   |                   |  
|Net (decrease) increase in unrealized appreciation on investments held                 |  |                    | (386,156    | ) |                   |  
|Net increase (decrease) in unrealized appreciation on written call options             |  |                    | 125,360     |   |                   |  
|                                                                                       |  |                    |             |   |                   |  
|Net decrease in net assets resulting from operations                                   |  |                    | (2,060,192  | ) |                   |  
|                                                                                       |  |                    |             |   |                   |  
|Changes in net assets from capital stock transactions:                                 |  |                    |             |   |                   |  
|                                                                                       |  |                    |             |   |                   |  
|Payment of employee withholding on net settlement of vested restricted stock awards    |  |                    | 0           |   |                   |  
|Stock-based compensation expense                                                       |  |                    | 314,721     |   |                   |  
|                                                                                       |  |                    |             |   |                   |  
|Net
increase in net assets resulting from capital stock transactions                   |  |                    | 314,721     |   |                   |  
|                                                                                       |  |                    |             |   |                   |  
|Changes in net assets from accumulated other comprehensive income:                     |  |                    |             |   |                   |  
|                                                                                       |  |                    |             |   |                   |  
|Other comprehensive income                                                             |  |                    | 1,057,800   |   |                   |  
|                                                                                       |  |                    |             |   |                   |  
|Net
    increase in net assets resulting from accumulated other comprehensive income   |  |                    | 1,057,800   |   |                   |  
|                                                                                       |  |                    |             |   |                   |  
|Net decrease in net assets                                                             |  |                    | (687,671    | ) |                   |  
|                                                                                       |  |                    |             |   |                   |  
|Net Assets:                                                                            |  |                    |             |   |                   |  
|                                                                                       |  |                    |             |   |                   |  
|Beginning of the period                                                                |  |                    | 128,436,774 |   |                   |  
|                                                                                       |  |                    |             |   |                   |  
|End of the period                                                                      |  | $                  | 127,749,103 |   |                   | $



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



6







|HARRIS & HARRIS GROUP,
        INC.
        CONSOLIDATED
        SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2013
        (Unaudited)
|---------------------------------------------------------------------------------------------------------------------------------



|                                                                          |  |  | Method of     |  |  |  | Primary      |  |  |      |           |  | Shares/   |  |           |       | 
|------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------ |  |  | ---- | --------- |  | --------- |  | --------- | ----- | 
|                                                                          |  |  | Valuation (1) |  |  |  | Industry (2) |  |  | Cost |           |  | Principal |  |           | Value | 
|                                                                          |  |  |               |  |  |  |              |  |  |      |           |  |           |  |          
|Investments in Unaffiliated Companies (3) – 34.0% of net assets at value  |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|                                                                          |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|Private Placement Portfolio (Illiquid) (4) – 20.6% of net assets at value |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|                                                                          |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|Bridgelux, Inc. (7)(8)(10)                                                |  |  |               |  |  |  | Energy       |  |  |      |           |  |           |  |           |       | 
|Manufacturing high-power light emitting diodes (LEDs) and arrays          |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|Series B Convertible Preferred Stock                                      |  |  | (M)           |  |  |  |              |  |  | $    | 1,000,000 |  |           |  | 1,861,504 |       | 
|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   |       | 
|Warrants 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    |       | 
|Series E-1 Convertible Preferred Stock                                    |  |  | (M)           |  |  |  |              |  |  |      | 114,938   |  |           |  | 46,089    |       | 
|Warrants for Series E-1 Pref. Stock expiring on 10/9/22                   |  |  | ( I )         |  |  |  |              |  |  |      | 2,781     |  |           |  | 1,407     |       | 
|Warrants for Series E-1 Pref. Stock expiring on 3/11/23                   |  |  | ( I )         |  |  |  |              |  |  |      | 5,355     |  |           |  | 2,707     |       | 
|                                                                          |  |  |               |  |  |  |              |  |  |      | 995,142   |  |           |  |           |       | 



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



7







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF MARCH 31, 2013
        (Unaudited)
|-------------------------------------------------------------------------------------------------------------------------



|                                                                                       |  |  | Method of     |  |  |  | Primary       |  |  |      |           |  | Shares/   |   |           |       | 
|-------------------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------- |  |  | ---- | --------- |  | --------- | - | --------- | ----- | 
|                                                                                       |  |  | Valuation (1) |  |  |  | Industry (2)  |  |  | Cost |           |  | Principal |   |           | Value | 
|                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |          
|Investments in Unaffiliated Companies (3) – 34.0% of net assets at value (Cont.)       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Private Placement Portfolio (Illiquid) (4) – 20.6% of net assets at value (Cont.)      |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Ensemble Therapeutics Corporation (7)(9)(12)                                           |  |  |               |  |  |  | Life Sciences |  |  |      |           |  |           |   |           |       | 
|Developing DNA-Programmed 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)           |  |  |  |               |  |  |      | 341,486   |  |           | $ | 250,211   |       | 
|Secured Convertible Bridge Note, 8%, acquired 12/10/09                                 |  |  | (M)           |  |  |  |               |  |  |      | 61,822    |  |           | $ | 48,868    |       | 
|Secured Convertible Bridge Note, 8%, acquired 1/25/12                                  |  |  | (M)           |  |  |  |               |  |  |      | 119,792   |  |           | $ | 109,400   |       | 
|Secured Convertible Bridge Note, 8%, acquired 3/28/13                                  |  |  | (M)           |  |  |  |               |  |  |      | 73,685    |  |           | $ | 73,598    |       | 
|                                                                                       |  |  |               |  |  |  |               |  |  |      | 2,596,785 |  |           |   |           |       | 
|                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|GEO Semiconductor Inc. (13)                                                            |  |  |               |  |  |  | Electronics   |  |  |      |           |  |           |   |           |       | 
|Developing programmable, high-performance video and geometry processing solutions      |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Participation Agreement with Montage Capital relating to the following assets:         |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Senior secured debt, 13.75%, maturing on 4/4/13                                        |  |  | ( I )         |  |  |  |               |  |  |      | 254,501   |  |           | $ | 344,751   |       | 
|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 4/5/13                                  |  |  | ( 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    |       | 
|                                                                                       |  |  |               |  |  |  |               |  |  |      | 469,751   |  |           |   |           |       | 
|                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Mersana Therapeutics, Inc. (7)(9)(14)                                                  |  |  |               |  |  |  | Life Sciences |  |  |      |           |  |           |   |           |       | 
|Developing treatments for cancer based on novel drug delivery polymers                 |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Series A-1 Convertible Preferred Stock                                                 |  |  | (M)           |  |  |  |               |  |  |      | 316,453   |  |           |   | 294,019   |       | 
|Common Stock                                                                           |  |  | (M)           |  |  |  |               |  |  |      | 3,875,395 |  |           |   | 350,539   |       | 
|                                                                                       |  |  |               |  |  |  |               |  |  |      | 4,191,848 |  |           |   |           |       | 
|                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Molecular Imprints, Inc. (7)(10)(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.



8







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF MARCH 31, 2013
        (Unaudited)
|-------------------------------------------------------------------------------------------------------------------------



|                                                                                                                            |  |  | Method of     |  |  |  | Primary       |  |  |      |           |  | Shares/   |   |           |       | 
|--------------------------------------------------------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------- |  |  | ---- | --------- |  | --------- | - | --------- | ----- | 
|                                                                                                                            |  |  | Valuation (1) |  |  |  | Industry (2)  |  |  | Cost |           |  | Principal |   |           | Value | 
|                                                                                                                            |  |  |               |  |  |  |               |  |  |      |           |  |           |   |          
|Investments in Unaffiliated Companies (3) – 34.0% of net assets at value (Cont.)                                            |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                                                            |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Private Placement Portfolio (Illiquid) (4) – 20.6% of net assets at value (Cont.)                                           |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                                                            |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Nanosys, Inc. (7)                                                                                                           |  |  |               |  |  |  | Energy        |  |  |      |           |  |           |   |           |       | 
|Developing inorganic nanowires and quantum dots for use in LED-backlit devices                                              |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Series C Convertible Preferred Stock                                                                                        |  |  | (M)           |  |  |  |               |  |  | $    | 1,500,000 |  |           |   | 803,428   |       | 
|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)           |  |  |  |               |  |  |      | 45,065    |  |           | $ | 43,821    |       | 
|                                                                                                                            |  |  |               |  |  |  |               |  |  |      | 5,041,641 |  |           |   |           |       | 
|                                                                                                                            |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Nano Terra, Inc. (9)                                                                                                        |  |  |               |  |  |  | Energy        |  |  |      |           |  |           |   |           |       | 
|Developing surface chemistry and nano-manufacturing solutions                                                               |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Senior secured debt, 12.0%, maturing on 12/1/15                                                                             |  |  | ( I )         |  |  |  |               |  |  |      | 918,896   |  |           | $ | 954,299   |       | 
|Warrants for Series A-2 Pref. Stock expiring on 2/22/21                                                                     |  |  | ( I )         |  |  |  |               |  |  |      | 69,168    |  |           |   | 446,248   |       | 
|Warrants for Series C Pref. Stock expiring on 11/15/22                                                                      |  |  | ( I )         |  |  |  |               |  |  |      | 35,403    |  |           |   | 241,662   |       | 
|                                                                                                                            |  |  |               |  |  |  |               |  |  |      | 1,023,467 |  |           |   |           |       | 
|                                                                                                                            |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|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   |       | 
|Series D Convertible Preferred Stock                                                                                        |  |  | (M)           |  |  |  |               |  |  |      | 139,075   |  |           |   | 35,569    |       | 
|                                                                                                                            |  |  |               |  |  |  |               |  |  |      | 1,523,403 |  |           |   |           |       | 
|                                                                                                                            |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|OHSO Clean, Inc. (16)                                                                                                       |  |  |               |  |  |  | Life Sciences |  |  |      |           |  |           |   |           |       | 
|Developing natural, hypoallergenic household cleaning products enabled by nanotechnology- enabled formulations of thyme oil |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Participation Agreement with Montage Capital relating to the following assets:                                              |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Senior secured debt, 13.00%, maturing on 3/31/15                                                                            |  |  | ( I )         |  |  |  |               |  |  |      | 581,395   |  |           | $ | 683,200   |       | 
|Warrants for Series C Pref. Stock expiring on 3/30/22                                                                       |  |  | ( I )         |  |  |  |               |  |  |      | 91,742    |  |           |   | 1,109,333 |       | 
|                                                                                                                            |  |  |               |  |  |  |               |  |  |      | 673,137   |  |           |   |           |       | 
|                                                                                                                            |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Total Unaffiliated Private Placement Portfolio (cost: $29,753,283)                                                          |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 



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



9







|HARRIS & HARRIS GROUP,
        INC.
        CONSOLIDATED
        SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2013
        (Unaudited)
|---------------------------------------------------------------------------------------------------------------------------------



|                                                                                                   |  |  | Method of     |  |  |  | Primary       |  |  |      |           |  | Shares/   |   |           |       | 
|-------------------------------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------- |  |  | ---- | --------- |  | --------- | - | --------- | ----- | 
|                                                                                                   |  |  | Valuation (1) |  |  |  | Industry (2)  |  |  | Cost |           |  | Principal |   |           | Value | 
|                                                                                                   |  |  |               |  |  |  |               |  |  |      |           |  |           |   |          
|Rights to Milestone Payments (Illiquid) (5) – 2.7% of net assets at value                          |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                                   |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Amgen, Inc. (7)(10)                                                                                |  |  |               |  |  |  | Life Sciences |  |  |      |           |  |           |   |           |       | 
|Rights to Milestone Payments from Acquisition of BioVex Group, Inc.                                |  |  | ( I )         |  |  |  |               |  |  | $    | 3,291,750 |  |           | $ | 3,291,750 |       | 
|                                                                                                   |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Laird Technologies, Inc. (7)(10)                                                                   |  |  |               |  |  |  | Energy        |  |  |      |           |  |           |   |           |       | 
|Rights to Milestone Payments from Merger & Acquisition of Nextreme Thermal Solutions, Inc.         |  |  | ( I )         |  |  |  |               |  |  |      | 0         |  |           |   | 0         |       | 
|                                                                                                   |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Total Unaffiliated Rights to Milestone Payments (cost: $3,291,750)                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                                   |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Publicly Traded Portfolio (6) – 10.7% of net assets at value                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                                   |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Solazyme, Inc. (10)(17)                                                                            |  |  |               |  |  |  | Energy        |  |  |      |           |  |           |   |           |       | 
|Developing algal biodiesel, industrial chemicals and specialty ingredients using synthetic biology |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Common Stock                                                                                       |  |  | (M)           |  |  |  |               |  |  | $    | 3,654,604 |  |           |   | 1,546,490 |       | 
|                                                                                                   |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Champions Oncology, Inc. (10)(18)                                                                  |  |  |               |  |  |  | Life Sciences |  |  |      |           |  |           |   |           |       | 
|Developing its TumorGraftTM platform for personalized medicine and drug development                |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Common Stock                                                                                       |  |  | (M)           |  |  |  |               |  |  |      | 2,199,600 |  |           |   | 3,293,190 |       | 
|Warrants for Common Stock expiring 1/29/18                                                         |  |  | ( I )         |  |  |  |               |  |  |      | 400       |  |           |   | 40,000    |       | 
|                                                                                                   |  |  |               |  |  |  |               |  |  |      | 2,200,000 |  |           |   |           |       | 
|                                                                                                   |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Total Unaffiliated Publicly Traded Portfolio (cost: $5,854,604)                                    |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                                   |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Total Investments in Unaffiliated Companies (cost: $38,899,637)                                    |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 



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



10







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF MARCH 31, 2013
        (Unaudited)
|-------------------------------------------------------------------------------------------------------------------------



|                                                                                                                                                       |  |  | Method of     |  |  |  | Primary       |  |  |      |           |  | Shares/   |   |           |       | 
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  | ------------- |  |  |  | ------------- |  |  | ---- | --------- |  | --------- | - | --------- | ----- | 
|                                                                                                                                                       |  |  | Valuation (1) |  |  |  | Industry (2)  |  |  | Cost |           |  | Principal |   |           | Value | 
|                                                                                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |          
|Investments in Non-Controlled Affiliated Companies (3) – 
48.2% of net assets at value                                                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Private Placement Portfolio (Illiquid) (19) – 48.2% of net assets at value                                                                             |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|ABSMaterials, Inc. (7)(9)                                                                                                                              |  |  |               |  |  |  | Energy        |  |  |      |           |  |           |   |           |       | 
|Developing nano-structured absorbent materials for environmental remediation                                                                           |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Series A Convertible Preferred Stock                                                                                                                   |  |  | (M)           |  |  |  |               |  |  | $    | 435,000   |  |           |   | 390,000   |       | 
|Unsecured Convertible Bridge Note, 8%, acquired 10/1/12                                                                                                |  |  | (M)           |  |  |  |               |  |  |      | 207,978   |  |           | $ | 200,000   |       | 
|                                                                                                                                                       |  |  |               |  |  |  |               |  |  |      | 642,978   |  |           |   |           |       | 
|                                                                                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|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 |       | 
|Series D Convertible Preferred Stock                                                                                                                   |  |  | (M)           |  |  |  |               |  |  |      | 1,393,147 |  |           |   | 1,466,470 |       | 
|Subordinated Convertible Bridge Note, 8%, acquired 1/17/13                                                                                             |  |  | (M)           |  |  |  |               |  |  |      | 682,970   |  |           | $ | 672,070   |       | 
|                                                                                                                                                       |  |  |               |  |  |  |               |  |  |      | 7,961,648 |  |           |   |           |       | 
|                                                                                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|AgBiome, LLC (formerly AgInnovation, LLC) (7)(9)(10)(20)                                                                                               |  |  |               |  |  |  | Life Sciences |  |  |      |           |  |           |   |           |       | 
|Providing early stage research and discovery for agriculture and utilizing the crop microbiome to identify products that reduce risk and improve yield |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Series A-1 Convertible Preferred Stock                                                                                                                 |  |  | (M)           |  |  |  |               |  |  |      | 2,000,000 |  |           |   | 2,000,000 |       | 
|                                                                                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Contour Energy Systems, Inc. (7)(9)(10)                                                                                                                |  |  |               |  |  |  | Energy        |  |  |      |           |  |           |   |           |       | 
|Developing batteries using nano-structured materials                                                                                                   |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Series A Convertible Preferred Stock                                                                                                                   |  |  | (M)           |  |  |  |               |  |  |      | 2,009,995 |  |           |   | 2,565,798 |       | 
|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 |  |           |   |           |       | 



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



11







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF MARCH 31, 2013
        (Unaudited)
|-------------------------------------------------------------------------------------------------------------------------



|                                                                                               |  |  | Method of     |  |  |  | Primary       |  |  |      |           |  | Shares/   |   |           |       | 
|---------------------------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------- |  |  | ---- | --------- |  | --------- | - | --------- | ----- | 
|                                                                                               |  |  | Valuation (1) |  |  |  | Industry (2)  |  |  | Cost |           |  | Principal |   |           | Value | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      |           |  |           |   |          
|Investments in Non-Controlled Affiliated Companies (3) – 
48.2% of net assets at value (Cont.) |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Private Placement Portfolio (Illiquid) (19) – 48.2% of net assets at value (Cont.)             |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|D-Wave Systems, Inc. (7)(9)(21)                                                                |  |  |               |  |  |  | Electronics   |  |  |      |           |  |           |   |           |       | 
|Developing high-performance quantum computing systems                                          |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Series 1 Class B Convertible Preferred Stock                                                   |  |  | (M)           |  |  |  |               |  |  | $    | 1,002,074 |  |           |   | 1,144,869 |       | 
|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)           |  |  |  |               |  |  |      | 659,493   |  |           |   | 513,900   |       | 
|Series 2 Class F Convertible Preferred Stock                                                   |  |  | (M)           |  |  |  |               |  |  |      | 633,631   |  |           |   | 493,747   |       | 
|Warrants for Common Stock expiring 6/30/15                                                     |  |  | ( I )         |  |  |  |               |  |  |      | 98,644    |  |           |   | 153,890   |       | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      | 4,852,510 |  |           |   |           |       | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Enumeral Biomedical Corp. (7)(9)(10)                                                           |  |  |               |  |  |  | Life Sciences |  |  |      |           |  |           |   |           |       | 
|Developing therapeutics and diagnostics through functional assaying of single cells            |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Series A Convertible Preferred Stock                                                           |  |  | (M)           |  |  |  |               |  |  |      | 1,026,832 |  |           |   | 957,038   |       | 
|Series A-1 Convertible Preferred Stock                                                         |  |  | (M)           |  |  |  |               |  |  |      | 750,000   |  |           |   | 576,923   |       | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      | 1,776,832 |  |           |   |           |       | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|HzO, Inc. (7)(9)                                                                               |  |  |               |  |  |  | Electronics   |  |  |      |           |  |           |   |           |       | 
|Developing novel industrial coatings that protect electronics against damage from liquids      |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Series A Convertible Preferred Stock                                                           |  |  | (M)           |  |  |  |               |  |  |      | 666,667   |  |           |   | 4,057,294 |       | 
|Series B Convertible Preferred Stock                                                           |  |  | (M)           |  |  |  |               |  |  |      | 2,000,000 |  |           |   | 7,895,776 |       | 
|Secured Convertible Bridge Note, 8%, acquired 3/26/13                                          |  |  | (M)           |  |  |  |               |  |  |      | 350,460   |  |           | $ | 350,000   |       | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      | 3,017,127 |  |           |   |           |       | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|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 |  |           |   |           |       | 



