UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~FORM~~Form 10-Q

(Mark One)

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

For the quarterly period ended ~~March~~June 3130, 2005

ORor

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

For the transition period from to

Commission ~~file~~File ~~number~~Number 0-30889

~~HARBOR~~Harbor ~~GLOBAL~~Global ~~COMPANY~~Company ~~LTD~~Ltd.

(Exact name of registrant as specified in its charter)

BERMUDA		52-2256071
Bermuda		52-2256071
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

ONE FANEUIL HALL MARKETPLACE

4^TH FLOOR

BOSTON, MASSACHUSETTS

(Address of principal executive offices)

02109~~-1820~~

(Zip Code)

(617) 878-1600

(Registrant’s telephone number, including area code)

NO CHANGES

(Former name, former address and former fiscal year, if changes since last report)

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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of ~~April~~August 151, 2005, the registrant had 5,667,311 common shares, par value $.0025 per share, issued and outstanding.

HARBOR GLOBAL COMPANY LTD.

FORM 10-Q

FOR THE QUARTER ENDED ~~MARCH~~JUNE 3130, 2005

INDEX

PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets –December 31, 2004 and March 31, 2005	3
	Consolidated Balance Sheets – June 30, 2005 and December 31, 2004	3
	Consolidated Statements of Operations –three ended March 31, 2004 and 2005	4
	Consolidated Statements of Operations – three months ended June 30, 2005 and 2004 and six months ended June 30, 2005 and 2004	4
	Consolidated Statements of Cash Flows –three months ended March 31, 2004 and 2005	5
	Consolidated Statements of Cash Flows – six months ended June 30, 2005 and 2004	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1315
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	1922
Item 4.	Controls and Procedures	2123
PART II.	OTHER INFORMATION	2124
Item 6.	Exhibits	2124
SIGNATURE		2225
EXHIBIT INDEX		26

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HARBOR GLOBAL COMPANY LTD.

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

	March 31,2005			December 31,2004
	(Unaudited)
ASSETS
Cash and Cash Equivalents	$	6,615		$	7,754
Restricted Cash		12,983			13,035
Marketable Securities		17,051			17,456
Accounts Receivable		1,034			986
Prepaid Expenses		2,190			1,880
Other Current Assets		7			7
Total Current Assets		39,880			41,118
Polish Venture Capital Investment		259			273
Marketable Securities		23,329			19,998
Long-term Investments		6,414			8,715
Building		21,553			21,726
Other Long-term Assets		1,274			1,190
Goodwill		1,253			1,253
Total Assets	$	93,962		$	94,273
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts Payable	$	614		$	1,140
Dividend Payable		12,983			13,035
Accrued Expenses		1,859			2,206
Accrued Fees Payable to Calypso Management		186			739
Foreign Taxes Payable		695			196
Deferred Taxes		252			241
Total Current Liabilities		16,589			17,557
Deferred Taxes		2,133			2,039
Total Liabilities		18,722			19,596
Minority Interest		27,983			27,109
STOCKHOLDERS’ EQUITY
Common shares, par value $.0025 per share; authorized 48,000,000 shares; 5,667,311 shares issued and outstanding as of March 31, 2005 and December 31, 2004		14			14
Preferred shares, par value $.01 per share; authorized 1,000,000 shares; none issued		—			—
Paid-in Capital		48,284			48,284
Accumulated Deficit		(5,041	)		(4,541	)
Other Comprehensive Income
Net Unrealized Gains on Available for Sale Marketable Securities		4,000			3,811
Total Stockholders’ Equity		47,257			47,568
Total Liabilities and Stockholders’ Equity	$	93,962		$	94,273

(UNAUDITED)


	June 30, 2005			December 31, 2004
ASSETS
Cash and Cash Equivalents	$	12,720		$	7,754
Restricted Cash		13,210			13,035
Marketable Securities		15,589			17,456
Accounts Receivable		1,420			986
Prepaid Expenses		2,225			1,880
Other Current Assets		4,307			7

Total Current Assets		49,471			41,118

Polish Venture Capital Investment		253			273
Marketable Securities		20,319			19,998
Long-term Investments		1,264			8,715
Building		21,531			21,726
Other Long-term Assets		1,145			1,190
Goodwill		1,253			1,253

Total Assets	$	95,236		$	94,273

LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts Payable	$	578		$	1,140
Dividend Payable		13,210			13,035
Accrued Expenses		2,280			2,206
Accrued Fees Payable to Calypso Management		373			739
Foreign Taxes Payable		468			196
Deferred Taxes		222			241
Other Current Liabilities		2,698			—

Total Current Liabilities		19,829			17,557

Deferred Taxes		1,637			2,039

Total Liabilities		21,466			19,596

Minority Interest		27,522			27,109

STOCKHOLDERS’ EQUITY

Common shares, par value $.0025 per share; authorized 48,000,000 shares; 5,667,311 shares issued and outstanding as of June 30, 2005 and December 31, 2004		14			14
Preferred shares, par value $.01 per share; authorized 1,000,000 shares; none issued		—			—
Paid-in Capital		48,259			48,284
Accumulated Deficit		(5,023	)		(4,541	)
Other Comprehensive Income
Net Unrealized Gains on Available for Sale Marketable Securities		2,998			3,811

Total Stockholders’ Equity		46,248			47,568

Total Liabilities and Stockholders’ Equity	$	95,236		$	94,273

The accompanying notes are an integral part of these Consolidated Financial Statements.