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



12







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF MARCH 31, 2013
        (Unaudited)
|-------------------------------------------------------------------------------------------------------------------------



|                                                                                                                                 |  |  | Method of     |  |  |  | Primary       |  |  |      |           |  | Shares/   |  |            |       | 
|-------------------------------------------------------------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------- |  |  | ---- | --------- |  | --------- |  | ---------- | ----- | 
|                                                                                                                                 |  |  | Valuation (1) |  |  |  | Industry (2)  |  |  | Cost |           |  | Principal |  |            | Value | 
|                                                                                                                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |  |           
|Investments in Non-Controlled Affiliated Companies (3) – 
48.2% of net assets at value (Cont.)                                   |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|                                                                                                                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|Private Placement Portfolio (Illiquid) (19) – 48.2% of net assets at value (Cont.)                                               |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|                                                                                                                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|Metabolon, Inc. (7)(10)                                                                                                          |  |  |               |  |  |  | Life Sciences |  |  |      |           |  |           |  |            |       | 
|Developing service and diagnostic products through the use of a metabolomics, or biochemical, profiling platform                 |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|Series B Convertible Preferred Stock                                                                                             |  |  | (M)           |  |  |  |               |  |  | $    | 2,500,000 |  |           |  | 371,739    |       | 
|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 |  |           |  |            |       | 
|                                                                                                                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|OpGen, Inc. (7)(10)                                                                                                              |  |  |               |  |  |  | Life Sciences |  |  |      |           |  |           |  |            |       | 
|Developing tools for genomic sequence assembly and analysis                                                                      |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|Series C Convertible Preferred Stock                                                                                             |  |  | (M)           |  |  |  |               |  |  |      | 3,260,000 |  |           |  | 23,623,188 |       | 
|                                                                                                                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|Produced Water Absorbents, Inc. (7)(9)(10)                                                                                       |  |  |               |  |  |  | Energy        |  |  |      |           |  |           |  |            |       | 
|Developing nano-structured absorbent materials for environmental remediation of contaminated water in the oil and gas industries |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|Series A Convertible Preferred Stock                                                                                             |  |  | (M)           |  |  |  |               |  |  |      | 1,000,000 |  |           |  | 1,000,000  |       | 
|                                                                                                                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|Senova Systems, Inc. (7)(9)(10)                                                                                                  |  |  |               |  |  |  | Life Sciences |  |  |      |           |  |           |  |            |       | 
|Developing next-generation sensors to measure pH                                                                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|Series B Convertible Preferred Stock                                                                                             |  |  | (M)           |  |  |  |               |  |  |      | 1,218,462 |  |           |  | 1,350,000  |       | 
|Warrants for Series B Preferred Stock expiring 10/15/17                                                                          |  |  | ( I )         |  |  |  |               |  |  |      | 131,538   |  |           |  | 164,423    |       | 
|                                                                                                                                 |  |  |               |  |  |  |               |  |  |      | 1,350,000 |  |           |  |            |       | 



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



13







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF MARCH 31, 2013
        (Unaudited)
|-------------------------------------------------------------------------------------------------------------------------



|                                                                                                                 |  |  | Method of     |  |  |  | Primary      |  |  |      |           |  | Shares/   |  |           |       | 
|---------------------------------------------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------ |  |  | ---- | --------- |  | --------- |  | --------- | ----- | 
|                                                                                                                 |  |  | Valuation (1) |  |  |  | Industry (2) |  |  | Cost |           |  | Principal |  |           | Value | 
|                                                                                                                 |  |  |               |  |  |  |              |  |  |      |           |  |           |  |          
|Investments in Non-Controlled Affiliated Companies (3) – 
48.2% of net assets at value (Cont.)                   |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|                                                                                                                 |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|Private Placement Portfolio (Illiquid) (19) – 48.2% of net assets at value (Cont.)                               |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|                                                                                                                 |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|SiOnyx, Inc. (7)(9)(10)                                                                                          |  |  |               |  |  |  | Electronics  |  |  |      |           |  |           |  |           |       | 
|Developing silicon-based optoelectronic products enabled by its proprietary Black Silicon                        |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|Series A Convertible Preferred Stock                                                                             |  |  | (M)           |  |  |  |              |  |  | $    | 750,000   |  |           |  | 233,499   |       | 
|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 |  |           |  |           |       | 
|                                                                                                                 |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|Ultora, Inc. (7)(9)                                                                                              |  |  |               |  |  |  | Energy       |  |  |      |           |  |           |  |           |       | 
|Developing energy-storage devices enabled by carbon nanotubes                                                    |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|Series A Convertible Preferred Stock                                                                             |  |  | (M)           |  |  |  |              |  |  |      | 671,830   |  |           |  | 671,830   |       | 
|                                                                                                                 |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|Xradia, Inc. (7)(10)                                                                                             |  |  |               |  |  |  | Electronics  |  |  |      |           |  |           |  |           |       | 
|Designing, manufacturing and selling ultra-high resolution 3D x-ray microscopes and fluorescence imaging systems |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|Series D Convertible Preferred Stock                                                                             |  |  | (M)           |  |  |  |              |  |  |      | 4,000,000 |  |           |  | 3,121,099 |       | 
|                                                                                                                 |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|Total Non-Controlled Private Placement Portfolio (cost: $54,932,975)                                             |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|                                                                                                                 |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|Total Investments in Non-Controlled Affiliated Companies (cost: $54,932,975)                                     |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 



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



14







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF MARCH 31, 2013
        (Unaudited)
|-------------------------------------------------------------------------------------------------------------------------



|                                                                                               |  |  | Method of     |  |  |  | Primary       |  |  |      |           |  | Shares/   |   |            |       | 
|---------------------------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------- |  |  | ---- | --------- |  | --------- | - | ---------- | ----- | 
|                                                                                               |  |  | Valuation (1) |  |  |  | Industry (2)  |  |  | Cost |           |  | Principal |   |            | Value | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           
|Investments in Controlled Affiliated Companies (3) – 2.3% of net assets at value               |  |  |               |  |  |  |               |  |  |      |           |  |           |   |            |       | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      |           |  |           |   |            |       | 
|Private Placement Portfolio (Illiquid) (22)  – 2.3% of net assets at value                     |  |  |               |  |  |  |               |  |  |      |           |  |           |   |            |       | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      |           |  |           |   |            |       | 
|Ancora Pharmaceuticals Inc. (7)(9)                                                             |  |  |               |  |  |  | Life Sciences |  |  |      |           |  |           |   |            |       | 
|Developing synthetic carbohydrates for pharmaceutical applications                             |  |  |               |  |  |  |               |  |  |      |           |  |           |   |            |       | 
|Common Stock                                                                                   |  |  | ( I )         |  |  |  |               |  |  | $    | 2,729,817 |  |           |   | 57,463     |       | 
|Series A' Convertible Preferred Stock                                                          |  |  | ( I )         |  |  |  |               |  |  |      | 4,855,627 |  |           |   | 4,855,627  |       | 
|Senior Secured Debt, 12.00%, maturing on 12/11/13                                              |  |  | ( I )         |  |  |  |               |  |  |      | 456,894   |  |           | $ | 500,000    |       | 
|Secured Convertible Bridge Note, 8%, acquired 1/23/13                                          |  |  | (M)           |  |  |  |               |  |  |      | 355,216   |  |           | $ | 350,000    |       | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      | 8,397,554 |  |           |   |            |       | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      |           |  |           |   |            |       | 
|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)           |  |  |  |               |  |  |      | 235,638   |  |           | $ | 200,000    |       | 
|Secured Convertible Bridge Note, 12%, acquired 11/17/11                                        |  |  | (M)           |  |  |  |               |  |  |      | 111,407   |  |           | $ | 95,652     |       | 
|Secured Convertible Bridge Note, 12%, acquired 12/21/11                                        |  |  | (M)           |  |  |  |               |  |  |      | 95,292    |  |           | $ | 82,609     |       | 
|Secured Convertible Bridge Note, 12%, acquired 3/5/12                                          |  |  | (M)           |  |  |  |               |  |  |      | 490,818   |  |           | $ | 434,784    |       | 
|Secured Convertible Bridge Note, 12%, acquired 7/26/12                                         |  |  | (M)           |  |  |  |               |  |  |      | 202,260   |  |           | $ | 186,955    |       | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      | 6,231,217 |  |           |   |            |       | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      |           |  |           |   |            |       | 
|Total Controlled Private Placement Portfolio (cost: $14,628,771)                               |  |  |               |  |  |  |               |  |  |      |           |  |           |   |            |       | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      |           |  |           |   |            |       | 
|Total Investments in Controlled Affiliated Companies (cost: $14,628,771)                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |            |       | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      |           |  |           |   |            |       | 
|Total Private Placement and Publicly Traded Portfolio (cost: $108,461,383)                     |  |  |               |  |  |  |               |  |  |      |           |  |           |   |            |       | 



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



15







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF MARCH 31, 2013
        (Unaudited)
|-------------------------------------------------------------------------------------------------------------------------



|                                                          |  |  | Method of     |  |  | Number of |      |   |       |  
|--------------------------------------------------------- |  |  | ------------- |  |  | --------- | ---- | - | ----- | -
|                                                          |  |  | Valuation (1) |  |  | Contracts |      |   | Value |  
|                                                          |  |  |               |  |  |           |      |   |      
|Purchased Put Options (23)  – 0.0% of net assets at value |  |  |               |  |  |           |      |   |       |  
|                                                          |  |  |               |  |  |           |      |   |       |  
|Solazyme, Inc. — Strike Price $7.50, April 20, 2013       |  |  | (M)           |  |  |           | (200 | ) |       | $
|                                                          |  |  |               |  |  |           |      |   |       |  
|Total Purchased Put Options (Cost: $5,637)                |  |  |               |  |  |           |      |   |       | $



|                                                                    |  |  | Method of     |  |  |      |            |  | Shares/   |   |            |       | 
|------------------------------------------------------------------- |  |  | ------------- |  |  | ---- | ---------- |  | --------- | - | ---------- | ----- | 
|                                                                    |  |  | Valuation (1) |  |  | Cost |            |  | Principal |   |            | Value | 
|                                                                    |  |  |               |  |  |      |            |  |           |   |            |      
|U.S. Government Securities (24) – 10.9% of net assets at value      |  |  |               |  |  |      |            |  |           |   |            |       | 
|                                                                    |  |  |               |  |  |      |            |  |           |   |            |       | 
|U.S. Treasury Bill — due date 04/25/13                              |  |  | (M)           |  |  | $    | 13,999,531 |  |           | $ | 14,000,000 |       | 
|                                                                    |  |  |               |  |  |      |            |  |           |   |            |       | 
|Total Investments in U.S. Government Securities (cost: $13,999,531) |  |  |               |  |  |      |            |  |           |   |            |       | 
|                                                                    |  |  |               |  |  |      |            |  |           |   |            |       | 
|Total Investments (cost: $122,466,551)                              |  |  |               |  |  |      |            |  |           |   |            |       | 



|                                                           |  |  | Method of     |  |  | Number of |       |  |       |  
|---------------------------------------------------------- |  |  | ------------- |  |  | --------- | ----- |  | ----- | -
|                                                           |  |  | Valuation (1) |  |  | Contracts |       |  | Value |  
|                                                           |  |  |               |  |  |           |       |  |      
|Written Call Options (23) – (0.05)% of net assets at value |  |  |               |  |  |           |       |  |       |  
|                                                           |  |  |               |  |  |           |       |  |       |  
|Solazyme, Inc. — Strike Price $7.50, April 20, 2013        |  |  | (M)           |  |  |           | 200   |  |       |  
|Solazyme, Inc. — Strike Price $10.00, June 22, 2013        |  |  | (M)           |  |  |           | 5,400 |  |       |  
|                                                           |  |  |               |  |  |           |       |  |       |  
|Total Written Call Options (Premiums Received $196,597)    |  |  |               |  |  |           |       |  |       | $



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



16







|HARRIS & HARRIS GROUP,
        INC.
        CONSOLIDATED SCHEDULE OF
        INVESTMENTS AS OF MARCH 31, 2013
        (Unaudited)
|---------------------------------------------------------------------------------------------------------------------------------



Notes to Consolidated Schedule of Investments



| | (1) | See "Footnote to Consolidated Schedule of Investments" on page 33 for a description of
the "Valuation Procedures."
| | --- | ------------------------------------------------------------------------------------------------------------------



| | (2) | We classify "Energy" companies as those that seek to improve performance, productivity
or efficiency, and to reduce environmental impact, waste, cost, energy consumption or raw materials using nanotechnology-enabled
solutions. We classify "Electronics" companies as those that use nanotechnology to address problems in electronics-related
industries, including semiconductors. We classify "Life Sciences" companies as those that address problems in life sciences-related
industries, including biotechnology, agriculture, advanced materials and chemicals, healthcare, bioprocessing, water, industrial
biotechnology, food, nutrition and energy.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Investments in unaffiliated companies consist of investments in which we own less than five percent
of the voting shares of the portfolio company. Investments in non-controlled affiliated companies consist of investments in which
we own five percent or more, but less than 25 percent, of the voting shares of the portfolio company, or where we hold one or more
seats on the portfolio company’s Board of Directors but do not control the company. Investments in controlled affiliated
companies consist of investments in which we own 25 percent or more of the voting shares of the portfolio company or otherwise
control the company.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | The aggregate cost for federal income tax purposes of investments in unaffiliated privately held
companies is $29,753,283. The gross unrealized appreciation based on the tax cost for these securities is $4,431,342. The gross
unrealized depreciation based on the tax cost for these securities is $7,804,710.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | The aggregate cost for federal income tax purposes of investments in unaffiliated rights to milestone
payments is $3,291,750. The gross unrealized appreciation based on the tax cost for these securities is $113,062. The gross unrealized
depreciation based on the tax cost for these securities is $0.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (6) | The aggregate cost for federal income tax purposes of
investments in unaffiliated publicly traded companies is $5,854,604. The gross unrealized appreciation based on the tax cost for
these securities is $8,408,018. The gross unrealized depreciation based on the tax cost for these securities is $647,949.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | (8) | With the conversion of our bridge note into shares of Series E-1 Preferred Stock, we received a
warrant to purchase shares of common stock at $0.25 per share. The number of shares is determined by certain financial targets
for 2012 set upon receipt of the audited financial statements for 2012. These financial statements have not yet been issued, and,
therefore, the warrant remains contingent as of March 31, 2013.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (9) | These investments are development-stage companies. A development-stage company is defined as a
company that is devoting substantially all of its efforts to establishing a new business, and either it has not yet commenced its
planned principal operations, or it has commenced such operations but has not realized significant revenue from them.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (10) | Represents a non-income producing security. Investments that have not paid dividends or interest
within the last 12 months are considered to be non-income producing.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (11) | Cobalt Technologies, Inc., also does business as Cobalt Biofuels.
| | ---- | -----------------------------------------------------------------



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



17







|HARRIS & HARRIS GROUP,
        INC.
        CONSOLIDATED SCHEDULE OF
        INVESTMENTS AS OF MARCH 31, 2013
        (Unaudited)
|---------------------------------------------------------------------------------------------------------------------------------



| | (12) | With our investments in convertible bridge notes issued by Ensemble Therapeutics Corporation, we
received warrants to purchase a number of shares of the class of stock sold in the next financing of Ensemble Therapeutics Corporation
equal to $241,038 divided by the price per share of the class of stock sold in the next financing of Ensemble Therapeutics Corporation.
The ability to exercise these warrants is, therefore, contingent on Ensemble Therapeutics Corporation completing successfully a
subsequent round of financing. These warrants shall expire and no longer be exercisable on dates ranging from September 10, 2015,
through March 28, 2020. The cost basis of these warrants is $144.85.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (13) | The outstanding loans were repaid in full on April 4 and 5, 2013. We continue to own warrants to
purchase Series A and Series A-1 Preferred Stock of GEO Semiconductor, Inc.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (14) | With our investment in the Mersana Therapeutics, Inc., Series A-1 financing, we received a warrant
to purchase 277,760 shares of Series A-2 Convertible Preferred Stock. The ability to exercise the warrant is contingent upon Mersana's
achievement of certain milestones. Mersana has not achieved those milestones as of March 31, 2013, and, therefore, this warrant
is a contingent asset as of that date. The warrant will expire on July 27, 2022.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (15) | As part of a loan the Company made to Molecular Imprints in the second quarter of 2011, we received
a liquidation preference payable upon a sale of the company equal to three times the principal of the loan, or $4,044,450. This
preference is senior to the preferences of the outstanding preferred stock. While the loan has since been repaid, this liquidation
preference remains outstanding as of March 31, 2013.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (16) | OHSO Clean, Inc. also does business as CleanWell Company.
| | ---- | ---------------------------------------------------------



| | (17) | A portion of this security is held in connection with written
call option contracts: 560,000 shares, having a fair value of $4,368,000, have been pledged to brokers.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (18) | As of March 31, 2013, we owned a total of 3,293,190 shares of Champions Oncology, Inc.; 626,523
of these shares are subject to legal restrictions on their sale. Our remaining 2,666,667 shares of common stock of Champions are
not subject to legal restrictions on their sale.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (19) | The aggregate cost for federal income tax purposes of investments in non-controlled affiliated
privately held companies is $54,932,975. The gross unrealized appreciation based on the tax cost for these securities is $17,048,815.
The gross unrealized depreciation based on the tax cost for these securities is $10,434,863.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (20) | On January 29, 2013, AgInnovation, LLC, changed its name to AgBiome, LLC.
| | ---- | -------------------------------------------------------------------------



| | (21) | D-Wave Systems, Inc., is located and is doing business primarily in Canada. We invested in D-Wave
Systems, Inc., through Parallel Universes, Inc., a Delaware company. Our investment is denominated in Canadian dollars and is subject
to foreign currency translation. See "Note 3. Summary of Significant Accounting Policies."
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (22) | The aggregate cost for federal income tax purposes of investments in controlled affiliated companies
is $14,628,771. The gross unrealized appreciation based on the tax cost for these securities is $0. The gross unrealized depreciation
based on the tax cost for these securities is $11,711,597.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (23) | Initial investment was made in 2013.
| | ---- | ------------------------------------



| | (24) | The aggregate cost for federal income tax purposes of our U.S. government securities is $13,999,531.
The gross unrealized appreciation on the tax cost for these securities is $189. The gross unrealized depreciation on the tax cost
of these securities is $0.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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





18









|HARRIS & HARRIS GROUP,
        INC.
        CONSOLIDATED
        SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012
|----------------------------------------------------------------------------------------------------------------



|                                                                          |  |  | Method of     |  |  |  | Primary      |  |  | Shares/ |           |  |           |   |           |       | 
|------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------ |  |  | ------- | --------- |  | --------- | - | --------- | ----- | 
|                                                                          |  |  | Valuation (1) |  |  |  | Industry (2) |  |  | Cost    |           |  | Principal |   |           | Value | 
|                                                                          |  |  |               |  |  |  |              |  |  |         |           |  |           |   |          
|Investments in Unaffiliated Companies (3) – 33.3% of net assets at value  |  |  |               |  |  |  |              |  |  |         |           |  |           |   |           |       | 
|                                                                          |  |  |               |  |  |  |              |  |  |         |           |  |           |   |           |       | 
|Private Placement Portfolio (Illiquid) (4) – 19.4% of net assets at value |  |  |               |  |  |  |              |  |  |         |           |  |           |   |           |       | 
|                                                                          |  |  |               |  |  |  |              |  |  |         |           |  |           |   |           |       | 
|Bridgelux, Inc. (7)(8)                                                    |  |  |               |  |  |  | Energy       |  |  |         |           |  |           |   |           |       | 
|Manufacturing high-power light emitting diodes (LEDs) and arrays          |  |  |               |  |  |  |              |  |  |         |           |  |           |   |           |       | 
|Series B Convertible Preferred Stock                                      |  |  | (M)           |  |  |  |              |  |  | $       | 1,000,000 |  |           |   | 1,861,504 |       | 
|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   |       | 
|Warrants 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    |       | 
|Series E-1 Convertible Preferred Stock                                    |  |  | (M)           |  |  |  |              |  |  |         | 42,328    |  |           |   | 16,890    |       | 
|Secured Convertible Bridge Note, 10%, acquired 5/25/12                    |  |  | (M)           |  |  |  |              |  |  |         | 47,828    |  |           | $ | 45,097    |       | 
|Warrants for Series E-1 Pref. Stock expiring on 10/9/22                   |  |  | ( I )         |  |  |  |              |  |  |         | 2,781     |  |           |   | 1,407     |       | 
|                                                                          |  |  |               |  |  |  |              |  |  |         | 965,005   |  |           |   |           |       | 



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



19







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF DECEMBER 31, 2012
|--------------------------------------------------------------------------------------------------------



|                                                                                                                                                                 |  |  | Method of     |  |  |  | Primary       |  |  |      |           |  | Shares/   |   |           |       | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------- |  |  | ---- | --------- |  | --------- | - | --------- | ----- | 
|                                                                                                                                                                 |  |  | Valuation (1) |  |  |  | Industry (2)  |  |  | Cost |           |  | Principal |   |           | Value | 
|                                                                                                                                                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |   |          
|Investments in Unaffiliated Companies (3) – 33.3% of net assets at value (Cont.)                                                                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                                                                                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Private Placement Portfolio (Illiquid) (4) – 19.4% of net assets at value (Cont.)                                                                                |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                                                                                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Ensemble Therapeutics Corporation (7)(9)(12)                                                                                                                     |  |  |               |  |  |  | Life Sciences |  |  |      |           |  |           |   |           |       | 
|Developing DNA-Programmed 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)           |  |  |  |               |  |  |      | 336,550   |  |           | $ | 250,211   |       | 
|Secured Convertible Bridge Note, 8%, acquired 12/10/09                                                                                                           |  |  | (M)           |  |  |  |               |  |  |      | 60,858    |  |           | $ | 48,868    |       | 
|Secured Convertible Bridge Note, 8%, acquired 1/25/12                                                                                                            |  |  | (M)           |  |  |  |               |  |  |      | 117,634   |  |           | $ | 109,400   |       | 
|                                                                                                                                                                 |  |  |               |  |  |  |               |  |  |      | 2,515,042 |  |           |   |           |       | 
|                                                                                                                                                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|GEO Semiconductor Inc. (13)                                                                                                                                      |  |  |               |  |  |  | Electronics   |  |  |      |           |  |           |   |           |       | 
|Developing programmable, high-performance video and geometry processing solutions Participation Agreement with Montage Capital relating to the following assets: |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Senior secured debt, 13.75%, maturing on 1/15/13                                                                                                                 |  |  | ( I )         |  |  |  |               |  |  |      | 285,125   |  |           | $ | 375,801   |       | 
|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 1/15/13                                                                                                           |  |  | ( I )         |  |  |  |               |  |  |      | 109,574   |  |           | $ | 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    |       | 
|                                                                                                                                                                 |  |  |               |  |  |  |               |  |  |      | 500,007   |  |           |   |           |       | 
|                                                                                                                                                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Mersana Therapeutics, Inc. (7)(9)(14)                                                                                                                            |  |  |               |  |  |  | Life Sciences |  |  |      |           |  |           |   |           |       | 
|Developing treatments for cancer based on novel drug delivery polymers                                                                                           |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Series A-1 Convertible Preferred Stock                                                                                                                           |  |  | (M)           |  |  |  |               |  |  |      | 316,453   |  |           |   | 294,019   |       | 
|Common Stock                                                                                                                                                     |  |  | (M)           |  |  |  |               |  |  |      | 3,875,395 |  |           |   | 350,539   |       | 
|                                                                                                                                                                 |  |  |               |  |  |  |               |  |  |      | 4,191,848 |  |           |   |           |       | 
|                                                                                                                                                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Molecular Imprints, Inc. (7)(10)(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.



20







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF INVESTMENTS
        AS OF DECEMBER 31, 2012
|--------------------------------------------------------------------------------------------------------



|                                                                                                                                                                                                           |  |  | Method of     |  |  |  | Primary       |  |  |      |           |  | Shares/   |   |           |       | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------- |  |  | ---- | --------- |  | --------- | - | --------- | ----- | 
|                                                                                                                                                                                                           |  |  | Valuation (1) |  |  |  | Industry (2)  |  |  | Cost |           |  | Principal |   |           | Value | 
|                                                                                                                                                                                                           |  |  |               |  |  |  |               |  |  |      |           |  |           |   |          
|Investments in Unaffiliated Companies (3) – 33.3% of net assets at value (Cont.)                                                                                                                           |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                                                                                                                                           |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Private Placement Portfolio (Illiquid) (4) – 19.4% of net assets at value (Cont.)                                                                                                                          |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                                                                                                                                           |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Nanosys, Inc. (7)                                                                                                                                                                                          |  |  |               |  |  |  | Energy        |  |  |      |           |  |           |   |           |       | 
|Developing inorganic nanowires and quantum dots for use in LED-backlit devices                                                                                                                             |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Series C Convertible Preferred Stock                                                                                                                                                                       |  |  | (M)           |  |  |  |               |  |  | $    | 1,500,000 |  |           |   | 803,428   |       | 
|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)           |  |  |  |               |  |  |      | 44,633    |  |           | $ | 43,821    |       | 
|                                                                                                                                                                                                           |  |  |               |  |  |  |               |  |  |      | 5,041,209 |  |           |   |           |       | 
|                                                                                                                                                                                                           |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Nano Terra, Inc. (9)                                                                                                                                                                                       |  |  |               |  |  |  | Energy        |  |  |      |           |  |           |   |           |       | 
|Developing surface chemistry and nano- manufacturing solutions                                                                                                                                             |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Senior secured debt, 12.0%, maturing on 12/1/15                                                                                                                                                            |  |  | ( I )         |  |  |  |               |  |  |      | 614,597   |  |           | $ | 650,000   |       | 
|Warrants for Series A-2 Pref. Stock expiring on 2/22/21                                                                                                                                                    |  |  | ( I )         |  |  |  |               |  |  |      | 69,168    |  |           |   | 446,248   |       | 
|Warrants for Series C Pref. Stock expiring on 11/15/22                                                                                                                                                     |  |  | ( I )         |  |  |  |               |  |  |      | 35,403    |  |           |   | 241,662   |       | 
|                                                                                                                                                                                                           |  |  |               |  |  |  |               |  |  |      | 719,168   |  |           |   |           |       | 
|                                                                                                                                                                                                           |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|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   |       | 
|Series D Convertible Preferred Stock                                                                                                                                                                       |  |  | (M)           |  |  |  |               |  |  |      | 139,075   |  |           |   | 35,569    |       | 
|                                                                                                                                                                                                           |  |  |               |  |  |  |               |  |  |      | 1,523,403 |  |           |   |           |       | 
|                                                                                                                                                                                                           |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|OHSO Clean, Inc. (16)(17)                                                                                                                                                                                  |  |  |               |  |  |  | Life Sciences |  |  |      |           |  |           |   |           |       | 
|Developing natural, hypoallergenic household cleaning products enabled by nanotechnology- enabled formulations of thyme oil Participation Agreement with Montage Capital relating to the following assets: |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Senior secured debt, 13.00%, maturing on 3/31/15                                                                                                                                                           |  |  | ( I )         |  |  |  |               |  |  |      | 580,025   |  |           | $ | 683,200   |       | 
|Warrants for Series C Pref. Stock expiring on 3/30/22                                                                                                                                                      |  |  | ( I )         |  |  |  |               |  |  |      | 91,742    |  |           |   | 1,109,333 |       | 
|                                                                                                                                                                                                           |  |  |               |  |  |  |               |  |  |      | 671,767   |  |           |   |           |       | 
|                                                                                                                                                                                                           |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Total Unaffiliated Private Placement Portfolio (cost: $29,365,558)                                                                                                                                         |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 



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, 2012
|----------------------------------------------------------------------------------------------------------------





|                                                                                                       |  |  | Method of     |  |  |  | Primary       |  |  |      |           |  | Shares/   |   |           |       | 
|------------------------------------------------------------------------------------------------------ |  |  | ------------- |  |  |  | ------------- |  |  | ---- | --------- |  | --------- | - | --------- | ----- | 
|                                                                                                       |  |  | Valuation (1) |  |  |  | Industry (2)  |  |  | Cost |           |  | Principal |   |           | Value | 
|                                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Rights to Milestone Payments (Illiquid) (5) – 2.7% of net assets at value                              |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Amgen, Inc. (7)(10)                                                                                    |  |  |               |  |  |  | Life Sciences |  |  |      |           |  |           |   |           |       | 
|Rights to Milestone Payments from Acquisition of BioVex Group, Inc.                                    |  |  | ( I )         |  |  |  |               |  |  | $    | 3,291,750 |  |           | $ | 3,291,750 |       | 
|                                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Total Unaffiliated Rights to Milestone Payments (cost: $3,291,750)                                     |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Publicly Traded Portfolio (6) – 11.2% of net assets at value                                           |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|NeoPhotonics Corporation (10)(18)                                                                      |  |  |               |  |  |  | Electronics   |  |  |      |           |  |           |   |           |       | 
|Developing and manufacturing optical devices and components                                            |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Common Stock                                                                                           |  |  | (M)           |  |  |  |               |  |  | $    | 821,971   |  |           |   | 50,807    |       | 
|                                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Solazyme, Inc. (10)(19)                                                                                |  |  |               |  |  |  | Energy        |  |  |      |           |  |           |   |           |       | 
|Developing algal biodiesel, industrial chemicals and specialty ingredients
    using synthetic biology |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Common Stock                                                                                           |  |  | (M)           |  |  |  |               |  |  |      | 4,248,476 |  |           |   | 1,797,790 |       | 
|                                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Total Unaffiliated Publicly Traded Portfolio (cost: $5,070,447)                                        |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Total Investments in Unaffiliated Companies (cost: $37,727,755)                                        |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 



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, 2012
|--------------------------------------------------------------------------------------------------------



|                                                                                                                                                       |  |  | Method of     |  |  |  | Primary       |  |  |      |           |  | Shares/   |   |           |       | 
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  | ------------- |  |  |  | ------------- |  |  | ---- | --------- |  | --------- | - | --------- | ----- | 
|                                                                                                                                                       |  |  | Valuation (1) |  |  |  | Industry (2)  |  |  | Cost |           |  | Principal |   |           | Value | 
|                                                                                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Investments in Non-Controlled Affiliated Companies (3) – 
48.4% of net assets at value                                                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Private Placement Portfolio (Illiquid) (20) – 47.3% of net assets at value                                                                             |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|ABSMaterials, Inc. (7)(9)                                                                                                                              |  |  |               |  |  |  | Energy        |  |  |      |           |  |           |   |           |       | 
|Developing nano-structured absorbent materials for environmental remediation                                                                           |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Series A Convertible Preferred Stock                                                                                                                   |  |  | (M)           |  |  |  |               |  |  | $    | 435,000   |  |           |   | 390,000   |       | 
|Secured Convertible Bridge Note, 8%, acquired 10/1/12                                                                                                  |  |  | (M)           |  |  |  |               |  |  |      | 204,033   |  |           | $ | 200,000   |       | 
|                                                                                                                                                       |  |  |               |  |  |  |               |  |  |      | 639,033   |  |           |   |           |       | 
|                                                                                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|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 |  |           |   |           |       | 
|                                                                                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|AgBiome, LLC (formerly AgInnovation, LLC) (7)(9)(10)(16)(21)                                                                                           |  |  |               |  |  |  | Life Sciences |  |  |      |           |  |           |   |           |       | 
|Providing early stage research and discovery for agriculture and utilizing the crop microbiome to identify products that reduce risk and improve yield |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Series A-1 Convertible Preferred Stock                                                                                                                 |  |  | (M)           |  |  |  |               |  |  |      | 2,000,000 |  |           |   | 2,000,000 |       | 
|                                                                                                                                                       |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Contour Energy Systems, Inc. (7)(9)(10)                                                                                                                |  |  |               |  |  |  | Energy        |  |  |      |           |  |           |   |           |       | 
|Developing batteries using nano-structured materials                                                                                                   |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Series A Convertible Preferred Stock                                                                                                                   |  |  | (M)           |  |  |  |               |  |  |      | 2,009,995 |  |           |   | 2,565,798 |       | 
|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 |  |           |   |           |       | 



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, 2012
|--------------------------------------------------------------------------------------------------------



|                                                                                                   |  |  | Method of     |  |  |  | Primary       |  |  |      |           |  | Shares/   |  |           |       | 
|-------------------------------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------- |  |  | ---- | --------- |  | --------- |  | --------- | ----- | 
|                                                                                                   |  |  | Valuation (1) |  |  |  | Industry (2)  |  |  | Cost |           |  | Principal |  |           | Value | 
|                                                                                                   |  |  |               |  |  |  |               |  |  |      |           |  |           |  |           |       | 
|Investments in Non-Controlled Affiliated Companies (3) – 
48.4% of net
    assets at value (Cont.) |  |  |               |  |  |  |               |  |  |      |           |  |           |  |           |       | 
|                                                                                                   |  |  |               |  |  |  |               |  |  |      |           |  |           |  |           |       | 
|Private Placement Portfolio (Illiquid) (20) – 47.3% of net assets at
    value (Cont.)             |  |  |               |  |  |  |               |  |  |      |           |  |           |  |           |       | 
|                                                                                                   |  |  |               |  |  |  |               |  |  |      |           |  |           |  |           |       | 
|D-Wave Systems, Inc. (7)(9)(22)                                                                    |  |  |               |  |  |  | Electronics   |  |  |      |           |  |           |  |           |       | 
|Developing high-performance quantum computing systems                                              |  |  |               |  |  |  |               |  |  |      |           |  |           |  |           |       | 
|Series 1 Class B Convertible Preferred Stock                                                       |  |  | (M)           |  |  |  |               |  |  | $    | 1,002,074 |  |           |  | 1,144,869 |       | 
|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 |  |           |  |           |       | 
|                                                                                                   |  |  |               |  |  |  |               |  |  |      |           |  |           |  |           |       | 
|Enumeral Biomedical Corp. (7)(9)(10)                                                               |  |  |               |  |  |  | Life Sciences |  |  |      |           |  |           |  |           |       | 
|Developing therapeutics and diagnostics through functional assaying of single cells                |  |  |               |  |  |  |               |  |  |      |           |  |           |  |           |       | 
|Series A Convertible Preferred Stock                                                               |  |  | (M)           |  |  |  |               |  |  |      | 1,026,832 |  |           |  | 957,038   |       | 
|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)           |  |  |  |               |  |  |      | 2,000,000 |  |           |  | 7,895,776 |       | 
|                                                                                                   |  |  |               |  |  |  |               |  |  |      | 2,666,667 |  |           |  |           |       | 
|                                                                                                   |  |  |               |  |  |  |               |  |  |      |           |  |           |  |           |       | 
|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 |  |           |  |           |       | 



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, 2012
|--------------------------------------------------------------------------------------------------------



|                                                                                                                                 |  |  | Method of     |  |  |  | Primary       |  |  |      |           |  | Shares/   |  |            |       | 
|-------------------------------------------------------------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------- |  |  | ---- | --------- |  | --------- |  | ---------- | ----- | 
|                                                                                                                                 |  |  | Valuation (1) |  |  |  | Industry (2)  |  |  | Cost |           |  | Principal |  |            | Value | 
|                                                                                                                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|Investments in Non-Controlled Affiliated Companies (3) – 
48.4% of net assets at value (Cont.)                                   |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|                                                                                                                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|Private Placement Portfolio (Illiquid) (20) – 47.3% of net assets at value (Cont.)                                               |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|                                                                                                                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|Metabolon, Inc. (7)(10)                                                                                                          |  |  |               |  |  |  | Life Sciences |  |  |      |           |  |           |  |            |       | 
|Developing service and diagnostic products through the use of a metabolomics, or biochemical, profiling platform                 |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|Series B Convertible Preferred Stock                                                                                             |  |  | (M)           |  |  |  |               |  |  | $    | 2,500,000 |  |           |  | 371,739    |       | 
|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 |  |           |  |            |       | 
|                                                                                                                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|Nextreme Thermal Solutions, Inc. (7)(9)(10)(23)                                                                                  |  |  |               |  |  |  | Energy        |  |  |      |           |  |           |  |            |       | 
|Developed thin-film thermoelectric devices for cooling and energy conversion                                                     |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|Common Stock                                                                                                                     |  |  | (M)           |  |  |  |               |  |  |      | 4,384,762 |  |           |  | 8,080,153  |       | 
|                                                                                                                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|OpGen, Inc. (7)(10)(16)                                                                                                          |  |  |               |  |  |  | Life Sciences |  |  |      |           |  |           |  |            |       | 
|Developing tools for genomic sequence assembly and analysis                                                                      |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|Series C Convertible Preferred Stock                                                                                             |  |  | (M)           |  |  |  |               |  |  |      | 3,260,000 |  |           |  | 23,623,188 |       | 
|                                                                                                                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|Produced Water Absorbents, Inc. (7)(9)(10)                                                                                       |  |  |               |  |  |  | Energy        |  |  |      |           |  |           |  |            |       | 
|Developing nano-structured absorbent materials for environmental remediation of contaminated water in the oil and gas industries |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|Series A Convertible Preferred Stock                                                                                             |  |  | (M)           |  |  |  |               |  |  |      | 1,000,000 |  |           |  | 1,000,000  |       | 
|                                                                                                                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|Senova Systems, Inc. (7)(9)(10)                                                                                                  |  |  |               |  |  |  | Life Sciences |  |  |      |           |  |           |  |            |       | 
|Developing next-generation sensors to measure pH                                                                                 |  |  |               |  |  |  |               |  |  |      |           |  |           |  |            |       | 
|Series B Convertible Preferred Stock                                                                                             |  |  | (M)           |  |  |  |               |  |  |      | 1,218,462 |  |           |  | 1,350,000  |       | 
|Warrants for Series B Preferred Stock expiring 10/15/17                                                                          |  |  | ( I )         |  |  |  |               |  |  |      | 131,538   |  |           |  | 164,423    |       | 
|                                                                                                                                 |  |  |               |  |  |  |               |  |  |      | 1,350,000 |  |           |  |            |       | 