HARBOR GLOBAL COMPANY LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

	Three Months EndedMarch 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Revenues:
Real Estate Rental Revenue	$	2,093		$	1,926
Real Estate Revenue	$	2,130		$	1,975		$	4,223		$	3,900
Other Income		781			1,462
Management Fee Income		500			544			983			997
Total Revenues		2,874			3,388
Other Income		520			368			818			1,378
Operating Expenses:
Total Revenues		3,150			2,887			6,024			6,275
Salary and Benefit Expenses		(1,281	)		(1,313	)
Operating Expenses:
Facility Expenses		(358	)		(379	)
Salary and Benefit Expenses		(1,146	)		(1,193	)		(2,427	)		(2,506	)
Building and Property Management Expenses		(635	)		(689	)
Facility Expenses		(374	)		(378	)		(732	)		(756	)
Management Fee Expense		(795	)		(980	)
Building and Property Management Expenses		(585	)		(493	)		(1,219	)		(1,182	)
Other Expenses		(1,380	)		(635	)
Management Fee Expense		(580	)		(726	)		(1,375	)		(1,707	)
Total Operating Expenses		(4,449	)		(3,996	)
Operating Taxes		(449	)		(1,325	)		(736	)		(1,742	)
Operating Loss		(1,575	)		(608	)
Other Expenses		(1,642	)		(1,480	)		(2,735	)		(1,698	)
Other Income:
Total Operating Expenses		(4,776	)		(5,595	)		(9,224	)		(9,591	)
Net Unrealized and Realized Gains on Securities		2,242			562
Operating Loss		(1,626	)		(2,708	)		(3,200	)		(3,316	)
Interest Income		483			508
Other Income:
Total Other Income		2,725			1,070
Net Unrealized and Realized Gains on Securities		2,516			466			4,758			1,028
Income from Operations before Provision for Income Taxes, Minority Interest and Equity Loss on Investment		1,150			462
Interest Income		431			497			914			1,006
Provision for Income Taxes		(879	)		(249	)
Total Other Income, Net		2,947			963			5,672			2,034
Income from Operations before Minority Interest and Equity Loss on Investment		271			213
Income (Loss) from Operations before Provision for Income Taxes, Minority Interest and Equity (Loss) Gain on Investment		1,321			(1,745	)		2,472			(1,282	)
Minority Interest		(757	)		(812	)
Provision for Income Taxes		(553	)		(1,286	)		(1,433	)		(1,535	)
Equity Loss on Venture Capital Investments		(14	)		(10	)
Income (Loss) from Operations before Minority Interest and Equity (Loss) Gain on Investment		768			(3,031	)		1,039			(2,817	)
Net Loss	$	(500	)	$	(609	)
Minority Interest (Expense) Income		(744	)		41			(1,501	)		(771	)
Loss Per Share:
Equity (Loss) Gain on Venture Capital Investment		(6	)		208			(20	)		198
Basic and Diluted Loss Per Share	$	(0.09	)	$	(0.11	)
Net Income (Loss)	$	18		$	(2,782	)	$	(482	)	$	(3,390	)
Weighted Average Basic and Diluted Shares Outstanding		5,667			5,661
Earnings (Loss) Per Share:
Basic and Diluted Earnings (Loss) Per Share	$	0.00		$	(0.49	)	$	(0.09	)	$	(0.60	)
Weighted Average Basic and Diluted Shares Outstanding		5,667			5,661			5,667			5,661

The accompanying notes are an integral part of these Consolidated Financial Statements.

HARBOR GLOBAL COMPANY LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

	THREE MONTHS ENDEDMARCH 31,
	SIX MONTHS ENDEDJUNE 30,
	2005			~~2004~~2004Restated
Cash Flows from Operating Activities:
Net Loss	$	(~~500~~$482	)	$	(~~609~~$3,390	)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities —
Depreciation and Amortization		~~263~~704			~~231~~498
Restricted Unit Awards		—			76169
Unrealized and Realized Gains on Venture Capital, Marketable Securities, and Long-term Investments, Net		(24,~~242~~758	)		(~~562~~1,028	)
Minority Interest		757			812
Purchase of Trading Securities		(2,298	)		(4,000	)
Equity Loss on Venture Capital Investment		14			10
Proceeds from Sale of Trading Securities		2,651			6,082
Translation Loss (Gain)		241			(143	)
Minority Interest		1,501			771
Equity Loss (Gain) on Venture Capital Investment		20			(198	)
Changes in Operating Assets and Liabilities —
Other Current Assets		219			(3,876	)
Accounts Receivable		(434	)		(318	)
Accrued Expenses and Accounts Payable		(957	)		(1,178	)
Other Current Assets		(345	)		(84	)
Total Adjustments and Changes in Operating Assets and Liabilities		(1,946	)		(4,487	)
Accounts Payable		(587	)		(401	)
Net Cash Used in Operating Activities		(2,446	)		(5,096	)
Dividend Payable		(436	)		82
Accrued Expenses		(291	)		1,627
Foreign Taxes Payable and Deferred Taxes		253			(211	)
Other Current Liabilities		2,698			—
Total Adjustments and Changes in Operating Assets and Liabilities		(1,081	)		2,846
Net Cash Used in Operating Activities		(1,563	)		(544	)
Cash Flows from Investing Activities:
Purchase of Long-term Investments and Marketable Securities		(8,340	)		(4,745	)
Building Improvements		(158	)		—
Other Long-term Assets		(133	)		6
Purchase of Long-term Investments and Marketable Securities		(20,139	)		(18,440	)
Proceeds from Sale of Long-term Investments and Marketable Securities		9,742			6,038
Other Long-term Assets		(46	)		(112	)
Proceeds from Sale of Long-term Investments and Marketable Securities		27,078			10,083
Proceeds from Payment on Note Receivable		—			4,700
Net Cash Provided by Investing Activities		1,269			5,999
Proceeds from Prospect Poland Fund		—			388
Restricted Cash for Minority Dividends		(175	)		(6,392	)
Net Cash Provided by Investing Activities		6,560			(9,773	)
Cash Flows from Financing Activities:
Dividends Paid		(1531	)		(510	)
Reclassification of Restricted Cash		53			(207	)
Purchase of Restricted Stock		—			(308	)
Net Cash Provided By (Used In) Financing Activities		38			(212	)
Net Cash (Used In) Financing Activities		(31	)		(318	)
Net (Decrease) Increase in Cash and Cash Equivalents		(1,139	)		691
Net Increase (Decrease) in Cash and Cash Equivalents		4,966			(10,635	)
Cash and Cash Equivalents, Beginning of Period		7,754			23,957
Cash and Cash Equivalents, End of Period	$	612,~~615~~720		$	2413,~~648~~322

The accompanying notes are an integral part of these Consolidated Financial Statements.