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, 2012
|--------------------------------------------------------------------------------------------------------



|                                                                                                                  |  |  | Method of     |  |  |  | Primary      |  |  |      |           |  | Shares/   |  |           |       | 
|----------------------------------------------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------ |  |  | ---- | --------- |  | --------- |  | --------- | ----- | 
|                                                                                                                  |  |  | Valuation (1) |  |  |  | Industry (2) |  |  | Cost |           |  | Principal |  |           | Value | 
|                                                                                                                  |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|Investments in Non-Controlled Affiliated Companies (3) – 
48.4% of net assets at value (Cont.)                    |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|                                                                                                                  |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|Private Placement Portfolio (Illiquid) (20) – 47.3% of net assets at value (Cont.)                                |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|                                                                                                                  |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|SiOnyx, Inc. (7)(9)(10)                                                                                           |  |  |               |  |  |  | Electronics  |  |  |      |           |  |           |  |           |       | 
|Developing silicon-based optoelectronic products enabled by its proprietary Black Silicon                         |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|Series A Convertible Preferred Stock                                                                              |  |  | (M)           |  |  |  |              |  |  | $    | 750,000   |  |           |  | 233,499   |       | 
|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 |  |           |  |           |       | 
|                                                                                                                  |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|Ultora, Inc. (7)(9)                                                                                               |  |  |               |  |  |  | Energy       |  |  |      |           |  |           |  |           |       | 
|Developing energy-storage devices enabled by carbon nanotubes                                                     |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|Series A Convertible Preferred Stock                                                                              |  |  | (M)           |  |  |  |              |  |  |      | 671,830   |  |           |  | 671,830   |       | 
|                                                                                                                  |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|Xradia, Inc. (7)(10)                                                                                              |  |  |               |  |  |  | Electronics  |  |  |      |           |  |           |  |           |       | 
|Designing, manufacturing and selling ultra-high resolution 3D x-ray microscopes and  fluorescence imaging systems |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|Series D Convertible Preferred Stock                                                                              |  |  | (M)           |  |  |  |              |  |  |      | 4,000,000 |  |           |  | 3,121,099 |       | 
|                                                                                                                  |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 
|Total Non-Controlled Private Placement Portfolio (cost: $57,789,263)                                              |  |  |               |  |  |  |              |  |  |      |           |  |           |  |           |       | 



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, 2012
|--------------------------------------------------------------------------------------------------------



|                                                                                               |  |  | Method of     |  |  |  | Primary       |  |  |      |           |  | Shares/   |   |           |       | 
|---------------------------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------- |  |  | ---- | --------- |  | --------- | - | --------- | ----- | 
|                                                                                               |  |  | Valuation (1) |  |  |  | Industry (2)  |  |  | Cost |           |  | Principal |   |           | Value | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Investments in Non-Controlled Affiliated Companies (3) – 
48.4% of net assets at value (Cont.) |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Publicly Traded Portfolio (Illiquid) (24) – 1.1% of net assets at value                        |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Champions Oncology, Inc. (10)                                                                  |  |  |               |  |  |  | Life Sciences |  |  |      |           |  |           |   |           |       | 
|Developing its 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: $59,789,263)                   |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Investments in Controlled Affiliated Companies (3)(25) – 
2.4% of net assets at value          |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Private Placement Portfolio (Illiquid) – 2.4% of net assets at value                           |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Ancora Pharmaceuticals Inc. (7)(9)                                                             |  |  |               |  |  |  | Life Sciences |  |  |      |           |  |           |   |           |       | 
|Developing synthetic carbohydrates for pharmaceutical applications                             |  |  |               |  |  |  |               |  |  |      |           |  |           |   |           |       | 
|Common Stock                                                                                   |  |  | ( I )         |  |  |  |               |  |  | $    | 2,729,817 |  |           |   | 57,463    |       | 
|Series A' Convertible Preferred Stock                                                          |  |  | ( I )         |  |  |  |               |  |  |      | 4,855,627 |  |           |   | 4,855,627 |       | 
|Senior Secured Debt, 12.00%, maturing on 12/11/13                                              |  |  | ( I )         |  |  |  |               |  |  |      | 446,731   |  |           | $ | 500,000   |       | 
|                                                                                               |  |  |               |  |  |  |               |  |  |      | 8,032,175 |  |           |   |           |       | 



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, 2012
|--------------------------------------------------------------------------------------------------------



|                                                                                               |  |  | Method of     |  |  |  | Primary      |  |  |      |           |  | Shares/   |   |            |       | 
|---------------------------------------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------ |  |  | ---- | --------- |  | --------- | - | ---------- | ----- | 
|                                                                                               |  |  | Valuation (1) |  |  |  | Industry (2) |  |  | Cost |           |  | Principal |   |            | Value | 
|                                                                                               |  |  |               |  |  |  |              |  |  |      |           |  |           |   |            |       | 
|Investments in Controlled Affiliated Companies (3)(25) – 
2.4% of net assets at value (Cont.)  |  |  |               |  |  |  |              |  |  |      |           |  |           |   |            |       | 
|                                                                                               |  |  |               |  |  |  |              |  |  |      |           |  |           |   |            |       | 
|Private Placement Portfolio (Illiquid) – 2.4% of net assets at value (Cont.)                   |  |  |               |  |  |  |              |  |  |      |           |  |           |   |            |       | 
|                                                                                               |  |  |               |  |  |  |              |  |  |      |           |  |           |   |            |       | 
|Laser Light Engines, Inc. (7)(9)                                                               |  |  |               |  |  |  | Energy       |  |  |      |           |  |           |   |            |       | 
|Manufacturing solid-state light sources for digital cinema and large-venue projection displays |  |  |               |  |  |  |              |  |  |      |           |  |           |   |            |       | 
|Series A Convertible Preferred Stock                                                           |  |  | (M)           |  |  |  |              |  |  | $    | 2,000,000 |  |           |   | 7,499,062  |       | 
|Series B Convertible Preferred Stock                                                           |  |  | (M)           |  |  |  |              |  |  |      | 3,095,802 |  |           |   | 13,571,848 |       | 
|Secured Convertible Bridge Note, 12%, acquired 10/7/11                                         |  |  | (M)           |  |  |  |              |  |  |      | 229,721   |  |           | $ | 200,000    |       | 
|Secured Convertible Bridge Note, 12%, acquired 11/17/11                                        |  |  | (M)           |  |  |  |              |  |  |      | 108,577   |  |           | $ | 95,652     |       | 
|Secured Convertible Bridge Note, 12%, acquired 12/21/11                                        |  |  | (M)           |  |  |  |              |  |  |      | 92,848    |  |           | $ | 82,609     |       | 
|Secured Convertible Bridge Note, 12%, acquired 3/5/12                                          |  |  | (M)           |  |  |  |              |  |  |      | 477,953   |  |           | $ | 434,784    |       | 
|Secured Convertible Bridge Note, 12%, acquired 7/26/12                                         |  |  | (M)           |  |  |  |              |  |  |      | 196,728   |  |           | $ | 186,955    |       | 
|                                                                                               |  |  |               |  |  |  |              |  |  |      | 6,201,629 |  |           |   |            |       | 
|                                                                                               |  |  |               |  |  |  |              |  |  |      |           |  |           |   |            |       | 
|Total Controlled Private Placement Portfolio (cost: $14,233,804)                               |  |  |               |  |  |  |              |  |  |      |           |  |           |   |            |       | 
|                                                                                               |  |  |               |  |  |  |              |  |  |      |           |  |           |   |            |       | 
|Total Investments in Controlled Affiliated Companies (cost: $14,233,804)                       |  |  |               |  |  |  |              |  |  |      |           |  |           |   |            |       | 
|                                                                                               |  |  |               |  |  |  |              |  |  |      |           |  |           |   |            |       | 
|Total Private Placement and Publicly Traded Portfolio (cost: $111,750,822)                     |  |  |               |  |  |  |              |  |  |      |           |  |           |   |            |       | 



|                                                                    |  | Method of     |  |      |            |  | Shares/   |   |            |       | 
|------------------------------------------------------------------- |  | ------------- |  | ---- | ---------- |  | --------- | - | ---------- | ----- | 
|                                                                    |  | Valuation (1) |  | Cost |            |  | Principal |   |            | Value | 
|                                                                    |  |               |  |      |            |  |           |   |            |       | 
|U.S. Government Securities (26) – 10.9% of net assets at value      |  |               |  |      |            |  |           |   |            |       | 
|                                                                    |  |               |  |      |            |  |           |   |            |       | 
|U.S. Treasury Bill — due date 03/28/13                              |  | (M)           |  | $    | 13,996,136 |  |           | $ | 14,000,000 |       | 
|                                                                    |  |               |  |      |            |  |           |   |            |       | 
|Total Investments in U.S. Government Securities (cost: $13,996,136) |  |               |  |      |            |  |           |   |            |       | 
|                                                                    |  |               |  |      |            |  |           |   |            |       | 
|Total Investments (cost: $125,746,958)                              |  |               |  |      |            |  |           |   |            |       | 



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, 2012
|----------------------------------------------------------------------------------------------------------------



|                                                                 |  | Method of     |  | Number of |       |  |       |  
|---------------------------------------------------------------- |  | ------------- |  | --------- | ----- |  | ----- | -
|                                                                 |  | Valuation (1) |  | Contracts |       |  | Value |  
|                                                                 |  |               |  |           |       |  |       |  
|Written Call Options (16) – (0.03)% of net assets at value       |  |               |  |           |       |  |       |  
|                                                                 |  |               |  |           |       |  |       |  
|Solazyme, Inc. — Strike Price $10.00, March 16, 2013             |  | (M)           |  |           | 1,500 |  |       |  
|NeoPhotonics Corporation — Strike Price $7.50, February 16, 2013 |  | (M)           |  |           | 500   |  |       |  
|                                                                 |  |               |  |           |       |  |       |  
|Total Written Call Options (Premiums Received $50,000)           |  |               |  |           |       |  |       | $



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, 2012
|----------------------------------------------------------------------------------------------------------------



Notes to Consolidated Schedule of Investments



| | (1) | See "Footnote to Consolidated Schedule of Investments" on page 33 for a description of
the "Valuation Procedures."
| | --- | ------------------------------------------------------------------------------------------------------------------



| | (2) | We classify "Energy" companies as those that seek to improve performance, productivity
or efficiency, and to reduce environmental impact, waste, cost, energy consumption or raw materials using nanotechnology-enabled
solutions. We classify "Electronics" companies as those that use nanotechnology to address problems in electronics-related
industries, including semiconductors. In the fourth quarter of 2012, we renamed the industry classification "Healthcare"
to "Life Sciences." We classify "Life Sciences" companies as those that address problems in life sciences-related
industries, including biotechnology, agriculture, advanced materials and chemicals, healthcare, bioprocessing, water, industrial
biotechnology, food, nutrition and energy.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Investments in unaffiliated companies consist of investments in which we own less than five percent
of the voting shares of the portfolio company. Investments in non-controlled affiliated companies consist of investments in which
we own five percent or more, but less than 25 percent, of the voting shares of the portfolio company, or where we hold one or more
seats on the portfolio company’s Board of Directors but do not control the company. Investments in controlled affiliated
companies consist of investments in which we own 25 percent or more of the voting shares of the portfolio company or otherwise
control the company.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | (5) | The aggregate cost for federal income tax purposes of investments in unaffiliated rights to milestone
payments is $3,291,750. The gross unrealized appreciation based on the tax cost for these securities is $108,984. The gross unrealized
depreciation based on the tax cost for these securities is $0.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (6) | The aggregate cost for federal income tax purposes of
investments in unaffiliated publicly traded companies is $5,070,447. The gross unrealized appreciation based on the tax cost for
these securities is $9,882,153. The gross unrealized depreciation based on the tax cost for these securities is $530,339.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | (8) | With the conversion of our bridge note into shares of Series E-1 Preferred Stock, we received a
warrant to purchase shares of common stock at $0.25 per share. The number of shares is determined by certain financial targets
for 2012 set upon receipt of the audited financial statements for 2012. These financial statements have not yet been issued, and,
therefore, the warrant remains contingent as of December 31, 2012.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (9) | 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.



30







|HARRIS & HARRIS GROUP,
        INC.
        CONSOLIDATED SCHEDULE OF
        INVESTMENTS AS OF DECEMBER 31, 2012
|----------------------------------------------------------------------------------------------------------------



| | (10) | Represents a non-income producing security. Investments that have not paid dividends or interest
within the last 12 months are considered to be non-income producing.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (11) | Cobalt Technologies, Inc., also does business as Cobalt
Biofuels.
| | ---- | -----------------------------------------------------------------



| | (12) | With our investment in a convertible bridge note issued by Ensemble Therapeutics Corporation, we
received a warrant to purchase a number of shares of the class of stock sold in the next financing of Ensemble Therapeutics Corporation
equal to $149,540 divided by the price per share of the class of stock sold in the next financing of Ensemble Therapeutics Corporation.
The ability to exercise this warrant is, therefore, contingent on Ensemble Therapeutics Corporation completing successfully a subsequent
round of financing. This warrant shall expire and no longer be exercisable on September 10, 2015. The cost basis of this warrant
is $89.86.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | (14) | With our investment in the Mersana Therapeutics, Inc., Series A-1 financing, we received a warrant
to purchase 277,760 shares of Series A-2 Convertible Preferred Stock. The ability to exercise the warrant is contingent upon Mersana's
achievement of certain milestones. Mersana has not achieved those milestones as of December 31, 2012, and, therefore, this warrant
is a contingent asset as of that date. The warrant will expire on July 27, 2022.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (15) | 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, 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, having a fair value of $287,000, have been pledged to brokers.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (19) | A portion of this security is held in connection with written
call option contracts: 150,000 shares, having a fair value of $1,175,000, have been pledged to brokers.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (20) | The aggregate cost for federal income tax purposes of investments in non-controlled affiliated
companies is $57,789,263. The gross unrealized appreciation based on the tax cost for these securities is $15,229,665. The gross
unrealized depreciation based on the tax cost for these securities is $12,226,531.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (21) | On January 29, 2013, AgInnovation, LLC, changed its name to AgBiome, LLC.
| | ---- | -------------------------------------------------------------------------



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



31







|HARRIS & HARRIS GROUP, INC.
        CONSOLIDATED SCHEDULE OF
        INVESTMENTS AS OF DECEMBER 31, 2012
|--------------------------------------------------------------------------------------------------------



| | (22) | 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."
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (23) | On February 13, 2013, Nextreme Thermal Solutions, Inc., was acquired by Laird Technologies, Inc.,
for $1 and the potential for future milestone payments.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| | (24) | The aggregate cost for federal income tax purposes of investments in non-controlled affiliated
publicly traded companies is $2,000,000. The gross unrealized appreciation based on the tax cost for these securities is $0. The
gross unrealized depreciation based on the tax cost for these securities is $651,773.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (25) | The aggregate cost for federal income tax purposes of investments in controlled affiliated companies
is $14,233,804. The gross unrealized appreciation based on the tax cost for these securities is $0. The gross unrealized depreciation
based on the tax cost for these securities is $11,144,988.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (26) | The aggregate cost for federal income tax purposes of our U.S. government securities is $13,996,136.
The gross unrealized appreciation on the tax cost for these securities is $2,744. The gross unrealized depreciation on the tax
cost of these securities is $0.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



| | II. | Approaches to Determining Fair Value
| | --- | ------------------------------------



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



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



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



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: Unadjusted quoted prices in active markets for identical assets or liabilities.
| | - | ----------------------------------------------------------------------------------------



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



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



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



| | III. | Investment Categories
| | ---- | ---------------------



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



| | · | Equity-related securities;
| | - | --------------------------



| | · | Long-term fixed-income securities;
| | - | ----------------------------------



| | · | Short-term fixed-income securities;
| | - | -----------------------------------



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



| | · | All other securities.
| | - | ---------------------



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



34







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



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



| | § | Readily available public market quotations;
| | - | -------------------------------------------



| | § | The cost of the Company’s investment;
| | - | -------------------------------------



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



| | § | The financial condition and operating results of the company;
| | - | -------------------------------------------------------------



| | § | The company's progress towards milestones.
| | - | ------------------------------------------



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



| | § | The values of similar securities issued by companies in similar businesses;
| | - | ---------------------------------------------------------------------------



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



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



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



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



| | 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, 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
        (Unaudited)
|--------------------------------------------------------------



NOTE 1. THE COMPANY



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



H&H Ventures Management,
Inc.SM ("Ventures"), formerly Harris & Harris Enterprises, Inc.SM, is a 100 percent wholly
owned subsidiary of the Company. Ventures is taxed under Subchapter C (a "C Corporation") of the Internal Revenue Code
of 1986 (the "Code"). Harris Partners I, L.P, is a limited partnership and, from time to time, may be used to hold certain
interests in portfolio companies. The partners of Harris Partners I, L.P., are Ventures (sole general partner) and the Company
(sole limited partner). Ventures pays taxes on income generated by its operations as well as on any non-passive investment income
generated by Harris Partners I, L.P. For the period ended March 31, 2013, there was no non-passive investment income generated
by Harris Partners I, L.P. Ventures, as the sole general partner, consolidates Harris Partners I, L.P. The Company consolidates
its wholly owned subsidiary, Ventures, for financial reporting purposes.



NOTE 2. INTERIM FINANCIAL STATEMENTS



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



NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



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



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.



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



Portfolio Investment
Valuations. Investments are stated at "value" as defined in the 1940 Act and in the applicable regulations of the
Securities and Exchange Commission ("SEC") and in accordance with GAAP. Value, as defined in Section 2(a)(41) of the
1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) the fair value
as determined in good faith by, or under the direction of, the Board of Directors for all other assets. (See "Valuation Procedures"
in the "Footnote to Consolidated Schedule of Investments.") As of March 31, 2013, our financial statements include privately
held investments and one illiquid publicly traded venture capital investment, Champions Oncology, Inc., collectively fair valued
at $95,800,879. The fair values of our privately held and illiquid publicly traded venture capital investments were determined
in good faith by, or under the direction of, the Board of Directors. Upon sale of investments, the values that are ultimately realized
may be different from what is presently estimated. The difference could be material.



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



Restricted Funds.
At March 31, 2013, and December 31, 2012, we held $10,020 and $10,015, respectively, in "Restricted funds," which were
held in security deposits for sublessors.



Unaffiliated Rights
to Milestone Payments. At March 31, 2013, and December 31, 2012, the outstanding milestone payments from Amgen, Inc.’s
acquisition of Biovex Group, Inc., were valued at $3,404,812 and $3,400,734, respectively. The milestone payments are derivatives
and valued using the probability-adjusted, present value of proceeds from future payments that would be due upon successful completion
of certain regulatory and sales milestones. If all remaining milestones are met, we would receive $9,526,393. There can be no assurance
as to how much of this amount we will ultimately realize or when it will be realized, if at all. At March 31, 2013, the outstanding
milestone payments from Laird Technologies, Inc.’s acquisition of Nextreme Thermal Solutions, Inc., were valued at $0.



Receivable from
Sales of Investments. At March 31, 2013, we had a receivable totaling $273,361 relating to the sale of Crystal IS, Inc. The
escrow period expired on March 28, 2013, and the funds were released to us on April 4, 2013.



38







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



Property and Equipment.
Property and equipment are included in "Other assets" and are carried at $275,871 and $288,122 at March 31, 2013, and
December 31, 2012, respectively, representing cost, less accumulated depreciation. Depreciation is provided using the straight-line
method over the estimated useful lives of the premises and equipment. We estimate the useful lives to be five to ten years for
furniture and fixtures, three years for computer equipment, and ten years for leasehold improvements.



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



Interest Income
Recognition. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis.
When securities are determined to be non-income producing, the Company ceases accruing interest and writes off any previously accrued
interest. Securities are deemed to be non-income producing if, on their last interest or dividend date, no cash was paid or no
cash or in-kind dividends were declared. These write-offs are recorded as a debit to interest income. During the three months ended
March 31, 2013, the Company earned $95,209 in interest on U.S. government securities, senior secured debt, participation agreements,
subordinated secured debt, non-convertible promissory notes and interest-bearing accounts. During the three months ended March
31, 2013, the Company recorded $59,881 of bridge note interest.



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



Call
Options. The Company writes covered call options on publicly traded securities with the intention of earning option premiums.
Option premiums may increase the Company’s realized gains and, therefore, may help increase distributable income, but may
limit the realized gains on the security. When a Company writes (sells) an option, an amount equal to the premium received by the
Company is recorded in the Consolidated Statements of Assets and Liabilities as a liability. The amount of the liability is subsequently
marked-to-market to reflect the current market value of the option written. When an option expires, the Company realizes a gain
on the option to the extent of the premiums received. Premiums received from writing options that are exercised or closed are added
to or offset against the proceeds or amount paid on the transaction to determine the realized gain or loss. At March 31, 2013,
the Company had 560,000 shares of Solazyme, Inc., covered by call option contracts. In the event these contracts are exercised,
the Company would be required to deliver those shares to the counterparty. See "Note 12. Subsequent Events."



39







Put Options.
The Company purchases put options on publicly traded securities with the intention of limiting its downside risk. When the Company
purchases a put option, an amount equal to the premium paid is recorded in the Consolidated Statements of Assets and Liabilities
as an investment. The amount of this asset is subsequently marked-to-market to reflect the current value of the put option. In
the event that the put option is exercised, the Company would be required to deliver those shares to the counterparty. When the
put option expires unexercised, the Company realizes a loss on the premium paid.



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



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



40







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



Income Taxes.
As we intend to qualify as a RIC under Subchapter M of the Code, the Company does not accrue for income taxes. The
Company has capital loss carryforwards that can be used to offset net realized capital gains. The Company recognizes interest and
penalties in income tax expense.



We pay federal, state
and local income taxes on behalf of our wholly owned subsidiary, Ventures, which is a C corporation. See "Note 10. Income
Taxes."



Foreign Currency
Translation. The accounting records of the Company are maintained in U.S. dollars. All assets and liabilities denominated in
foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies against U.S. dollars on the
date of valuation. For the three months ended March 31, 2013, included in the net decrease in unrealized depreciation on investments
was an unrealized loss of $113,006resulting from foreign currency translation.



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



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



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



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



Approximately 87 percent
of our equity-focused venture capital portfolio by value was comprised of securities of 25 privately held companies. Because there
is typically no public or readily ascertainable market for our interests in the small privately held companies in which we invest,
the valuation of the securities in that portion of our portfolio is determined in good faith by our Valuation Committee, which
is comprised of all of the independent members of our Board of Directors. The values are determined in accordance with our Valuation
Procedures and are subject to significant estimates and judgments. The fair value of the securities in our portfolio may differ
significantly from the values that would be placed on these securities if a ready market for the securities existed. Any changes
in valuation are recorded in our Consolidated Statements of Operations as "Net (decrease) increase in unrealized appreciation
on investments." Changes in valuation of any of our investments in privately held companies from one period to another may
be significant.



NOTE 5. DEBT



On February 24, 2011,
the Company established a $10 million three-year revolving credit facility (the "credit facility") with TD Bank, N.A.
to be used in conjunction with its investments in venture debt.



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



42







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



NOTE 6. FAIR VALUE OF INVESTMENTS



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





|                                     |  | Fair Value Measurement at Reporting Date Using: |            
|------------------------------------ |  | ----------------------------------------------- | -----------
|                                     |  |                                                 |            
|Description                          |  | March 31,
    2013                              |            
|                                     |  |                                                 |            
|U.S. Government Securities           |  | $                                               | 13,999,720 
|                                     |  |                                                 |            
|Put Options                          |  | $                                               | 5,637      
|                                     |  |                                                 |            
|Privately Held Portfolio Companies:  |  |                                                 |            
|Preferred Stock                      |  | $                                               | 79,279,756 
|Bridge Notes                         |  | $                                               | 5,213,314  
|Warrants                             |  | $                                               | 544,844    
|Rights to Milestone Payments         |  | $                                               | 3,404,812  
|Common Stock                         |  | $                                               | 108,667    
|Senior Secured Debt                  |  | $                                               | 1,388,150  
|Participation Agreement              |  | $                                               | 1,146,618  
|Subordinated  Secured  Debt          |  | $                                               | 129,500    
|Non-Convertible Promissory Note      |  | $                                               | 3,033,338  
|                                     |  |                                                 |            
|Publicly Traded Portfolio Companies: |  |                                                 |            
|Common Stock                         |  | $                                               | 13,614,502 
|                                     |  |                                                 |            
|Total Investments                    |  | $                                               | 121,868,858
|                                     |  |                                                 |            
|Liabilities:                         |  |                                                 |            
|Written Call Options                 |  | $                                               | 63,737     
|                                     |  |                                                 |            
|Total Liabilities                    |  | $                                               | 63,737     



43







Significant Unobservable Inputs



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



|                                |  | Fair Value at
    March 31, 2013 |            |  | Valuation Techniques(s) |                                               | Unobservable Input |                                                                                                                                                            | Range (WeightedAverage(1)) | 
|------------------------------- |  | -------------------------------- | ---------- |  | ----------------------- | --------------------------------------------- | ------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | 
|                                |  |                                  |            |  |                         |                                               |                    |                                                                                                                                                            |                            | 
|Preferred Stock                 |  | $                                | 79,279,756 |  |                         | Income Approach Market Approach               |                    | Probability of Achieving Milestones Private Offering
    Price Non-Performance Risk Revenue Multiple Discount for Illiquidity Probability of Exit Outcomes |                            | 
|                                |  |                                  |            |  |                         |                                               |                    |                                                                                                                                                            |                            | 
|Bridge Notes                    |  |                                  | 5,213,314  |  |                         | Market Approach                               |                    | Private Offering Price Non-Performance Risk                                                                                                                |                            | 
|                                |  |                                  |            |  |                         |                                               |                    |                                                                                                                                                            |                            | 
|Common Stock                    |  |                                  | 108,667    |  |                         | Market Approach                               |                    | Private Offering Price Non-Performance Risk                                                                                                                |                            | 
|                                |  |                                  |            |  |                         |                                               |                    |                                                                                                                                                            |                            | 
|Warrants                        |  |                                  | 544,844    |  |                         | Black-Sholes-Merton Model                     |                    | Stock Price Volatility Expected Term                                                                                                                       |                            | 
|                                |  |                                  |            |  |                         |                                               |                    |                                                                                                                                                            |                            | 
|Rights to Milestone Payments    |  |                                  | 3,404,812  |  |                         | Probability Weighted
    Discounted Cash Flow |                    | Probability of Achieving Independent Milestones
    Probability of Achieving Dependent Milestones                                                          |                            | 
|                                |  |                                  |            |  |                         |                                               |                    |                                                                                                                                                            |                            | 
|Participation Agreements        |  |                                  | 1,146,618  |  |                         | Income Approach                               |                    | Warrant Adjusted Effective Yield Effective Yield Non-Performance
    Risk Participation Payment Risk Discount for Comparable Prices of High-Yield Debt     |                            | 
|                                |  |                                  |            |  |                         |                                               |                    |                                                                                                                                                            |                            | 
|Subordinated Secured Debt       |  |                                  | 129,500    |  |                         | Income Approach                               |                    | Non-Performance Risk                                                                                                                                       |                            | 
|                                |  |                                  |            |  |                         |                                               |                    |                                                                                                                                                            |                            | 
|Senior Secured Debt             |  |                                  | 1,388,150  |  |                         | Income Approach                               |                    | Effective Yield Non-Performance Risk                                                                                                                       |                            | 
|                                |  |                                  |            |  |                         |                                               |                    |                                                                                                                                                            |                            | 
|Non-Convertible Promissory Note |  |                                  | 3,033,338  |  |                         | Income Approach                               |                    | Probability of Exit Outcomes Private Offering Price Non-Performance
    Risk                                                                               |                            | 
|                                |  |                                  |            |  |                         |                                               |                    |                                                                                                                                                            |                            | 
|OTC Traded Common Stock         |  | $                                | 1,551,880  |  |                         | Market Approach                               |                    | Illiquidity Discount Non-Performance Risk
    Warrant Adjusted Price per Share                                                                             |                            | 
|Total                           |  | $                                | 95,800,879 |  |                         |                                               |                    |                                                                                                                                                            |                            | 



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



44







Valuation Methodologies and Inputs for
Level 3 Assets



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



Preferred Stock, Bridge Notes and Common
Stock



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



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



Warrants



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



45







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



Rights to Milestone Payments



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



Participation Agreements, Subordinated
Secured Debt and Senior Secured Debt



We invest in venture
debt investments through participation agreements, subordinated secured debt and senior secured debt. We value these securities
using an income approach. The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings)
to a single present value amount (discounted). The measurement is based on the value indicated by current market expectations about
those future amounts. Common inputs for valuing Level 3 debt investments include: the effective yield of the debt investment or,
in the case where we have received warrant coverage, the warrant-adjusted effective yield of the security, adjustments for changes
in the yields of comparable publicly traded high-yield debt funds and risk-free interest rates and an assessment of non-performance
risk. For those debt investments made through participation agreements, we include discounts for the risk of breach of the participation
agreements. For venture debt investments, an increase in yields would result in a lower fair value measurement. Furthermore, yields
would decrease, and value would increase, if the company is exceeding targets and risk has been substantially reduced from the
level of risk that existed at the time of investment. Yields would increase, and values would decrease, if the company is failing
to meet its targets and risk has been increased from the level of risk that existed at the time of investment.



Non-Convertible Promissory Note



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



46







OTC Traded Common Stock



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



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



|                                |  | BeginningBalance1/1/2013 |            |  | TotalRealizedGains(Losses)Included inChanges inNet Assets |   |            | Transfers |  |   | TotalUnrealized(Depreciation)AppreciationIncluded inChanges inNet Assets |   |  | Investments inPortfolioCompanies,Interest onBridge Notes,andAmortizationof LoanFees, Net |           |   | Disposals |   |           | EndingBalance3/31/2013 |  |   | Amount of Total(Depreciation)Appreciation for thePeriod Included inChanges in NetAssets Attributableto the Change inUnrealized Gains orLosses Relating toAssets Still Held atthe Reporting Date |  
|------------------------------- |  | ------------------------ | ---------- |  | --------------------------------------------------------- | - | ---------- | --------- |  | - | ------------------------------------------------------------------------ | - |  | ---------------------------------------------------------------------------------------- | --------- | - | --------- | - | --------- | ---------------------- |  | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -
|                                |  |                          |            |  |                                                           |   |            |           |  |   |                                                                          |   |  |                                                                                          |           |   |           |   |           |                        |  |   |                                                                                                                                                                                                 |  
|Preferred Stock                 |  | $                        | 78,615,582 |  |                                                           | $ | 0          |           |  | $ | 72,610                                                                   |   |  | $                                                                                        | 100,464   |   |           | $ | 491,100   |                        |  | $ | 0                                                                                                                                                                                               |  
|                                |  |                          |            |  |                                                           |   |            |           |  |   |                                                                          |   |  |                                                                                          |           |   |           |   |           |                        |  |   |                                                                                                                                                                                                 |  
|Bridge Notes                    |  |                          | 4,152,634  |  |                                                           |   | 0          |           |  |   | (77,965                                                                  | ) |  |                                                                                          | (395,841  | ) |           |   | 1,534,486 |                        |  |   | 0                                                                                                                                                                                               |  
|                                |  |                          |            |  |                                                           |   |            |           |  |   |                                                                          |   |  |                                                                                          |           |   |           |   |           |                        |  |   |                                                                                                                                                                                                 |  
|Common Stock                    |  |                          | 108,667    |  |                                                           |   | (4,384,762 | )         |  |   | 0                                                                        |   |  |                                                                                          | 4,384,762 |   |           |   | 0         |                        |  |   | 0                                                                                                                                                                                               |  
|                                |  |                          |            |  |                                                           |   |            |           |  |   |                                                                          |   |  |                                                                                          |           |   |           |   |           |                        |  |   |                                                                                                                                                                                                 |  
|Warrants                        |  |                          | 586,320    |  |                                                           |   | 0          |           |  |   | 5,355                                                                    |   |  |                                                                                          | (47,231   | ) |           |   | 400       |                        |  |   | 0                                                                                                                                                                                               |  
|                                |  |                          |            |  |                                                           |   |            |           |  |   |                                                                          |   |  |                                                                                          |           |   |           |   |           |                        |  |   |                                                                                                                                                                                                 |  
|Rights to Milestone Payments    |  |                          | 3,400,734  |  |                                                           |   | 0          |           |  |   | 0                                                                        |   |  |                                                                                          | 4,078     |   |           |   | 0         |                        |  |   | 0                                                                                                                                                                                               |  
|                                |  |                          |            |  |                                                           |   |            |           |  |   |                                                                          |   |  |                                                                                          |           |   |           |   |           |                        |  |   |                                                                                                                                                                                                 |  
|Participation Agreements        |  |                          | 1,138,148  |  |                                                           |   | 0          |           |  |   | 0                                                                        |   |  |                                                                                          | 37,723    |   |           |   | 1,797     |                        |  |   | (31,050                                                                                                                                                                                         | )
|                                |  |                          |            |  |                                                           |   |            |           |  |   |                                                                          |   |  |                                                                                          |           |   |           |   |           |                        |  |   |                                                                                                                                                                                                 |  
|Subordinated Secured Debt       |  |                          | 120,410    |  |                                                           |   | 0          |           |  |   | 0                                                                        |   |  |                                                                                          | 8,722     |   |           |   | 368       |                        |  |   | 0                                                                                                                                                                                               |  
|                                |  |                          |            |  |                                                           |   |            |           |  |   |                                                                          |   |  |                                                                                          |           |   |           |   |           |                        |  |   |                                                                                                                                                                                                 |  
|Senior Secured Debt             |  |                          | 1,075,870  |  |                                                           |   | 0          |           |  |   | 0                                                                        |   |  |                                                                                          | (2,182    | ) |           |   | 360,163   |                        |  |   | (45,701                                                                                                                                                                                         | )
|                                |  |                          |            |  |                                                           |   |            |           |  |   |                                                                          |   |  |                                                                                          |           |   |           |   |           |                        |  |   |                                                                                                                                                                                                 |  
|Non-Convertible Promissory Note |  |                          | 3,033,338  |  |                                                           |   | 0          |           |  |   | 0                                                                        |   |  |                                                                                          | 0         |   |           |   | 0         |                        |  |   | 0                                                                                                                                                                                               |  
|                                |  |                          |            |  |                                                           |   |            |           |  |   |                                                                          |   |  |                                                                                          |           |   |           |   |           |                        |  |   |                                                                                                                                                                                                 |  
|Publicly Traded Common Stock    |  |                          | 1,348,227  |  |                                                           |   | 0          |           |  |   | 0                                                                        |   |  |                                                                                          | 4,053     |   |           |   | 199,600   |                        |  |   | 0                                                                                                                                                                                               |  
|                                |  |                          |            |  |                                                           |   |            |           |  |   |                                                                          |   |  |                                                                                          |           |   |           |   |           |                        |  |   |                                                                                                                                                                                                 |  
|Total                           |  | $                        | 93,579,930 |  |                                                           | $ | (4,384,762 | )         |  | $ | 0                                                                        |   |  | $                                                                                        | 4,094,548 |   |           | $ | 2,587,914 |                        |  | $ | (76,751                                                                                                                                                                                         | )



We elected to use the
beginning of period values to recognize transfers in and out of Level 3 investments. For the three months ended March 31, 2013,
there were no transfers out of Level 3.



47







At December 31, 2012,
our financial assets were categorized as follows in the fair value hierarchy:



|                                     |  | Fair
    Value Measurement at Reporting Date Using: |            
|------------------------------------ |  | --------------------------------------------------- | -----------
|                                     |  |                                                     |            
|Description                          |  | December
    31, 2012                               |            
|                                     |  |                                                     |            
|U.S. Government Securities           |  | $                                                   | 13,998,880 
|                                     |  |                                                     |            
|Privately Held Portfolio Companies:  |  |                                                     |            
|Preferred Stock                      |  | $                                                   | 78,615,582 
|Bridge Notes                         |  | $                                                   | 4,152,634  
|Warrants                             |  | $                                                   | 586,320    
|Rights to Milestone Payments         |  | $                                                   | 3,400,734  
|Common Stock                         |  | $                                                   | 108,667    
|Senior Secured Debt                  |  | $                                                   | 1,075,870  
|Participation Agreement              |  | $                                                   | 1,138,148  
|Subordinated  Secured  Debt          |  | $                                                   | 120,410    
|Non-Convertible Promissory Note      |  | $                                                   | 3,033,338  
|                                     |  |                                                     |            
|Publicly Traded Portfolio Companies: |  |                                                     |            
|Common Stock                         |  | $                                                   | 15,770,488 
|                                     |  |                                                     |            
|Total Investments                    |  | $                                                   | 122,001,071
|                                     |  |                                                     |            
|Liabilities:                         |  |                                                     |            
|Written Call Options                 |  | $                                                   | 42,500     
|                                     |  |                                                     |            
|Total                                |  | $                                                   | 42,500     



At December 31, 2012,
certain written call option contracts were classified as Level 2 investments because there was no active market for the options
as of that date. These options were valued using a midpoint pricing convention.



The following chart
shows the components of change in the financial assets categorized as Level 3 for the twelve months ended December 31, 2012.



48







|                                |  | Beginning Balance 1/1/2012 |            |  | Total Realized Gains (Losses) Included
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              in Changes
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              in Net
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              Assets |   |   | Transfers |  |   | Total Unrealized (Depreciation) Appreciation Included
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              in Changes
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              in Net
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              Assets |   |  | Investments in
                                                                                                                                                                                                                       Portfolio Companies, Interest
                                                                                                                                                                                                                                                                                                                                                                                                                                                   on Bridge
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              Notes, and Amortization of
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              Loan Fees,
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              Net |            |   | Disposals |   |            | Ending Balance 12/31/2012 |  |   | Amount
                                                                                                         of Total (Depreciation) Appreciation
                                                                                                                                                                                                                                                                                                                                            for
                                                                                                                                                                                                                                                                                                                                            the Period
                                                                                                                                                                                                                                                                                                                                                                                                                                                                   Included
                                                                                                                                                                                                                                                                                                                                                                                                                                                                   in Changes
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              in
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              Net Assets
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              Attributable to
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              the
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              Change
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              in Unrealized
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              Gains
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              or Losses
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              Relating
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              to Assets
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              Still
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              Held
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              at the
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              Reporting
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              Date |  
|------------------------------- |  | -------------------------- | ---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | - | --------- |  | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------- | - | --------- | - | ---------- | ------------------------- |  | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -
|                                |  |                            |            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |           |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |            |   |           |   |            |                           |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  
|Preferred Stock                 |  | $                          | 68,833,189 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | $ | 0 |           |  | $ | 1,091,677                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |  | $                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | (4,903,413 | ) |           | $ | 13,594,129 |                           |  | $ | 0                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  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                                                                                                                                                                                                                                                                                                                        |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  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                                                                                                                                                                                                |  
|                                |  |                            |            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |           |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |            |   |           |   |            |                           |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  
|Senior Secured Debt             |  |                            | 942,695    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | 0 |           |  |   | 0                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | (13,663    | ) |           |   | 609,267    |                           |  |   | (462,429                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | )
|                                |  |                            |            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |           |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |            |   |           |   |            |                           |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  
|Non-Convertible Promissory Note |  |                            | 3,033,338  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | 0 |           |  |   | 0                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | 0          |   |           |   | 0          |                           |  |   | 0                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  
|                                |  |                            |            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |           |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |            |   |           |   |            |                           |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  
|Publicly Traded Common Stock    |  |                            | 1,973,334  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | 0 |           |  |   | 0                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | (625,107   | ) |           |   | 0          |                           |  |   | 0                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  
|                                |  |                            |            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |           |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |            |   |           |   |            |                           |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  
|Total                           |  | $                          | 83,563,723 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | $ | 0 |           |  | $ | 0                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |  | $                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | (6,091,306 | ) |           | $ | 16,730,941 |                           |  | $ | (623,428                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | )



We elected to use the
beginning of period values to recognize transfers in and out of Level 3 investments. For the year ended December 31, 2012, there
were no transfers out of Level 3.