HARBOR GLOBAL COMPANY LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~March~~June 3130, ~~2004~~2005

(1) BACKGROUND AND BASIS OF PRESENTATION

BACKGROUND

Harbor Global Company Ltd., a Bermuda limited duration company (“Harbor Global” or the “Company”), was formed in May 2000 as a wholly owned subsidiary of Pioneer Investment Management USA Inc. (formerly known as The Pioneer Group, Inc.), a Delaware corporation (“Pioneer”), to facilitate the merger between Pioneer and UniCredito Italiano, S.p.A., an Italian financial institution (“UniCredito”). As a condition to closing the merger and pursuant to a Distribution Agreement dated as of October 24, 2000 by and among the Company, Pioneer and Harbor Global II Ltd., a wholly owned subsidiary of the Company (the “Distribution Agreement”), Pioneer agreed to transfer certain of its assets to Harbor Global and distribute all of the outstanding Harbor Global common shares to its stockholders. Pioneer transferred to Harbor Global all of the assets required to be transferred pursuant to the merger agreement and the Distribution Agreement, and on October 24, 2000, Pioneer distributed all of the outstanding common shares of Harbor Global to its stockholders (the “Spin-off”). Pioneer stockholders received one Harbor Global common share for every five shares of Pioneer common stock held on that date.

The Company’s primary assets by segment consist of the following:

•

Russian real estate management and investment management operations: investment advisory and management operations

•

Real estate management operations: real estate management services, including property management and advisory services

•

Other:

• approximately $7.54 million in cash, cash equivalents and marketable securities held directly by Harbor Global

•

an approximately 8% limited partnership interest in the Prospect Poland Fund

Harbor Global seeks to liquidate its assets in a timely fashion on economically advantageous terms and continues to operate its assets as going concern ~~businesses~~ businesses until they are liquidated. Harbor Global’s memorandum of association dated May 22, 2000 provides that the liquidation of its assets must be completed upon the earlier of October 24, 2005, the fifth anniversary of the date of the Spin-off, or the distribution by Harbor Global of all its assets to its shareholders. On October 18, 2004, pursuant to the Company’s memorandum of association, the Harbor Global board of directors (“Board of Directors”) unanimously authorized the Company to continue ~~operating~~to operate its assets for an additional one year period ~~or through October 24~~, ~~2006,~~ unless and until the Company has distributed all of its assets to its shareholders to the extent permitted by the Bermuda Companies Act of 1981. If Harbor Global has not liquidated all of its assets before October 24, 2006, the Board of Directors, in its discretion, may authorize Harbor Global to continue to operate its assets for up to two additional one-year periods.

BASIS OF PRESENTATION

The interim financial data included as part of ~~March~~this ~~31,~~Quarterly ~~2005~~Report ~~and~~on ~~for~~Form ~~the~~10-Q ~~three months ended March 31, 2005~~ is unaudited;. ~~however~~However, in the opinion of management, the accompanying Consolidated Financial Statements contain all adjustments, consisting of normal and recurring adjustments, necessary for a fair statement of the financial position of the Company as of ~~March~~June 3130, 2005 and the results of operations of the Company for the three and six month periods ended June 30, 2005 and 2004 and cash flows of the Company for the ~~three~~six ~~month~~months ~~periods~~ ended ~~March~~June 3130, 2005 and 2004. Results for interim periods may not be necessarily indicative of the results to be expected for the year. ~~These~~The interim ~~consolidated financial~~Consolidated ~~statements~~Financial Statements included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s 2004 Annual Report on Form 10-K for the year ended December 31, 2004 (the “Form 10-K”) filed with the Securities and Exchange Commission on March 23, 2005 and Amendment No. 1 on Form 10-K/A filed with the Securities and Exchange Commission on August 18, 2005. However, investors are cautioned not to rely on the Consolidated Financial Statements included as part of the Form 10-K as the Company has restated such

~~Since~~financial ~~Harbor~~statements ~~Global~~in isAmendment aNo. ~~Bermuda~~1 ~~limited~~on ~~duration~~Form ~~company,~~10-K/A ~~the~~to ~~Company~~include ~~expects~~additional ~~that~~lease ~~for~~and ~~United~~lease ~~States federal~~revenue ~~income~~disclosures ~~tax~~in ~~purposes~~Note 3 itto ~~will~~the beNotes ~~taxed~~to asthe aConsolidated ~~partnership,~~Financial Statements and asrestate athe ~~result,~~Consolidated ~~virtually~~Statements ~~all~~of ~~United~~Cash ~~States~~Flows ~~federal~~included ~~income~~therein ~~tax~~to ~~expenses~~properly ~~have~~reflect ~~been~~securities ~~and~~held ~~will~~to bematurity ~~borne~~in byCash ~~its~~Flows ~~shareholders.~~from ~~The~~Investing ~~income~~Activities, ~~tax~~trading ~~provisions~~securities ~~and~~in ~~deferred~~Cash ~~taxes~~Flows from ~~included~~Operating inActivities ~~the accompanying~~and ~~Consolidated~~restricted ~~Financial~~cash ~~Statements~~in ~~principally~~Cash ~~relate~~Flows tofrom ~~the~~Investing ~~Company’s~~Activities, ~~corporate~~as ~~subsidiaries~~indicated ~~that~~in ~~are~~Note ~~located~~2 ~~primarily~~to insuch ~~the~~Consolidated ~~Russian~~Financial ~~Federation (“Russia”)~~Statements.

Since Harbor Global is a Bermuda limited duration company, the Company expects that for United States federal income tax purposes it will be taxed as a partnership, and as a result, virtually all United States federal income tax expenses have been and will be borne by its shareholders. However, on April 12, 2004, Pioglobal First Russia, Inc., an indirect subsidiary of the Company, through which a portion of the Company’s Russian real estate management and investment management operations are conducted, converted from a Delaware corporation into a Delaware limited liability company, Pioglobal First Russia, LLC (“Pioglobal First Russia”). As a result of the conversion, the Company indirectly (through Pioglobal First Russia) incurred a United States federal income tax liability of $1,049,000, which is reported in provision for income taxes in the Consolidated Statement of Operations. Additionally the provision includes United States federal income tax expense of $1,000 and $62,000 for the three and six months ended June 30, 2005, respectively and approximately $19,000 for the three and six months ended June 30, 2004.

Other than the foregoing United States federal income tax liability, the income tax provisions and deferred taxes included in the accompanying Consolidated Financial Statements relate to the Company’s corporate subsidiaries that are located in the Russian Federation (“Russia”).