NOTE 7. DERIVATIVES



The Company has written
covered call options on a portion of its holdings of one of its publicly traded portfolio companies in exchange for the receipt
of a premium. 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.



49







Transactions in written
call options during the three months ended March 31, 2013, were as follows:



|                                                |  | Number of Contracts |        |   | Premium |  
|----------------------------------------------- |  | ------------------- | ------ | - | ------- | -
|Call options outstanding at December 31, 2012   |  |                     | 2,000  |   |         | $
|Call options written                            |  |                     | 8,621  |   |         |  
|Call options expired                            |  |                     | (1,500 | ) |         |  
|Call options terminated in closing transactions |  |                     | (3,521 | ) |         |  
|Call options outstanding at March 31, 2013      |  |                     | 5,600  |   |         | $



We have also purchased
put options as a method of limiting the downside risk that the price per share of this company 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.



Transactions in put options during the three
months ended March 31, 2013, were as follows:



|                                               |  | Number of Contracts |        |   | Premium |  
|---------------------------------------------- |  | ------------------- | ------ | - | ------- | -
|Put options outstanding at December 31, 2012   |  |                     | 0      |   |         | $
|Put options purchased                          |  |                     | (1,713 | ) |         |  
|Put options expired                            |  |                     | 1,513  |   |         |  
|Put options terminated in closing transactions |  |                     | 0      |   |         |  
|Put options outstanding at March 31, 2013      |  |                     | (200   | ) |         | $



At March 31, 2013,
and December 31, 2012, we had rights to milestone payments from Amgen, Inc.’s acquisition of our former portfolio company,
BioVex. These milestone payments were fair valued at $3,404,812 and $3,400,734, respectively, and are contingent upon certain milestones
being achieved in the future. As of March 31, 2013, we also had rights to milestone payments from Laird Technologies, Inc.'s acquisition
of our former portfolio company, Nextreme Thermal Solutions, Inc. These milestone payments were fair valued at $0 as of March 31,
2013.



The following tables
present the value of derivatives held at March 31, 2013, and the effect of derivatives held during the three months ended March
31, 2013, along with the respective location in the financial statements.



50







|                                                                                                           |  | Assets      |  | Liabilities |          
|---------------------------------------------------------------------------------------------------------- |  | ----------- |  | ----------- | ---------
|Derivatives                                                                                                |  | Location    |  | Fair Value  |          
|                                                                                                           |  |             |  |             |          
|Equity Contracts                                                                                           |  | Put Options |  | $           | 5,637    
|                                                                                                           |  |             |  |             |          
|Amgen, Inc. Rights to Milestone Payments from Acquisition of BioVex Group, Inc.                            |  | Investments |  | $           | 3,404,812
|                                                                                                           |  |             |  |             |          
|Laird Technologies, Inc. Rights to Milestone Payments from Acquisition of Nextreme Thermal Solutions, Inc. |  | Investments |  | $           | 0        



Statement of Operations



|Derivatives                                                                                                |  | Location                                |  | Realized (Loss)/Gain |         |   | Change in unrealized Appreciation/ (Depreciation) |  
|---------------------------------------------------------------------------------------------------------- |  | --------------------------------------- |  | -------------------- | ------- | - | ------------------------------------------------- | -
|                                                                                                           |  |                                         |  |                      |         |   |                                                   |  
|Equity Contracts                                                                                           |  | Net Realized and Unrealized (Loss) Gain |  | $                    | (33,134 | ) |                                                   | $
|                                                                                                           |  |                                         |  |                      |         |   |                                                   |  
|Amgen, Inc. Rights to Milestone Payments from Acquisition of BioVex Group, Inc.                            |  | Net Realized and Unrealized Gain (Loss) |  | $                    | 0       |   |                                                   | $
|                                                                                                           |  |                                         |  |                      |         |   |                                                   |  
|Laird Technologies, Inc. Rights to Milestone Payments from Acquisition of Nextreme Thermal Solutions, Inc. |  | Net Realized and Unrealized Gain (Loss) |  | $                    | 0       |   |                                                   | $



NOTE 8. EMPLOYEE BENEFITS



We administer a plan
to provide medical and dental insurance for retirees and their spouses who, at the time of their retirement, have 10 years of service
with us and have attained 50 years of age or have attained 45 years of age and have 15 years of service with us. On March 7, 2013,
the Board of Directors amended this Medical Benefit Retirement Plan. The amendment limits the medical benefit to $10,000 per year
for a period of ten years. The amendment does not affect benefits accrued by former employees or one current employee who is grandfathered
under the former terms of the plan.



Our accumulated postretirement
benefit obligation was remeasured as of the plan amendment date, which resulted in a $1,101,338 decrease in our liability. A deferred
gain of $1,101,338 owing to this amendment was included in "Accumulated other comprehensive income." This amount will
be amortized over a service period of 5.27 years. During the three months ended March 31, 2013, a total of $43,538 was amortized
and included as a reduction of "Salaries, benefits and stock-based compensation" on our Consolidated Statements of Operations.



NOTE 9. STOCK-BASED COMPENSATION



The Company maintains
the Stock Plan, which provides for the grant of equity-based awards of stock options to our officers and employees and restricted
stock to our officers, employees and non-employee directors subject to compliance with the 1940 Act and an exemptive order granted
by the SEC permitting us to award shares of restricted stock on April 3, 2012 (the "Exemptive Order").



51







Under the Stock Plan,
a maximum of 20 percent (6,200,120 shares) of our total shares of common stock issued and outstanding as of the 2012 Annual Meeting
date, calculated on a fully diluted basis (31,000,601 shares), were available for awards under the Stock Plan. Under the Stock
Plan, no more than 50 percent of the shares of stock reserved for the grant of the awards under the Stock Plan (up to an aggregate
of 3,100,060 shares) may be restricted stock awards at any time during the term of the Stock Plan. If any shares of restricted
stock are awarded, such awards will reduce on a percentage basis the total number of shares of stock for which options may be awarded.
No more than 1,000,000 shares of our common stock may be made subject to awards under the Stock Plan to any individual in any year.
Although the Stock Plan permits us to continue to grant stock options, our Board of Directors currently plans to discontinue further
grants of stock options.



The Stock Plan will
expire on June 7, 2022. The expiration of the Stock Plan will not by itself adversely affect the rights of plan participants under
awards that are outstanding at the time the Stock Plan expires. Our Board of Directors may terminate, modify or suspend the plan
at any time, provided that no modification of the 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 Stock Plan at any time, provided
that in such event, the award holder may exercise any vested options prior to such termination of the Stock Plan or award.



Stock Option Awards



During the three months
ended March 31, 2013, and the year ended December 31, 2012, 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. The Compensation Committee currently does not plan to grant new stock options
to employees.



For the three months
ended March 31, 2013, the Company recognized $60,019 of compensation expense in the Consolidated Statements of Operations related
to stock options. As of March 31, 2013, there was approximately $205,433 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 ended March 31, 2012, the Company recognized $447,824 of compensation expense in the Consolidated Statements of Operations
related to stock options.



For the three months
ended March 31, 2013, and March 31, 2012, no options were exercised.



52







A summary of the changes in outstanding
stock options for the three months ended March 31, 2013, 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, 2013                               |  |        | 1,425,372 |  |                | $ | 9.77 |                  |  | $ | 6.27                       |  |  |           | 3.68
|                                                                     |  |        |           |  |                |   |      |                  |  |   |                            |  |  |           |     
|Granted                                                              |  |        | 0         |  |                | $ | 0    |                  |  | $ | 0                          |  |  |           | 0   
|                                                                     |  |        |           |  |                |   |      |                  |  |   |                            |  |  |           |     
|Exercised                                                            |  |        | 0         |  |                | $ | 0    |                  |  | $ | 0                          |  |  |           | 0   
|                                                                     |  |        |           |  |                |   |      |                  |  |   |                            |  |  |           |     
|Forfeited or Expired                                                 |  |        | 0         |  |                | $ | 0    |                  |  | $ | 0                          |  |  |           | 0   
|                                                                     |  |        |           |  |                |   |      |                  |  |   |                            |  |  |           |     
|Options Outstanding at March 31, 2013                                |  |        | 1,425,372 |  |                | $ | 9.77 |                  |  | $ | 6.27                       |  |  |           | 3.43
|                                                                     |  |        |           |  |                |   |      |                  |  |   |                            |  |  |           |     
|Options Exercisable at March 31, 2013                                |  |        | 1,371,492 |  |                | $ | 9.77 |                  |  | $ | 6.24                       |  |  |           | 3.44
|                                                                     |  |        |           |  |                |   |      |                  |  |   |                            |  |  |           |     
|Options Exercisable and Expected to be Exercisable at March 31, 2013 |  |        | 1,424,100 |  |                | $ | 9.77 |                  |  | $ | 6.27                       |  |  |           | 3.43



The aggregate intrinsic
value in the table above with respect to options outstanding, exercisable and expected to be exercisable, is calculated as the
difference between the Company's closing stock price of $3.60 on March 28, 2013, the last trading day of the first quarter of 2013,
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 options been fully vested and all option holders exercised their awards
on March 31, 2013.



Restricted Stock



The Exemptive Order
provided for the grant of 14,000 shares of restricted stock to non-employee directors on June 7, 2012. On June 11, 2012, the Committee
granted the employees a total of 1,780,000 shares of restricted stock. A total of 1,068,000 awards (60 percent) vest when the volume-weighted
stock price is at or above pre-determined stock price targets over a 30-day period. These pre-determined stock price targets range
from $5.00 per share to $9.00 per share. The remaining 712,000 of these shares (40 percent) have vesting dates ranging from December
31, 2012, through June 30, 2017, based on the named executive officer's continued service to the Company. After this initial employee
grant, the Compensation Committee does not plan to grant additional restricted stock to existing employees until at least June
11, 2015. Pursuant to the Exemptive Order, non-employee directors will receive up to 2,000 shares of restricted stock annually.



For the three months
ended March 31, 2013, we recognized $254,702 of compensation expense related to restricted stock awards. As of March 31, 2013,
there was unrecognized compensation cost of $3,952,496 related to restricted stock awards. This cost is expected to be recognized
over a weighted average period of approximately 2.2 years.



Non-vested restricted
stock awards as of March 31, 2013, and changes during the three months ended March 31, 2013, were as follows:



53







|                                                                     |  | Shares |           |  | Weighted-Average Grant Date
                                                                                                                                                                                                 Fair
                                                                                                                                                                                                 Value
                                                                                                                                                                                                 Per
                                                                                                                                                                                                 Share |  
|-------------------------------------------------------------------- |  | ------ | --------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -
|Outstanding at January 1, 2013                                       |  |        | 1,616,000 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | $
|Granted                                                              |  |        | 0         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  
|Vested based on service                                              |  |        | 0         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  
|Shares withheld  related to net share settlement of restricted stock |  |        | 0         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  
|Forfeited                                                            |  |        | 0         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  
|Outstanding at March 31, 2013                                        |  |        | 1,616,000 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | $



Under net settlement
procedures currently applicable to our outstanding restricted stock awards for current employees, upon each settlement date, restricted
stock awards are withheld to cover the required withholding tax, which is based on the value of the restricted stock award on the
settlement date as determined by the closing price of our common stock on the vesting date. The remaining amounts are delivered
to the recipient as shares of our common stock. There have been no net settlements during the three months ended March 31, 2013.



NOTE 10. 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.



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."



54







We have received SEC
certification since 1999, including for 2011, pursuant to Section 851(e) of the Code. 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 March 31, 2013, and 2012, we paid $22,010 and $8,075, respectively, in federal, state and local taxes. At March 31, 2013,
and 2012, we had $0 accrued for federal, state and local taxes payable by the Company.



We pay federal, state
and local taxes primarily related to sublease income generated by Ventures, which is taxed as a C Corporation. For the three months
ended March 31, 2013, and 2012, our income tax expense for Ventures was $21,080 and $7,170, respectively.



NOTE 11. 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 ended March 31, 2013, and March 31, 2012.



|                                                                                  |  | For the Three Months Ended March 31, |           
|--------------------------------------------------------------------------------- |  | ------------------------------------ | ----------
|                                                                                  |  | 2013                                 |           
|                                                                                  |  |                                      |           
|Numerator for (decrease) increase in net assets per share                         |  | $                                    | (2,060,192
|                                                                                  |  |                                      |           
|Denominator for basic weighted average shares                                     |  |                                      | 31,116,881
|                                                                                  |  |                                      |           
|Basic net increase (decrease) in net assets per share resulting from operations   |  | $                                    | (0.07     
|                                                                                  |  |                                      |           
|Denominator for diluted weighted average shares                                   |  |                                      | 31,116,881
|                                                                                  |  |                                      |           
|Diluted net increase (decrease) in net assets per share resulting from operations |  | $                                    | (0.07     



For the three months
ended March 31, 2013, the calculation of net decrease in net assets resulting from operations per diluted share does not include
any stock options or restricted stock awards because such stock options and restricted stock awards were anti-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 12. COMMITMENTS AND CONTINGENCIES



On December 28, 2011,
the Asahi Kasei Group completed its acquisition of Crystal IS, Inc. As of March 31, 2013, approximately $273,000 in proceeds from
the transaction was 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
was 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 was up to $487,000 through March 28,
2013, and up to $238,000 through December 31, 2013. As of March 31, 2013, no such claims had been made. On April 4, 2013, we received
proceeds of $273,361 from the release of the Crystal IS escrow.



55







NOTE 13. SUBSEQUENT EVENTS



In April 2013, we sold
300 written call option contracts on Solazyme, Inc., that expired on April 20, 2013, with a strike price of $7.50. We received
premiums of approximately $10,077 for these contracts. We also purchased put options on Solazyme that expired on April 20, 2013,
with a strike price of $7.50. We paid premiums of approximately $9,490.



In April 2013, we were
assigned on a total of 50,000 shares of Solazyme, Inc., relating to the April 20, 2013, written call option contracts. We received
net proceeds of approximately $373,292 related to these sales.



During the period from
April 1, 2013, through May 8, 2013, we also sold 108,232 shares of Solazyme, Inc., in open market transactions for net proceeds
of $913,393.



On
April 4, 2013, we received $273,361 upon the release of funds held in escrow from the acquisition of Crystal IS, Inc., by Asahi
Kasei Group in 2011.



On
April 4 and 5, 2013, GEO Semiconductor, Inc., repaid to us all outstanding principal and interest totaling $490,313. We continue
to own warrants to purchase Series A and Series A-1 Preferred Stock of GEO Semiconductor.



On
April 9, 2013, the Company made a $260,870 follow-on investment in AgBiome, LLC, a privately held portfolio company.



On
April 24, 2013, the Company made a $100,000 follow-on investment in a privately held portfolio company.



On April 25, 2013,
the Company made a $300,000 follow-on investment in Ancora Pharmaceuticals Inc., a privately held portfolio company.



On April 29, 2013,
the Company made a $166,667 follow-on investment in a privately held portfolio company.



On April 30, 2013,
the Company made a $750,000 follow-on investment in Enumeral Biomedical Corp., a privately held portfolio company.



On May 2, 2013, the
Company made a $1,212,500 follow-on investment in HzO, Inc., a privately held portfolio company.



56







On May 2, 2013, pursuant
to the Exemptive Order, a grant of 12,000 shares of restricted stock was made to the non-employee directors of the Company. Each
non-employee director was granted 2,000 shares, which will vest ratably over a three-year period.



57







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



|                                                                                         |  | Three Months Ended March 31, |            
|---------------------------------------------------------------------------------------- |  | ---------------------------- | -----------
|                                                                                         |  | 2013                         |            
|                                                                                         |  |                              |            
|Per Share Operating Performance                                                          |  |                              |            
|                                                                                         |  |                              |            
|Net asset value per share, beginning of period                                           |  | $                            | 4.13       
|                                                                                         |  |                              |            
|Net operating loss*                                                                      |  |                              | (0.06      
|                                                                                         |  |                              |            
|Net realized (loss) gain on investments*                                                 |  |                              | (0.11      
|                                                                                         |  |                              |            
|Net increase in unrealized appreciation as a result of sales*                            |  |                              | 0.11       
|                                                                                         |  |                              |            
|Net increase in unrealized appreciation on investments held and written call options*(1) |  |                              | 0.00       
|                                                                                         |  |                              |            
|Total from investment operations*                                                        |  |                              | (0.06      
|                                                                                         |  |                              |            
|Net increase as a result of stock-based compensation expense*                            |  |                              | 0.01       
|                                                                                         |  |                              |            
|Total increase from capital stock transactions                                           |  |                              | 0.01       
|                                                                                         |  |                              |            
|Net increase as a result of other comprehensive income                                   |  |                              | 0.03       
|                                                                                         |  |                              |            
|Net asset value per share, end of period                                                 |  | $                            | 4.11       
|                                                                                         |  |                              |            
|Stock price per share, end of period                                                     |  | $                            | 3.60       
|                                                                                         |  |                              |            
|Total return based on stock price                                                        |  |                              | 9.09       
|                                                                                         |  |                              |            
|Supplemental Data:                                                                       |  |                              |            
|                                                                                         |  |                              |            
|Net assets, end of period                                                                |  | $                            | 127,749,103
|                                                                                         |  |                              |            
|Ratio of expenses to average net assets                                                  |  |                              | 1.7        
|                                                                                         |  |                              |            
|Ratio of net operating loss to average net assets                                        |  |                              | (1.5       
|                                                                                         |  |                              |            
|Average debt outstanding                                                                 |  | $                            | 0.00       
|                                                                                         |  |                              |            
|Average debt per share                                                                   |  | $                            | 0.00       
|                                                                                         |  |                              |            
|Number of shares outstanding, end of period                                              |  |                              | 31,116,881 



*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 March 31, 2013, Consolidated Financial Statements and
the Company's audited 2012 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 disruptive science-enabled companies, particularly ones
that are enabled by nanotechnology 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 are an early-stage,
active investor in transformative companies. We make venture capital investments in companies enabled by multi-disciplinary, scientific
innovations, particularly those enabled by nanotechnology and microsystems. We define venture capital investments as the money
and resources made available to privately held and publicly traded small businesses with exceptional growth potential. 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.



59







We believe companies
that leverage scientific innovations, particularly those at the nanoscale, are emerging as leaders in their respective industry
sectors. These industry sectors include life sciences, energy and electronics. Innovations within each sector often have very different,
sometimes unexpected, origins. The knowledge of core domains within each of these industry sectors can be augmented by exposure
to the adjacent or even entirely "white-field" multi-disciplinary technology domains including: nanoscale materials,
novel analytical instrumentation and manufacturing tools, ultrafast computational and modeling capabilities, high-function mobile
devices, high-speed wireless data transfer and high-density, long-lasting and renewable sources of energy. Our investment team
has the ability to identify and invest in such domains.









We believe that as
the impact of scientific innovation, particularly scientific innovation at the nanoscale, occurs, our portfolio companies are well
positioned to profit and that we will see investment returns as a result.



We consider a company
to fit our investment thesis if the company employs, or intends to employ, science-enabled technologies, particularly those 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 portfolio of venture capital investments that address a variety of
industries, markets and products leveraging science-related innovations, particularly in nanotechnology and microsystems.