RECLASSIFICATIONS

Certain reclassifications have been made to the 2004 amounts to conform to the 2005 presentation.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, PRINCIPLES OF CONSOLIDATION

PRINCIPLES OF CONSOLIDATION

The Consolidated Financial Statements include the accounts of Harbor Global and its majority-owned subsidiaries. The Company maintains an approximate 8% interest in the Prospect Poland Fund, a limited partnership. Because it is a limited partner investor, the Company accounts for this investment using the equity method of accounting. Equity losses and gains from this investment are included in equity loss (gain) on venture capital investments on the accompanying Consolidated Statements of Operations. All intercompany accounts and transactions have been eliminated from the Consolidated Financial Statements.

USE OF ESTIMATES

The preparation of the Consolidated Financial Statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements. Actual results could differ from those estimates.

Current Marketable Securities

United States Treasury securities are classified as held-to-maturity and are recorded at amortized cost. Russian Government and Municipal securities are classified as trading securities and are marked-to-market, with unrealized gains or losses reported in the Consolidated Statements of Operations pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. Russian federal and municipal government securities are held primarily in the Open Joint-Stock Company “PIOGLOBAL Real Estate Investment Fund” (“PIOGLOBAL Real Estate Investment Fund”), an approximately 52% owned subsidiary of the Company. Security transactions are recorded on the settlement date. For all periods presented, the difference between trade date and settlement date is immaterial. Investments are valued at the weighted average daily price if they are traded on the valuation date; otherwise, the bid price is used. Set forth in the following tables are the balances of marketable securities, segregated between United States Treasury obligations and Russian obligations at ~~March~~June 3130, 2005 and December 31, 2004. Unrealized gains and losses recorded on Russian government securities are presented for the three and six months ended ~~March~~June 3130, 2005 and 2004.

Balances of Current Marketable Securities

	March 31,2005		December 31,2004
	(In Thousands)
Russia (trading)	$	10,034	$	9,883
United States (held to maturity)		7,017		7,573
Total Marketable Securities	$	17,051	$	17,456

~~Net~~Balances ~~Unrealized~~of ~~Gain~~Current onMarketable ~~Russian Federal and Municipal Government~~ Securities

	Three months endedMarch 31,
	June 30, 2005			December 31, 2004
	2005				2004
	(In Thousands)
	(In Thousands)
Russia (trading)	$	9,268		$	9,883
Gross Unrealized Gain	$	128			$	294
United States (held to maturity)		6,321			7,573
Gross Unrealized Loss		(90	)			(69	)
Total Marketable Securities	$	15,589		$	17,456
Net Unrealized Gain	$	38			$	225

Net Unrealized Gain (Loss) on Russian Federal and Municipal Government Securities


	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
	(In Thousands)
Gross Unrealized Gain	$	60		$	26		$	188		$	320
Gross Unrealized Loss		(185	)		(466	)		(275	)		(535	)

Net Unrealized (Loss) Gain	$	(125	)	$	(440	)	$	(87	)	$	(215	)

LONG-TERM MARKETABLE SECURITIES

Long-term Marketable Securities consist primarily of Russian equity and fixed income securities, including Russian corporate bonds held in the portfolio of the PIOGLOBAL Real Estate Investment Fund and Closed Joint-Stock Company “PIOGLOBAL Asset Management” (“PIOGLOBAL Asset Management”). In addition, certain subsidiaries of the Company maintain investments in unit funds and trust management accounts managed by PIOGLOBAL Asset Management.

Equity securities, corporate bonds and investments in unit funds and trust management accounts are classified as available-for-sale and recorded at fair value pursuant to SFAS No. 115. In this regard, such securities are recorded in long-term marketable securities based on quoted prices on the Russian Trading System and Moscow Interbank Currency Exchange (“MICEX”). The cost of securities sold is based on the weighted-average method. Dividend income received on investments is recognized on a cash basis. Unrealized gains and ~~unrealized~~ losses for equity securities, corporate bonds and investments in unit fund and trust management accounts are recorded net of deferred taxes and minority interest in other comprehensive income.

Set forth in the following tables are the balances of long-term marketable securities at ~~March~~June 3130, 2005 and December 31, 2004, as well as cumulative unrealized gains and losses, before deferred taxes and minority interest, recorded in other comprehensive income at ~~March~~June 3130, 2005 and December 31, 2004:

Balance of Long-term Marketable Securities Classified as Available for Sale

	March 31,2005		December 31,2004
	June 30,2005		December 31,2004
	(In Thousands)
Equity Securities	$	1615,~~136~~883	$	13,333
Corporate Bonds		53,~~482~~739		5,043
Unit Funds		~~1,711~~697		1,622
Total Marketable Securities	$	2320,~~329~~319	$	19,998

Cumulative Unrealized Gain and Loss Recorded in Other Comprehensive Income

	March 31,2005			December 31,2004
	June 30,2005			December 31,2004
	(In Thousands)
Equity Securities
Gross Unrealized Gain	$	76,~~826~~272		$	7,276
Gross Unrealized Loss		(~~266~~258	)		(115	)
Net Unrealized Gain	$	76,~~560~~014		$	7,161
Corporate Bonds
Gross Unrealized Gain	$	~~288~~161		$	329
Gross Unrealized Loss		(3310	)		—
Net Unrealized Gain	$	~~255~~151		$	329
Unit Funds
Gross Unrealized Gain	$	~~1,067~~657		$	992
Gross Unrealized Loss		—			—
Net Unrealized Gain	$	~~1,067~~657		$	992

BUILDING

The building represents an office building in Moscow, Russia, the ~~Meridian~~ Meridian Commercial Tower. The Meridian Commercial Tower is carried at cost and is being depreciated on a straight-line basis over 40 years. Building improvements are depreciated on a straight-line basis over either five or ten years. A significant ~~portion~~ portion of the assets of PIOGLOBAL Real Estate Investment Fund consists of its ownership of Meridian Commercial Tower. Meridian Commercial Tower lease revenues accounted for approximately 8077% of the total revenue generated by Harbor Global’s ~~Russian~~ Russian real estate management and investment management operations during the ~~quarterly~~six ~~period~~months ended ~~March~~June 3130, 2005, and approximately 7470% of Harbor Global’s total revenue during the same period.

CONCENTRATION OF RISK

The Company’s operations are generally concentrated in Russia. The Company does not maintain political risk insurance for any of its businesses. In addition, a significant portion of Harbor Global’s revenues consist of rental income derived from Meridian Commercial Tower subleases. The loss of more than a few tenants of the Meridian Commercial Tower could materially adversely affect the Company’s revenues, the value of the Meridian Commercial Tower, and accordingly, the Company’s financial position.

~~RECLASSIFICATIONS~~RESTATEMENTS

~~Certain~~In ~~reclassifications~~the ~~have~~Company’s ~~been~~Amendment ~~made~~No. 1 on Form 10-K/A filed August 18, 2005, the Company restated its consolidated financial statements for the year ended December 31, 2004 to include in Note 3 to such financial statements certain previously omitted lease-related disclosures required by SFAS 13. In addition, on August 18, 2005, the Company restated its Consolidated Statement of Cash Flows for the year ended December 31, 2004. ~~amounts~~The accompanying Consolidated Statement of Cash Flows for June 30, 2004 has been revised to ~~conform~~properly reflect held to maturity securities (decrease of $3,125,000) in Cash Flows from Investing Activities rather than Cash Flows from Operating Activities and trading securities ( increase of $2,082,000) in Cash Flows from Operating Activities rather than Cash Flows from Investing Activities pursuant to SFAS 115. In addition, the classification ~~2005~~of ~~presentation~~restricted cash has also been revised to properly reflect changes therein as Cash Flows from Investing Activities rather than Cash Flows from Financing Activities.

The net effect of the foregoing restatements on Cash Flows from Operating Activities, Cash Flows from Investing Activities and Cash Flows from Financing Activities for 2004 from the results for such periods previously reported is set forth in the following table:


	2004
	(in Thousands)
Cash Flow from Operating Activities as reported	$	(5,751	)
Cash Flow from Operating Activities as restated		(544	)

Net Change in Cash Flows from Operating Activities	$	5,207

Cash Flow from Investing Activities as reported	$	1,826
Cash Flow from Investing Activities as restated		(9,773	)

Net Change in Cash Flows from Investing Activities		(11,599	)

Cash Flow from Financing Activities as reported	$	(6,710	)
Cash Flow from Financing Activities as restated		(318	)

Net Change in Cash Flows from Financing Activities		6,392

Net Change in Cash and Cash Equivalents	$	—

(3) EARNINGS PER SHARE

Basic and diluted earnings per share (“EPS”) are computed by dividing reported earnings by weighted average shares outstanding. There are currently no potentially dilutive securities.

(4) CHANGES IN STOCKHOLDERS’ EQUITY

For the three and six months ended ~~March~~June 3130, 2005 and 2004, the Company reported changes in stockholders’ equity as follows:

	THREE MONTHS ENDEDMARCH 31,
	THREE MONTHS ENDEDJUNE 30,
	2005				~~2004~~			2004
	(In Thousands)
Net Loss	$	(500	)		$	(609	)
Net Income (Loss)				$	18					$	(2,782	)
Net Unrealized Gains on Marketable Securities (Net of deferred taxes of $94,000 and $914,000 and minority interest of $117,000 and $1,287,000) for the three months ended March 31, 2005 and 2004, respectively)		189				1,615
Other Comprehensive Income
Total Comprehensive (Loss) Income	$	(311	)		$	1,006
Holding Gain (Loss)	1,515							(569	)
Additional Paid In Capital		—				76
Reclassification Adjustment	(2,517	)						(767	)
Change in Stockholder’s Equity	$	(311	)		$	1,082
Net Unrealized Gains on Marketable Securities
(Net of deferred taxes of ($496,000) and ($751,000) and minority interest of ($563,000) and ($1,046,000) for the three months ended June 30, 2005 and 2004, respectively)					(1,002	)					(1,336	)
Total Comprehensive Loss				$	(984	)				$	(4,118	)
Additional Paid In Capital					(25	)					(216	)
Change in Stockholder’s Equity				$	(1,009	)				$	(4,334	)
	THREE MONTHS ENDED JUNE 30,
	2005							2004
	(In Thousands)
Net Loss				$	(482	)				$	(3,390	)
Other Comprehensive Income
Holding Gain (Loss)	2,785							1,334
Reclassification Adjustment	(3,598	)						(1,055	)
Net Unrealized Gains on Marketable Securities
(Net of deferred taxes of ($402,000) and $164,000 and minority interest of ($445,000) and $241,000 for the six months ended June 30, 2005 and 2004, respectively)					(813	)					279
Total Comprehensive Loss				$	(1,295	)				$	(3,111	)
Additional Paid In Capital					(25	)					(140	)
Change in Stockholder’s Equity				$	(1,320	)				$	(3,251	)

(5) ~~RELATED~~LEASING ~~PARTY~~ARRANGEMENTS ~~TRANSACTIONS~~

The Meridian Commercial Tower is an 18 story, 20,707 square meter office building in Moscow, Russia. The Meridian Commercial Tower is managed by PREA, L.L.C. (“PREA”) and occupied primarily by United States and European corporate tenants or their Russian subsidiaries. PREA leases the building from the PIOGLOBAL Real Estate Investment Fund under a master lease agreement and in turn, subleases the premises to tenants. Generally, the tenant subleases have terms ranging from approximately eleven months to approximately five years six months and annual base rent ranging from approximately $167 to approximately $600 per square meter. In addition to base rent, each tenant pays a pro rata share of the operating expenses relating to the building, including utilities, maintenance expenses, management expenses (including fees payable to PREA for management of the building pursuant to the master lease agreement with PIOGLOBAL Real Estate Investment Fund), license fees, insurance premiums and taxes, other than income taxes relating to PREA. In addition, a small number of subtenants also pay additional contingent rent based on gross revenues and other financial measures. Rent and operating expenses are typically payable quarterly at the beginning of the applicable calendar quarter.

The following is a schedule by year of minimum future rental income on noncancellable operating subleases as of June 30, 2005:


Year Ending December 31,

2005	$	5,968,826
2006		4,705,736
2007		3,594,545
2008		2,454,991
2009		1,004,013
Beyond		126,900

Total minimum future rental income	$	17,855,011

Total minimum future rental income does not include contingent rental income based on a percentage of gross revenues which may be received under a sublease for the rental of cafeteria space or contingent rental income based on a percentage of billed fees for telephone services and a fixed amount per installed phone line which may be received under a sublease for the rental of roof space for an aerial tower.

Contingent rental income for the three and six months ended June 30, 2005 was approximately $46,000, and $90,000, respectively. Contingent rental income for the three and six months ended June 30, 2004 was approximately $36,000, and $79,000, respectively.