Industry Sectors of Investment



We generally classify
our investments in one of three industry sectors: Life Sciences, Energy and Electronics. We classify companies in our life sciences
portfolio as those that address problems in life sciences-related industries, including biotechnology, agriculture, advanced materials
and chemicals, diagnostics, healthcare, bioprocessing, water, industrial biotechnology, food, nutrition and energy. We may refer
to interdisciplinary approaches to addressing life science-related needs as "Biology+."



60







We classify companies
in our energy portfolio as those that seek to improve performance, productivity or efficiency, and to reduce environmental impact,
waste, cost, energy consumption or raw materials. Energy is a term used commonly to describe products and processes that solve
global problems related to resource constraints. The term, "cleantech," is also used commonly in a similar manner.



We classify companies
in our electronics portfolio as those that address problems in electronics-related industries, including semiconductors, telecommunications
and data communications, metrology and test and measurement.



We discuss in detail
our assessment of the trends, technologies and interdisciplinary approaches to solving needs within each of these industry sectors
on page 43 of the Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")
section of our Annual Report on Form 10-K for the year ended December 31, 2012.



Maturity of Current Equity-Focused Venture
Capital Portfolio



Our equity-focused
venture capital portfolio is composed 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. Early-stage companies have a high degree of technical, market and execution risk, which is typical of initial investments
by venture capital firms, including us. Mid-stage companies are those that have overcome most of the technical risk associated
with their products and are now focused on addressing the market acceptance for their products. Late-stage companies are those
that have determined there is a market for their products, and they are now focused on sales execution and scale. Late-stage, life
sciences companies are typically generating revenue from the commercial sale of one or more products or, in the case of therapeutic
or medical devise-focused life sciences companies, are in Phase III Clinical Trials, which are the pivotal trials before a possible
FDA approval and commercial launch of a product.



Our current portfolio
is comprised of companies at varying stages of maturity in a diverse set of industries within three sectors. 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
that primarily address needs in the sectors shown in the table below.



61











The interdisciplinary
nature of science-based inventions enables our portfolio companies to address needs in multiple sectors rather than being confined
to addressing needs in one sector. As such, many of our companies can adjust their business foci to address needs in a secondary
sector should opportunities in the company’s primary sector decrease in number or magnitude.



We expect some of our portfolio
companies to transition between stages of maturity over time. This transition may be forward if the company is maturing and is
successfully executing its business plan or may be backward if the company is not successfully executing its business plan or decides
to change its business plan substantially from its original plan. Transitions backward are commonly accompanied by an increase
in non-performance risk, which reduces valuation. We discuss non-performance risk and its implications on value below in the section
titled "Valuation of Investments."



During the first quarter
of 2013, we transitioned D-Wave Systems from a mid-stage company to a late-stage company and HzO from an early-stage company to
a mid-stage company.



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 and generate current income 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 specific sectors such as life sciences, energy and electronics that are enabled by scientific
breakthroughs, including nanotechnology. It is also possible these funds will 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.



62







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 MD&A as our "equity-focused"
portfolio of investments. We have historically, from time to time, taken 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. While we have historically made venture debt investments,
we currently plan to focus our efforts on equity-focused investments and on raising and managing one or more third-party funds.



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.



We believe our ability
to bring early-stage financing and strong corporate partnering early in the development process could be perceived as valuable
by potential portfolio companies and may be of particular benefit in investment opportunities that become competitive. We also
believe that corporate involvement is evolving to become more critical for the success of early-stage companies in the years ahead.
We discuss both of these topics in detail on pages 52 and 53, respectively, of the MD&A section of our Annual Report on Form
10-K for the year ended December 31, 2012.



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 March 31, 2013, we held at least one board seat or observer rights on 23 of our 27
equity-focused portfolio companies (85 percent).



63







We may be involved
actively in the formation and development of business strategies of our earliest stage portfolio companies. This involvement may
include hiring management, licensing intellectual property, securing space and raising additional capital. We also provide managerial
assistance to late-stage companies looking for potential exit opportunities by leveraging our relationships with the banking and
investment community and our knowledge and experience in running a micro-capitalization publicly traded business.



Investments and Current Investment Pace



Since our investment
in Otisville in 1983 through March 31, 2013, we have made a total of 95 equity-focused venture capital investments. We have completely
exited 68 of these 95 investments and partially exited through the sale of shares and/or the sale of call options covered by shares
of one of these 95 investments, recognizing aggregate net realized gains of $66,771,832 on invested capital of $105,363,448. For
the securities of the 27 companies in our equity-focused portfolio held at March 31, 2013, we have net unrealized depreciation
of $869,564 on invested capital of $103,003,278. We have aggregate net realized gains and unrealized depreciation for our 95 equity-focused
investments of $65,902,268 on invested capital of $208,366,726.



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 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;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | $949,469 from the portion of our upfront payment held in escrow from the sale of Innovalight, Inc.,
to DuPont, which was released on January 24, 2013;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | $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;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | $5,534,782 from the sale of shares of Solazyme, Inc., on invested capital of $1,788,874. In addition,
we generated $1,564,888 in realized gains on our sale of call option and put option contracts covered by our shares of Solazyme,
Inc.; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | A realized loss of $4,839,811, including call options, on our investment in NeoPhotonics Corporation
on invested capital of $7,299,590.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------





64







The aggregate net realized
gains and the cumulative invested capital also do not reflect the cost or value of our shares of Solazyme, Inc., that we owned
as of March 31, 2013, or the premiums received on open option contracts of $196,597. The aggregate net realized gains also do not
include potential escrow payments from the sale of Crystal IS, Inc., or potential milestone payments that could occur as part of
the acquisition of BioVex Group, Inc., by Amgen, Inc., or the acquisition of Nextreme Thermal Solutions, Inc., by Laird Technologies,
Inc., at points in time in the future as of March 31, 2013. If these amounts were included as of March 31, 2013, our aggregate
net realized gains and cumulative invested capital would be $82,512,627 and $109,018,052, respectively.



From August 2001 through
March 31, 2013, all 53 of our initial equity-focused investments have been in science-enabled companies commercializing or integrating
products enabled by nanotechnology or microsystems. From August 2001 through March 31, 2013, we have invested a total (before any
subsequent write-ups, write-downs or dispositions) of $161,306,035 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 transactions). At March 31, 2013, from first
dollar in, the average and median holding periods for these 26 investments were 5.5 years and 5.9 years, respectively. Historically,
as measured from first dollar in to last dollar out, the average and median holding periods for the 68 investments we have exited
were 4.3 years and 3.4 years, respectively.



The following is a
summary of our initial and follow-on equity-focused investments in nanotechnology companies from January 1, 2009, to March 31,
2013. 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                                                                         



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 March 31, 2013, and December 31, 2012,
our total primary and secondary liquidity was $34,741,991 and $38,231,691, 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.



65







Primary liquidity is
comprised of cash, U.S. Treasury securities and certain receivables. As of March 31, 2013, we held $13,999,720 in U.S. government
obligations, and we had an additional $7,060,100 in cash. As of December 31, 2012, we held $13,998,880 in U.S. government obligations,
and we had an additional $8,379,111 in cash.



On January 24, 2013,
the Company received payment of its portion of the proceeds held in escrow from DuPont’s acquisition of Innovalight, Inc.,
totaling $949,469. This payment 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., sale 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 disposition of Crystal
IS, 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. We received the proceeds from the funds held from the disposition of Crystal IS on April 4, 2013,
which will add to our primary liquidity during the second quarter of 2013. During the three months ended March 31, 2013, we sold
251,300 shares of our investment in Solazyme, Inc., under written call option contracts. We received $1,884,750 in gross proceeds
from these transactions, which added to our primary liquidity. During the three months ended March 31, 2013, we sold the remaining
50,807 shares of our investment in NeoPhotonics Corporation under written call option contracts and open market sales. We received
$254,039 in gross proceeds from these transactions, which also added to our primary liquidity.



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 March
31, 2013, our secondary liquidity was $13,614,502. Solazyme, Inc., accounts for $12,062,622 of this amount based on its closing
price as of March 31, 2013. The fair value of our shares of Champions Oncology, Inc., accounts for $1,551,880 of the total amount
of secondary liquidity. As of December 31, 2012, our secondary liquidity was $15,770,488. NeoPhotonics and Solazyme accounted for
$14,422,261 of this amount based on the closing price of each company as of December 31, 2012. Champions Oncology accounted for
$1,348,227 of the total amount of secondary liquidity. As of March 31, 2013, a total of 626,523 shares of Champions Oncology were
subject to restrictions that limit our ability to sell those securities. The remainder of our public securities were freely tradable.
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 March 31, 2013



During the fourth quarter
of 2012, one of our portfolio companies received letters of intent to acquire the company. During the first quarter of 2013, this
portfolio company entered into exclusive negotiations with one potential acquirer. As of March 31, 2013, definitive documents for
such acquisition were being drafted. We currently estimate that the transaction could close during the second or third quarter
of 2013; however, there can be no assurance that this company will be able to consummate a transaction within this time frame,
if at all.



66







Additionally, our companies
often plan for and/or begin the process of pursuing potential sales and/or IPOs of those companies by hiring bankers and/or advisors
to attempt to pursue such liquidity events. We consider these efforts to be in the ordinary course of business for those companies
until the potential and timing of a transaction become tangible through events such as receipt of letters of intent to acquire
a company and/or drafting of registration documents to pursue an IPO. Other than the company mentioned above, as of March 31, 2013,
we did not have any additional companies for which the potential and timing of a transaction are tangible.



As of March 31, 2013,
we valued potential milestone payments from the sale of BioVex Group, Inc., at $3,404,812. 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 March 31, 2013,
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. As
of March 31, 2013, we valued potential milestone payments from the sale of Nextreme Thermal Solutions's Inc., to Laird Technologies,
Inc., at $0.



Strategy for Managing Publicly Traded
Positions



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, 2012.



During the three months
ended March 31, 2013, our strategy for managing our publicly traded positions has generated approximately $264,072 in net cash
proceeds from premiums on call options sold and put options purchased of Solazyme, Inc. We added approximately $1,876,409 in proceeds,
net of commission, to our primary liquidity resulting from options called that were covered by a portion of our shares of Solazyme.
The net increase in our primary liquidity from these transactions was $2,140,481. Through March 31, 2013, we have generated
$2,008,906 in net cash premiums on call options sold and put options purchased of Solazyme since the company completed an IPO in
May 2011. We have sold a total of 757,659 shares of Solazyme since its IPO for net proceeds, after commission, of $7,056,458 or
an average sale price of $9.31 per share. Including premiums from call and put options, the average sale price for these shares
was $11.96 per share. 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 greater than 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.



As of March 31, 2013,
we had 560,000 of our remaining 1,546,490 shares of Solazyme under the following option contracts:



|No. of Shares |         |  | Expiration Date |                | Strike Price | 
|------------- | ------- |  | --------------- | -------------- | ------------ | 
|              | 20,000  |  |                 | April 20, 2013 |              | 
|              | 540,000 |  |                 | June 22, 2013  |              | 



67







During the three months
ended March 31, 2013, we sold the remaining 50,807 shares of our position in NeoPhotonics Corporation. We no longer own any shares
of NeoPhotonics. For the three months ended March 31, 2013, we received $252,042 in proceeds, net of commission, from the sale
of NeoPhotonics shares. We also received proceeds of $24,146 from call option premiums on shares of NeoPhotonics. Since its IPO,
the sale of our 450,907 shares of NeoPhotonics generated net proceeds of $2,239,809, or an average sale price, net of commission,
of $4.97 per share. Including premiums from call options, the average sale price for these shares was $5.45 per share. Our cost
basis in NeoPhotonics was $16.19 per share.



Portfolio Company
Revenue



We
currently have 24 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 $532 million in revenue in 2012, a 25.5 percent increase from aggregate 2011 revenue of approximately
$424 million, a 39.9 percent increase from aggregate 2010 revenue of approximately $380 million and a 99.1 percent increase from
aggregate 2009 revenue of $267 million.



Current Business Environment



The first quarter of
2013 ended with increases in value in the public market indices. However, these increases coincided with a decrease in the number
and value of initial public offerings ("IPOs") and mergers and acquisitions ("M&As"). These dynamics continue
to lead to a difficult fundraising environment for venture capital firms and for venture-backed companies, particularly those in
the middle stages of development.



Eight U.S. venture-backed
companies raised $672 million through IPOs in the first quarter of 2013, which is the same number from the fourth quarter of 2012
, but a 58 percent decline from the first quarter of 2012 (19 companies), according to Dow Jones VentureSource, Thomson Reuters
and the National Venture Capital Association ("NVCA"). For the first quarter of 2013, 77 venture-backed M&A deals
were reported, a 73 percent decrease from the first quarter of 2012. This marks the slowest quarter in the number of disclosed
deals since the first quarter of 1995, when eight disclosed deals were completed. Of the eight venture-backed IPOs that occurred
in the first quarter of 2013, six were IT-related. The remaining two companies were life science companies. Seven of the eight
companies traded above their offering price at the end of the first quarter of 2013. The average offering size was $84 million.



The average disclosed
deal value for venture-backed M&A transactions in the first quarter of 2013 was $98 million, which is lower than both the fourth
quarter of 2012 ($128 million) and the first quarter of 2012 ($131 million). Of these disclosed venture-backed M&A deals, nine
returned one to four times the amount invested and one returned less than the amount invested. The IT sector dominated these deals,
with 58 of the 77 deals, continuing a trend from 2012. Life science companies had nine deals, with an average disclosed price (four
disclosing of nine) of $149 million.



68







Thirty-five U.S. venture
capital funds raised $4.1 billion in the first quarter of 2013, according to Thomson Reuters and the NVCA. Compared to the fourth
quarter of 2012, this is a decrease in the number of funds (down from forty-two), but a 22 percent increase in the amount of capital
raised (up from $3.3 billion). The trend in fewer funds raising more money has continued and this marks the lowest number of funds
since the third quarter of 2003. The top five venture capital funds accounted for 57 percent of the total fundraising in the first
quarter, which is comparable to the fourth quarter of 2012. Of the thirty-five funds that were raised, only five were new funds,
and they represented only two percent of the dollar value. Historically (five years), first-time funds raised an average of eight
percent of the committed capital. This is the lowest number of new funds in a quarter since 2006.



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 and partisan politics 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. Further, many of our portfolio companies receive non-dilutive funding through government contracts
and grants. Sequestration could have a direct and significant reduction in our portfolio companies' contract or grant awards. Sequestration
will also likely result in reduced budgets at research facilities, which will reduce the volume of products they could potentially
purchase from our portfolio companies. 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.



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 science-related innovations, such as life sciences, energy 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.



69







Our overall goal remains
unchanged. We want to maintain our leadership position in investing in science-enabled companies, particularly those enabled by
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 may in the future invest
borrowed capital to take advantage of opportunities that we believe will return greater than the cost of such borrowed capital.
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 and under favorable terms in equity and convertible debt of new and existing privately held and publicly traded companies.



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 2009 through 2012, and for the three months ended March 31, 2013, 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.



|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             



70







From December 31, 2012,
to March 31, 2013, the value of our equity-focused venture capital portfolio, including our rights to potential future milestone
payments from the sales of BioVex Group, Inc., and Nextreme Thermal Solutions, Inc., decreased by $466,187, from $106,004,713 to
$105,538,526.



Not including
our rights to potential future milestone payments from the sale of BioVex Group, Inc, and Nextreme Thermal Solutions, Inc.,
our equity-focused portfolio companies decreased in value by $470,265. This decrease was primarily owing to 1) a net decrease
in the valuation of Solazyme, Inc., and sales of a portion of our shares of this company of $2,068,007, offset by
net cash proceeds to us of $1,876,409 that are not included in the valuation of Solazyme as of March
31, 2013; 2) the decrease in the value of NeoPhotonics Corporation of $291,632 owing to its disposal, offset by net
cash proceeds to us of $252,042 that are not included in the valuation of this portfolio company as of March 31, 2013; and 3)
a net decrease in value owing to a net increase in discounts for non-performance risk of $2,065,004.  These changes
were offset by 1) new and follow-on investments of $2,165,710; 2) a net increase in value owing to the terms and pricing of
new rounds of financing and indications of value from potential acquirers of $864,238; and 3) a net increase
in the values of comparables of $1,004,782. The remaining component of the change of the value of our
equity-focused portfolio companies of $80,352 was primarily owing to net decreases in the value of warrants, currency
fluctuations and interest on convertible bridge notes.



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 companies whose values are 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 company, Solazyme, Inc. Even though
our position in Champions Oncology, Inc., is traded on an OTC exchange, as of March 31, 2013, a portion of our shares of this portfolio
company is subject to restrictions on the sale of those shares and subjective inputs are also included in the determination of
value. Therefore, our Valuation Committee sets the value of this position.



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 that requires or seeks to
raise additional capital 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 first quarter of 2013 are included in the valuation
of the companies as of March 31, 2013. Changes in non-performance risk led to a net decrease in value of $2,065,004. 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 March 31, 2013, non-performance
risk was a significant factor in determining the values of nine of our 26 equity-focused portfolio companies that are fair valued
by our Board of Directors. These nine companies accounted for approximately $33.6 million, or 32.8 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 December 31, 2012, non-performance risk was a significant factor in determining the
values of nine of our 27 equity-focused portfolio companies that are fair valued by our Board of Directors. These nine companies
accounted for approximately $34.6 million, or 33.7 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.,
or our rights to milestone payments from the sale of Nextreme Thermal Solutions, Inc., to Laird Technologies, Inc.



71







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. This amount assumes that
the total non-convertible bridge note preferences of $10.5 million are paid in full. Our value of this portion of our securities
of Molecular Imprints as of March 31, 2013, reflects a probability-weighted discount applied to the total amount of the preference.



As of March 31, 2013,
our top ten investments by value accounted for approximately 73 percent of the value of our equity-focused venture capital portfolio.



|Top Ten Equity-FocusedInvestments by Value
|------------------------------------------
|                                          
|Company Name                              
|                                          
|Xradia, Inc.                              
|                                          
|Adesto Technologies Corp.                 
|                                          
|Solazyme,Inc.                             
|                                          
|SiOnyx, Inc.                              
|                                          
|Molecular Imprints, Inc.                  
|                                          
|Metabolon, Inc.                           
|                                          
|D-Wave Systems, Inc.                      
|                                          
|Nanosys, Inc.                             
|                                          
|HzO, Inc.                                 
|                                          
|Bridgelux, Inc.                           



73
Percent of Value of Equity-Focused Venture Capital Portfolio



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:



72







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.



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 March 31, 2013, as compared with the three months ended March 31, 2012



In the three months
ended March 31, 2013, we had a net decrease in net assets resulting from operations of $2,060,192. In the three months ended March
31, 2012, we had a net increase in net assets resulting from operations of $5,580,183.



Investment Income
and Expenses:



We had net operating
losses of $1,935,573 and $2,089,381 for the three months ended March 31, 2013, and March 31, 2012, respectively. The variation
in these results is primarily owing to the changes in investment income and operating expenses, including non-cash expense of $314,721
in 2013 primarily associated with the compensation cost for restricted stock as compared with $447,824 for the same period in 2012
associated with the prior years' granting of stock options. During the three months ended March 31, 2013, and 2012, total investment
income was $185,090 and $160,890, respectively. During the three months ended March 31, 2013, and 2012, total operating expenses
were $2,120,663 and $2,250,271, respectively.