(6) RELATED PARTY TRANSACTIONS

On July 10, 2003, the Company entered into an amended and restated administration and liquidation agreement with Calypso Management LLC (“Calypso Management”), pursuant to which Calypso Management manages the liquidation of the Company and operates the Company’s assets pending their liquidation. Calypso Management is owned and operated by Stephen G. Kasnet, the Company’s Chief Executive Officer, and Donald H. Hunter, the Company’s Chief Financial Officer. Mr. Kasnet is Calypso Management’s President and Chief Executive Officer and Mr. Hunter is Calypso Management’s Chief Operating Officer and Chief Financial Officer. Calypso Management performs its services pursuant to operating plans and budgets approved by the Harbor Global Board of Directors in accordance with the amended and restated administration and liquidation agreement.

The amended and restated administration and liquidation agreement provides that the Company pays the operating expenses of Calypso Management incurred in connection with the provision of services to the Company.

In addition, as compensation for its provision of services to the Company, Calypso Management receives a portion of the total net proceeds distributed from the liquidation of the Company’s assets, generally according to the following schedule:

•

with respect to the first $36 million in net proceeds to be distributed, Calypso Management shall receive a payment equal to 10% of such net proceeds;

•

with respect to the next $72 million in net proceeds to be distributed, Calypso Management shall receive a payment equal to 7.5% of such net proceeds; and

•

with respect to any additional net proceeds to be distributed, Calypso Management shall receive a payment equal to 10% of such net proceeds.

Net proceeds do not include any unexpended portion of the approximate $19,100,000 contributed by Pioneer to Harbor Global at the time of the Spin-off. However, because Harbor Global entered into a transaction in which it was released from its indirect obligation to fulfill its existing capital commitment of approximately $5.4 million to the Polish Real Estate Fund, $5.4 million of the amount contributed by Pioneer is included in the calculation of net proceeds. In addition, the proceeds received by Goldfields II in connection with the sale of its Ghanaian gold mine to Ashanti are not subject to the preceding fee schedule. Instead, Calypso Management will receive only 5% of the Ashanti proceeds that are distributed to shareholders.

In11 addition, if an individual, entity or group acquires at least 80% of the Company’s outstanding common shares or Harbor Global is a party to a merger, reorganization or similar business combination and the shareholders immediately prior to such transaction cease to own at least 50% of the outstanding common shares

In addition, if an individual, entity or group acquires at least 80% of the Company’s outstanding common shares or Harbor Global is a party to a merger, reorganization or similar business combination and the shareholders immediately prior to such transaction cease to own at least 50% of the outstanding common shares and voting power entitled to vote generally in the election of directors of the resulting entity (a “Deemed Sale”), Calypso Management is entitled to receive a portion of the consideration, in accordance with the compensation schedule described above, as would be received by all shareholders if all of the outstanding common shares were sold at the valuation of Harbor Global based on the per share consideration received by each shareholder who sold, exchanged or otherwise disposed of shares in the transaction. Also, in the event of a change in control (as defined in the agreement) coupled with a material change in the engagement status of Calypso Management or the employment status of its principal officers, Calypso Management will be paid a cash amount equal to a portion of the value of the underlying assets, in accordance with the compensation schedule described above, with such value determined pursuant to a predetermined valuation schedule.

With respect to ongoing asset sales, Harbor Global accrues management fees at the earlier of (1) the formal declaration by the Board of Directors of a distribution and (2) the time when a distributable amount is estimable following the sale or liquidation of an asset. Harbor Global will also accrue management fees when a distribution to Calypso Management is triggered following a Deemed Sale of the Company or a change in control as defined in the amended and restated administration and liquidation agreement.

The Company incurred management fee expenses of approximately $~~795~~580,000, and $~~745~~631,000 for the three months ended ~~March~~June 3130, 2005, and 2004, respectively, related to the reimbursement of expenses. For the six months ended June 30, 2005 and 2004, the Company incurred management fee expenses of approximately $1,375,000 and $1,377,000, respectively related to the reimbursement of expenses incurred by Calypso Management. Of this management fee, approximately $~~186~~373,000 and $~~178~~357,000 were outstanding at ~~March~~June 3130, 2005 and 2004, respectively.

~~During~~For the ~~first~~three ~~quarter~~and ofsix months ended June 30, 2004 , the Company also accrued management fee expense ~~and a corresponding payable to Calypso Management~~ of ~~approximately~~$95,000 and $~~235~~330,000, ~~associated~~respectively, ~~with~~relating to proceeds which were ~~ultimately~~distributed ~~included in the distribution paid~~ to shareholders on November 15, 2004.

Calypso Management pays the rent on behalf of the Company for its offices at One Faneuil Hall Marketplace, Boston, Massachusetts and is reimbursed by the Company pursuant to the administration and liquidation agreement.

PREA ~~L.L.C.~~, the subsidiary through which the Company’s real estate management operations are conducted ~~(“PREA”)~~, leases the Meridian Commercial Tower from PIOGLOBAL Real Estate Investment Fund under a master lease agreement and in turn, subleases the premises to tenants. PREA pays PIOGLOBAL Real Estate Investment Fund an amount equal to gross revenues less building operating expenses, the PREA property management fee and any value added taxes or similar taxes. The master lease agreement between PIOGLOBAL Real Estate Investment Fund and PREA expires in 2043.

Under a management agreement between PIOGLOBAL Asset Management and PIOGLOBAL Real Estate Investment Fund, PIOGLOBAL Asset Management provides portfolio management services to PIOGLOBAL Real Estate Investment Fund for an annual fee of 5% of all assets owned by PIOGLOBAL Real Estate Investment Fund net of any value added taxes or similar taxes.

(67) INDEMNIFICATION CONTRACTS

(78) FINANCIAL INFORMATION BY BUSINESS SEGMENT

In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”, the Company presents its segment information for ~~continuing operations using the management approach. The management approach is~~

1112

continuing operations using the management approach. The management approach is based on the way that management organizes the segments within a company for making operating decisions and assessing performance. The Company’s operating segments are organized around services and products provided, as well as geographic regions.

The Company derives its revenues from the following products and services by segment:

•

Russian Real Estate Management and Investment Management Operations: investment advisory and management services

•

Real Estate Management Operations: real estate management services, including property management and advisory services

•

Other

SEGMENT DISCLOSURES

	Russian Real EstateManagementAndInvestmentManagementOperations			Real EstateManagementOperations			Other			Total
As of and for the three months ended June 30, 2005	Russian Real EstateManagementAnd Investment Management Operations			Real EstateManagementOperations			Other			Total
As of and for the three months ended March 31, 2005
Gross Revenues and Sales	$	2,853		$	297		$	155		$	3,305
Net Revenues and Sales	$	2,620		$	254		$	—		$	2,874
Elimination of Intersegment Revenues		—			—			(155	)		(155	)
Income (Loss) before Provision for Income Taxes, Minority Interest, and Equity Loss on Investment		1,347			(284	)		87			1,150
Net Revenues and Sales	$	2,853		$	297		$	—		$	3,150
Provision for Income Taxes		(817	)		(1	)		(61	)		(879	)
Income before Provision for Income Taxes, Minority Interest, and Equity Loss on Investment		966			253			102			1,321
Minority Interest Expense		(757	)		—			—			(757	)
Provision for Income Taxes		(449	)		(103	)		(1	)		(553	)
Equity Loss on Venture Capital Investment		—			—			(14	)		(14	)
Minority Interest Expense		(744	)		—			—			(744	)
Net (Loss) Income	$	(227	)	$	(285	)	$	12		$	(500	)
Equity Loss on Venture Capital Investment		—			—			(6	)		(6	)
Depreciation and Amortization	$	257		$	6		$	—		$	263
Net (Loss) Income	$	(227	)	$	150		$	95		$	18
Total Assets	$	84,353		$	1,434		$	8,175		$	93,962
Depreciation and Amortization	$	243		$	198		$	—		$	441
As of and for the three months ended June 30, 2004	Russian Real Estate Management And Investment Management Operations			Real Estate Management Operations			Other			Total
Gross Revenues and Sales	$	2,644		$	247		$	146		$	3,037
Elimination of Intersegment Revenues		(4	)		—			(146	)		(150	)
Net Revenues and Sales	$	2,640		$	247		$	—		$	2,887
(Loss) Income before Provision for Income Taxes, Minority Interest, and Equity Gain on Investment		(1,699	)		(248	)		202			(1,745	)
Provision for Income Taxes		(1,286	)		—			—			(1,286	)
Minority Interest Income		41			—			—			41
Equity Gain on Venture Capital Investment		—			—			208			208
Net (Loss) Income	$	(2,944	)	$	(248	)	$	410		$	(2,782	)
Depreciation and Amortization	$	262		$	5		$	—		$	267

	Russian Real EstateManagementAndInvestmentManagementOperations			Real EstateManagementOperations			Other			Total
As of and for the three months ended March 31, 2004
Net Revenues and Sales	$	3,144		$	244		$	—		$	3,388
Income (Loss) before Provision for Income Taxes, Minority Interest, and Equity Loss on Investment		898			(256	)		(180	)		462
Provision for Income Taxes		(230	)		(9	)		(10	)		(249	)
Minority Interest Expense		(812	)		—			—			(812	)
Equity Loss on Venture Capital Investment		—			—			(10	)		(10	)
Net Loss	$	(144	)	$	(265	)	$	(200	)	$	(609	)
Depreciation and Amortization	$	224		$	7		$	—		$	231
Total Assets	$	95,803		$	1,512		$	6,158		$	103,473


As of and for the six months ended June 30, 2005	Russian Real Estate Management And Investment Management Operations			Real Estate Management Operations			Other			Total
Gross Revenues and Sales	$	5,474		$	551		$	309		$	6,334
Elimination of Intersegment Revenues		(1	)		—			(309	)		(310	)

Net Revenues and Sales	$	5,473		$	551		$	—		$	6,024

Income (Loss) before Provision for Income Taxes, Minority Interest, and Equity Loss on Investment		2,314			(31	)		189			2,472
Provision for Income Taxes		(1,267	)		(104	)		(62	)		(1,433	)
Minority Interest Expense		(1,501	)		—			—			(1,501	)
Equity Loss on Venture Capital Investment		—			—			(20	)		(20	)

Net Loss	$	(454	)	$	(135	)	$	107		$	(482	)

Depreciation and Amortization	$	494		$	210		$	—		$	704

Total Assets	$	86,259		$	925		$	8,052		$	95,236


As of and for the six months ended June 30, 2004	Russian Real Estate Management And Investment Management Operations			Real Estate Management Operations			Other			Total
Gross Revenues and Sales	$	5,788		$	491		$	353		$	6,632
Elimination of Intersegment Revenues		(4	)		—			(353	)		(357	)

Net Revenues and Sales	$	5,784		$	491		$	—		$	6,275

(Loss) Income before Provision for Income Taxes, Minority Interest, and Equity Gain on Investment		(801	)		(503	)		22			(1,282	)
Provision for Income Taxes		(1,515	)		(10	)		(10	)		(1,535	)
Minority Interest Expense		(771	)		—			—			(771	)
Equity Gain on Venture Capital Investment		—			—			198			198

Net (Loss) Income	$	(3,087	)	$	(513	)	$	210		$	(3,390	)

Depreciation and Amortization	$	486		$	12		$	—		$	498

Total Assets	$	92,924		$	1,441		$	5,208		$	99,573

(9) SUBSEQUENT EVENTS

On June 1, 2005, PIOGLOBAL Real Estate Investment Fund agreed to sell its approximately ten percent interest in OAO “Arnest”, one of its portfolio companies, for approximately $4.5 million. The transaction was completed on July 22, 2005 and resulted in an aggregate gain of approximately $57,000. PIOGLOBAL Real Estate Investment Fund received approximately $2.7 million of the purchase price in June, 2005, which is included in the accompanying Consolidated Financial Statements in cash and cash equivalents and other current liabilities. Accordingly, approximately $4.3 million previously classified as a long-term investment has been reclassified in the June 30, 2005 balance sheet as other current assets.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.

The preparation of the Consolidated Financial Statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, income and expenses. The Company evaluates its estimates on an on-going basis. The Company’s estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the Company’s assets, liabilities, income and expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company considers its critical accounting policies to include those related to (i) current marketable securities, (ii) long-term marketable securities, (iii) ~~the valuation of its Polish venture capital investment, (iv)~~ accrued management fees and (viv) deferred taxes.