73







During the three months
ended March 31, 2013, as compared with the same period in 2012, investment income increased, reflecting an increase in interest
income from non-convertible promissory notes, subordinated and senior secured debt, senior secured debt through a participation
agreement and an increase in our average holdings of U.S. government securities, offset by a decrease in interest income from convertible
bridge notes. During the three months ended March 31, 2013, our average holdings of U.S. government securities were $13,999,230.
As of March 31, 2012, we had no holdings of U.S. government securities, 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.



Operating expenses,
including non-cash, stock-based compensation expense, were $2,120,663 and $2,250,271 for the three months ended March 31, 2013,
and March 31, 2012, respectively. The decrease in operating expenses for the three months ended March 31, 2013, as compared with
the three months ended March 31, 2012, was primarily owing to decreases in salaries, benefits and stock-based compensation expense,
administration and operations expense and directors' fees and expenses, offset by increases in professional fees, rent expense
and custody fees. Salaries, benefits and stock-based compensation expense decreased by $71,706, or 5.2 percent, for the three months
ended March 31, 2013, as compared with March 31, 2012, primarily as a result of a decrease in non-cash stock-based compensation
expense of $133,103 associated with the Stock Plan, offset by increases in salaries of employees owing to cost of living adjustments
and costs associated with increases in salary for three of our employees who were promoted in 2013 from their positions in 2012.
While the non-cash, stock-based compensation expense for the Stock Plan increased our operating expenses by $314,721, this increase
was offset by a corresponding increase to our additional paid-in capital, resulting in no net impact to our net asset value. Administration
and operations expense decreased by $146,469, or 41.1 percent, through March 31, 2013, as compared with March 31, 2012, primarily
as a result of decreases in costs associated with investor outreach expenses and timing differences related to certain accrued
expenses. We did not hold a Meet the Portfolio Day during the three months ended March 31, 2013, as compared with costs of approximately
$37,898 associated with such an event in the comparable period in 2012. Directors' fees and expenses decreased by $23,356, or 24.4
percent, through March 31, 2013, as compared with March 31, 2012, primarily owing to the retirement of two members of our Board
of Directors in 2012.



Professional fees increased
by $112,387, or 41.1 percent, through March 31, 2013, as compared with March 31, 2012, primarily as a result of an increase in
certain legal fees. Rent expense increased by $2,772, or 2.8 percent, for the period ended March 31, 2013, as compared with the
three months ended March 31, 2012. Our rent expense of $101,215 for the three months ended March 31, 2012, includes $110,519 of
rent paid in cash, net of $9,304 non-cash rent expense, credits and abatements that we recognize on a straight-line basis over
the lease term. Custody fees increased by $2,938, or 27.1 percent, for the three months ended March 31, 2013, as compared with
March 31, 2012.



Realized Income and Losses from Investments:



During the three months
ended March 31, 2013, we realized net losses on investments of $3,376,163. During the three months ended March 31, 2012, we realized
net gains on investments of $669,503.



74







During the three months
ended March 31, 2013, we realized net losses of $3,376,163, consisting primarily of a realized loss on our investment in Nextreme
Thermal Solutions, Inc., of $4,384,762, a realized loss of $540,106 on the sale of 50,807 shares of NeoPhotonics Corporation, including
the sale of 50,800 shares that were called subject to the terms of call option contracts, and a realized loss of $57,082 on the
expiration of certain Solazyme, Inc., purchased put option contracts, offset by a realized gain of $1,433,109 on the sale of 251,300
shares of Solazyme that were called subject to the terms of written call option contracts and a realized gain of $23,949 on the
repurchase and expiration of certain Solazyme and NeoPhotonics written call option contracts. At March 31, 2013, we still owned
1,546,490 shares of Solazyme. At March 31, 2013, we did not hold any shares of NeoPhotonics. We also had a realized gain of $148,729
on our escrow payment from the sale of Crystal IS, Inc.



During the three months
ended March 31, 2012, we realized net gains of $669,503, consisting primarily of realized gains on our escrow payments from the
sales of BioVex Group, Inc., and Crystal IS, Inc., and a realized gain of $165,000 on the repurchase of certain Solazyme, Inc.,
written call options.



Net Unrealized Appreciation
and Depreciation of Portfolio Securities:



During the three months
ended March 31, 2013, net unrealized depreciation on total investments decreased by $3,273,554, or (87.6) percent, from accumulated
net unrealized depreciation of $3,738,387 at December 31, 2012, to accumulated net unrealized depreciation of $464,833 at March
31, 2013. During the three months ended March 31, 2012, net unrealized appreciation on total investments increased by $7,008,136,
or 71.1 percent, from accumulated net unrealized appreciation of $9,851,603 at December 31, 2011, to accumulated net unrealized
appreciation of $16,859,739 at March 31, 2012.



During the three months
ended March 31, 2013, net unrealized depreciation on our venture capital investments decreased by $3,150,749, from net unrealized
depreciation of $3,748,631 at December 31, 2012, to net unrealized depreciation of $597,882 at March 31, 2013, resulting primarily
from an increase in unrealized appreciation of $4,384,762 on our investment in Nextreme Thermal Solutions, Inc., owing to a realized
loss on the sale of its securities.



During the three months
ended March 31, 2013, we had write-downs in the valuations of the following investments held:



|Investment                        |  | Amount of Write-Down |          
|--------------------------------- |  | -------------------- | ---------
|                                  |  |                      |          
|Contour Energy Systems, Inc.      |  | $                    | 1,279,064
|Ancora Pharmaceuticals Inc.       |  |                      | 846,889  
|OpGen, Inc.                       |  |                      | 815,000  
|Senova Systems, Inc.              |  |                      | 605,769  
|Ensemble Therapeutics Corporation |  |                      | 93,183   
|Solazyme, Inc.                    |  |                      | 92,789   
|ABSMaterials, Inc.                |  |                      | 34,165   
|Produced Water Absorbents, Inc.   |  |                      | 28,170   
|SiOnyx, Inc.                      |  |                      | 23,411   
|Metabolon, Inc.                   |  |                      | 16,292   
|D-Wave Systems, Inc.              |  |                      | 5,285    



75







The write-downs for
the three months ended March 31, 2013, were offset by write-ups in the valuations of the following investments held:



|Investment                |  | Amount of Write-Up |          
|------------------------- |  | ------------------ | ---------
|                          |  |                    |          
|Bridgelux, Inc.           |  | $                  | 1,077,225
|Xradia, Inc.              |  |                    | 837,079  
|HzO, Inc.                 |  |                    | 569,060  
|AgBiome, LLC              |  |                    | 500,000  
|Laser Light Engines, Inc. |  |                    | 280,280  
|Enumeral Biomedical Corp. |  |                    | 239,481  
|GEO Semiconductor, Inc.   |  |                    | 41,371   
|OHSO Clean, Inc.          |  |                    | 6,124    
|Cobalt Technologies, Inc. |  |                    | 6,051    
|Nano Terra, Inc.          |  |                    | 4,589    
|Champions Oncology, Inc.  |  |                    | 3,824    
|Nanosys, Inc.             |  |                    | 260      



We had an increase
in unrealized appreciation of $4,078 on the rights to milestone payments from Amgen, Inc.’s acquisition of BioVex Group,
Inc.



We had a decrease in
unrealized appreciation owing to foreign currency translation of $113,006 on our investment in D-Wave Systems, Inc.



We
had an increase in unrealized appreciation of $530,934 on our investment in NeoPhotonics Corporation owing to realized losses on
the sale of its securities.



We had a decrease in
unrealized appreciation of $1,381,346 on our investment in Solazyme, Inc., owing to realized gains on the sale of its securities.



Unrealized appreciation on our U.S. government
securities portfolio decreased from unrealized appreciation of $2,744 at December 31, 2012, to unrealized appreciation of $189
at March 31, 2013.



During the three months
ended March 31, 2012, net unrealized appreciation on our venture capital investments increased by $7,220,971, from net unrealized
appreciation of $9,731,603 at December 31, 2011, to net unrealized appreciation of $16,952,574 at March 31, 2012, owing primarily
to write-ups in the valuations of the following investments held:



|Investment                        |  | Amount of Write-Up |          
|--------------------------------- |  | ------------------ | ---------
|                                  |  |                    |          
|Solazyme, Inc.                    |  | $                  | 6,290,327
|Xradia, Inc.                      |  |                    | 1,114,233
|D-Wave Systems, Inc.              |  |                    | 446,460  
|Ensemble Therapeutics Corporation |  |                    | 268,289  
|SiOnyx, Inc.                      |  |                    | 82,375   
|NeoPhotonics Corporation          |  |                    | 67,636   
|Nano Terra, Inc.                  |  |                    | 9,719    
|OHSO Clean, Inc.                  |  |                    | 4,483    
|Ancora Pharmaceuticals Inc.       |  |                    | 2,294    



76







The write-ups for the
three months ended March 31, 2012, were offset by write-downs in the valuations of the following investments held:



|Investment                |  | Amount of Write-Down |        
|------------------------- |  | -------------------- | -------
|                          |  |                      |        
|Nantero, Inc.             |  | $                    | 561,603
|Cobalt Technologies, Inc. |  |                      | 250,588
|Senova Systems, Inc.      |  |                      | 173,077
|Ultora, Inc.              |  |                      | 107,500
|Bridgelux, Inc.           |  |                      | 42,939 
|Metabolon, Inc.           |  |                      | 16,223 
|Laser Light Engines, Inc. |  |                      | 14,740 
|GEO Semiconductor, Inc.   |  |                      | 1,714  



We had a decrease in
unrealized appreciation of $9,905 on the rights to milestone payments from Amgen, Inc.’s acquisition of BioVex Group, Inc.,
in the first quarter of 2011.



We had an increase
in unrealized appreciation owing to foreign currency translation of $113,444 on our investment in D-Wave Systems, Inc.



Financial Condition



March
31, 2013



At March 31, 2013,
our total assets and net assets were $130,046,003 and $127,749,103, respectively. At December 31, 2012, they were $131,990,250
and $128,436,774, respectively.



At March 31, 2013,
our net asset value per share was $4.11, as compared with $4.13 at December 31, 2012. At March 31, 2013, and December 31, 2012,
our shares outstanding were 31,116,881.



Significant developments
in the three months ended March 31, 2013,included a decrease in the holdings of our venture capital investments of $138,690
and a decrease in our cash of $1,318,171. The decrease in the value of our venture capital investments from $108,002,191 at December
31, 2012, to $107,863,501 at March 31, 2013, resulted primarily from a decrease in the net value of our venture capital investments
of $3,150,749 and a net decrease of $2,128,451 owing to the sale of certain of our shares of Solazyme, Inc., and NeoPhotonics Corporation,
offset by an increase owing to eight follow-on investments of $2,515,710. The decrease in our cash and treasury holdings from $22,377,991
at December 31, 2012, to $21,059,820 at March 31, 2013, is primarily owing to the payment of cash for operating expenses of $1,808,693
and to follow-on venture capital investments totaling $2,515,710, offset by net proceeds of $2,128,451 received from the sale of
certain of our shares of Solazyme and NeoPhotonics, net premium proceeds of $288,217 received from certain Solazyme and NeoPhotonics
written call options and purchased put option contracts and $949,469 received from the portion of our payment held in escrow from
the sale of Innovalight, Inc.



77







The following table
is a summary of additions to our portfolio of venture capital investments made during the three months ended March 31, 2013:



|Follow-On Investments             |  | Amount of Investment |          
|--------------------------------- |  | -------------------- | ---------
|                                  |  |                      |          
|Adesto Technologies Corporation   |  | $                    | 672,070  
|D-Wave Systems, Inc.              |  |                      | 491,100  
|Ancora Pharmaceuticals Inc.       |  |                      | 350,000  
|HzO, Inc.                         |  |                      | 350,000  
|Nano Terra, Inc.                  |  |                      | 350,000  
|Champions Oncology, Inc.          |  |                      | 200,000  
|Ensemble Therapeutics Corporation |  |                      | 73,620   
|Cobalt Technologies, Inc.         |  |                      | 28,920   
|                                  |  |                      |          
|Total                             |  | $                    | 2,515,710



The following tables
summarize the values of our portfolios of venture capital investments and U.S. government obligations, as compared with their cost,
at March 31, 2013, and December 31, 2012:



|                                      |  | March 31, 2013 |             |   | December 31, 2012 |  
|------------------------------------- |  | -------------- | ----------- | - | ----------------- | -
|                                      |  |                |             |   |                   |  
|Venture capital investments, at cost  |  | $              | 108,461,383 |   |                   | $
|Net unrealized (depreciation) (1)     |  |                | (597,882    | ) |                   |  
|Venture capital investments, at value |  | $              | 107,863,501 |   |                   | $



|                                      |  | March 31, 2013 |            |  | December 31, 2012 |  
|------------------------------------- |  | -------------- | ---------- |  | ----------------- | -
|                                      |  |                |            |  |                   |  
|U.S. government obligations, at cost  |  | $              | 13,999,531 |  |                   | $
|Net unrealized appreciation(1)        |  |                | 189        |  |                   |  
|U.S. government obligations, at value |  | $              | 13,999,720 |  |                   | $



(1)At
March 31, 2013, and December 31, 2012, the net accumulated unrealized depreciation on investments was $464,833 and $3,738,387,
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 March
31, 2013, and December 31, 2012, we had no investments in money market mutual funds.



78







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 March 31, 2013, we had no debt outstanding. 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 March 31, 2013 and
December 31, 2012, our total net primary liquidity was $21,127,489 and $22,461,202, 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, 2012, to March 31, 2013, is primarily owing to the use of funds for investments and payment of net operating
expenses, offset by the receipt of $949,469 from the portion of our upfront payment held in escrow from the sale of Innovalight,
Inc., to DuPont and net proceeds of $2,128,451 received from the sales of certain of our shares of Solazyme, Inc., and NeoPhotonics
Corporation. During the three months ended March 31, 2013, we also purchased and sold call option and put option contracts on our
publicly traded positions generating net proceeds of $288,217.



At March 31, 2013,
and December 31, 2012, our secondary liquidity was $13,614,502 and $15,770,488, 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 March 31, 2013, 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 become primary liquidity if and when
they are received at the expiration of the escrow period. On April 4, 2013, we received proceeds of $273,361 from the release of
the Crystal IS escrow.



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 March 31, 2013, our net asset value per share was
$4.11 per share and our closing market price was $3.60 per share. We do not currently have shareholder approval to issue or sell
shares below our net asset value per share.



79







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, N.A. The credit facility
contains affirmative and restrictive covenants, including: (a) periodic financial reporting requirements, (b) maintaining
our status as a BDC (c) maintaining unencumbered, liquid assets of not less than $7,500,000, (d)  limitations on the incurrence
of additional indebtedness, (e) limitations on liens, and (f) limitations on mergers and dissolutions. The credit facility
is used to supplement our capital to make additional venture debt investments.



The Company’s
outstanding debt balance at March 31, 2013, and December 31, 2012, was $0. The annual weighted average interest cost for the three
months ended March 31, 2013, was zero percent, exclusive of amortization of closing fees and other expenses related to establishing
the credit facility. The remaining capacity under the credit facility was $10,000,000 at March 31, 2013. At March 31, 2013, the
Company was in compliance with all financial covenants required by the credit facility.



Contractual Obligations



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





|                             |  | Payments Due by Period |           |  |           |   |         |           |  |   |           | 
|---------------------------- |  | ---------------------- | --------- |  | --------- | - | ------- | --------- |  | - | --------- | 
|                             |  |                        |           |  | Less than |   |         |           |  |   |           | 
|                             |  | Total                  |           |  | 1 Year    |   |         | 1-3 Years |  |   | 3-5 Years | 
|Revolving credit facility(1) |  | $                      | 0         |  |           | $ | 0       |           |  | $ | 0         | 
|Operating leases             |  | $                      | 1,975,366 |  |           | $ | 335,451 |           |  | $ | 543,423   | 



(1) As of March 31, 2013, we had $10,000,000 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:



80







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.



| | • | 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 March 31, 2013,
our financial statements include venture capital investments valued at $95,800,879, the fair values of which were determined in
good faith by, or under the direction of, the Board of Directors. As of March 31, 2013, approximately 75 percent of our net assets
represent investments in portfolio companies at fair value by the Board of Directors.



81







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.



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 March 31, 2013.



All investments recorded
at fair value are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical
levels related to the amount of subjectivity associated with the inputs to fair valuation of these assets, are as follows:



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



| | · | Level 2: Quoted prices in active markets for similar assets or liabilities, or quoted prices
for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable
for the asset or liability.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Level 3: Unobservable inputs for the asset or liability.
| | - | --------------------------------------------------------



As of March 31, 2013,
approximately 88.8 percent of our portfolio company investments 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.



82







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.



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.



83







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, 2012, and to calculate our 2013 expense was 4.25 percent. The plan amendment
was measured at March 1, 2013, using a discount rate of 4.41 percent. We used a discount rate of 2.75 percent to calculate our
pension obligation for the Executive Mandatory Retirement Benefit Plan.



Recent Developments - Portfolio Companies



In April 2013, we sold
300 written call option contracts on Solazyme, Inc., that expired on April 20, 2013, with a strike price of $7.50. We received
premiums of approximately $10,077 for these contracts. We also purchased put options on Solazyme that expired on April 20, 2013,
with a strike price of $7.50. We paid premiums of approximately $9,490.



In April 2013, we were
assigned on a total of 50,000 shares of Solazyme, Inc., relating to the April 20, 2013, written call option contracts. We received
net proceeds of approximately $373,292 related to these sales.



During the period from
April 1, 2013, through May 8, 2013, we also sold 108,232 shares of Solazyme, Inc., in open market transactions for net proceeds
of $913,393.



On
April 4, 2013, we received $273,361 upon the release of funds held in escrow from the acquisition of Crystal IS, Inc., by Asahi
Kasei Group in 2011.



On
April 4 and 5, 2013, GEO Semiconductor, Inc., repaid to us all outstanding principal and interest totaling $490,313. We continue
to own warrants to purchase Series A and Series A-1 Preferred Stock of GEO Semiconductor.



On
April 9, 2013, the Company made a $260,870 follow-on investment in AgBiome, LLC, a privately held portfolio company.



On
April 24, 2013, the Company made a $100,000 follow-on investment in a privately held portfolio company.



84







On April 25, 2013,
the Company made a $300,000 follow-on investment in Ancora Pharmaceuticals Inc., a privately held portfolio company.



On April 29, 2013,
the Company made a $166,667 follow-on investment in a privately held portfolio company.



On April 30, 2013,
the Company made a $750,000 follow-on investment in Enumeral Biomedical Corp., a privately held portfolio company.



On May 2, 2013, the
Company made a $1,212,500 follow-on investment in HzO, Inc., a privately held portfolio company.



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;
| | - | -------------------------------------------------



| | • | 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.
| | - | ----------------------------------------------------------------------------------------------------------------------



85







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.



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.")



86







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.



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.



87







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 have historically funded
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. Additionally, in the future, we may fund a portion of our equity investments with borrowings. 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. At March 31, 2013, we had no debt outstanding.



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 March
31, 2013, were to increase by 25, 75 and 150 basis points, the average value of these securities held by us at March 31, 2013,
would decrease by approximately $35,000, $105,000 and $210,000, 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.



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 is $506,172 at March 31, 2013.



88







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 March 31, 2013, 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 first quarter of 2013 to which this report
relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over
financial reporting.



89







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, 2012, 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.



Item 6.   Exhibits





|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



90







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: May 10, 2013



91







EXHIBIT INDEX



|Exhibit No. |  | Description                                                                                                                           
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                       
|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.



92