Current marketable securities consist primarily of United States Treasury securities and Russian ~~Government~~government and ~~Municipal~~ municipal securities. United States Treasury securities are classified as held-to-maturity and recorded at amortized cost. Russian government and municipal securities are classified as trading securities and are marked-to-market, with unrealized gains or losses reported in other income (expense) in the Consolidated Statements of Operations pursuant to SFAS No. 115. Russian government securities are held primarily in the PIOGLOBAL Real Estate Investment Fund. Security transactions are recorded on the settlement date. For all periods presented, the difference between trade date and settlement date is immaterial. Investments are valued at the weighted average daily price if they are traded on the valuation date; otherwise, the bid price is used.

Long-term marketable securities consist primarily of Russian equity and fixed income securities, including Russian corporate bonds, held in the portfolio of the PIOGLOBAL Real Estate Investment Fund. In addition, certain subsidiaries of the Company maintain investments in unit funds and trust management accounts managed by PIOGLOBAL Asset Management. Russian corporate bonds and investments in unit fund and trust management accounts are characterized as available-for-sale and recorded at fair value based on quoted market prices pursuant to SFAS No. 115. The equity securities are also classified as available-for-sale and recorded at fair value pursuant to SFAS No. 115. In determining fair value, individual equity securities must first satisfy certain trading volume and bid-ask spread criteria established by management to demonstrate that there is sufficient breadth and scope in the market for that security. Equity securities that satisfy these criteria are recorded in long-term marketable securities based on the quoted price in the Russian Trading System and MICEX. Investments that do not have a readily determinable fair value are recorded in long term investments at cost with adjustments for other than temporary impairment. The cost of securities sold is based on the weighted-average method. Dividend income received on investments is recognized on a cash basis. Unrealized gains and unrealized losses are recorded net of deferred taxes and minority interest in stockholders equity as other comprehensive income in the Consolidated Balance Sheets. Realized gains or losses and any other than temporary declines in value are reported in other income (expense) in the Consolidated Statements of Operations.

~~The~~On ~~Company~~July ~~reports~~10, 2003, Harbor Global entered into an amended and restated administration and liquidation agreement with Calypso Management pursuant to which Calypso Management manages the liquidation of Harbor Global and operates Harbor Global’s assets pending their liquidation. As compensation for its ~~approximately~~provision 8%of services ~~aggregate~~to ~~limited~~the ~~partnership~~Company, ~~interest~~Calypso inManagement receives a portion of the ~~Prospect~~net ~~Poland~~proceeds ~~Fund~~distributed onto shareholders in connection with the ~~equity basis~~liquidation of ~~accounting~~the Company’s assets. NoIn ~~market~~addition, ~~quote~~in isthe ~~available~~event ~~for~~80% of the ~~remaining~~Company’s ~~Polish~~common ~~venture~~shares ~~capital~~are sold ~~investment.~~or ~~This~~if ~~investment~~the isCompany’s ~~valued~~shareholders immediately prior to a business combination or transaction cease to own at ~~fair~~least ~~value~~50% of the outstanding common shares and voting power entitled to vote generally in the election of directors following such combination or transaction (referred to as a “deemed sale”), Calypso Management is entitled to receive a portion of the consideration as ~~determined~~would be received by ~~Prospect~~all ~~Poland~~shareholders ~~Fund’s~~if ~~management.~~all ~~Unrealized~~of ~~and~~the ~~realized~~outstanding ~~gains~~common orshares ~~losses~~were ~~are~~sold at the ~~recorded~~valuation of Harbor Global based on the per share consideration received by each shareholder who sold, exchanged or otherwise disposed of shares in the transaction. Also, in the

1315

~~Consolidated~~event ~~Statements~~ of ~~Operations.~~a ~~The~~change ~~Company~~in ~~analyzes~~control (as defined in the ~~assumptions~~amended ~~supporting~~and ~~changes~~restated administration and liquidation agreement) coupled with a material change in the engagement ~~fair~~status of Calypso Management or the employment status of its principal officers, Calypso Management will be paid a cash amount equal to a portion of the value of the ~~investment~~underlying ~~for~~assets ~~appropriateness~~with onsuch value determined pursuant to a predetermined ~~quarterly~~valuation ~~basis~~schedule. Compensation to Calypso Management represents a percentage of such distributions, deemed distributions or distributions related to a change in control, which varies depending upon the source of the distribution and the cumulative amount of distributions since the Spin-off.

OnWith ~~July~~respect ~~10,~~to ongoing ~~2003~~asset sales, Harbor Global ~~entered~~accrues ~~into an~~management ~~amended~~fees ~~and~~at ~~restated administration and liquidation agreement with Calypso Management pursuant to which Calypso Management manages~~ the ~~liquidation~~earlier of ~~Harbor~~(1) ~~Global and operates Harbor Global’s assets pending their liquidation. As compensation for its provision of services to~~ the ~~Company,~~formal ~~Calypso~~declaration ~~Management~~by ~~receives a portion of~~ the ~~net~~Board ~~proceeds distributed to shareholders in connection with the liquidation~~ of ~~the~~Directors ~~Company’s assets. In addition, in the event 80%~~ of ~~the Company’s~~a ~~common~~distribution ~~shares are sold~~ or if(2) the ~~Company’s~~time ~~shareholders~~when ~~immediately prior to~~ a ~~business~~distributable ~~combination~~amount oris ~~transaction~~estimable ~~cease~~following tothe ~~own~~sale ator ~~least~~liquidation ~~50%~~ of ~~the outstanding common shares and voting power entitled to vote generally in the~~an ~~election~~asset. ofHarbor ~~directors~~Global ~~following~~will ~~such~~also ~~combination~~accrue ormanagement ~~transaction~~fees ~~(referred~~when ~~to as~~ a ~~“deemed~~distribution ~~sale”),~~to Calypso Management is ~~entitled~~triggered tofollowing ~~receive~~ a ~~portion~~deemed ofsale ~~the consideration as would be received by all shareholders if all~~ of the ~~outstanding common~~Company ~~shares were sold at the valuation of Harbor Global based on the per share consideration received by each shareholder who sold, exchanged~~ or ~~otherwise disposed of shares in the transaction. Also, in the event of~~ a change in control, (as defined in the amended and restated administration and liquidation ~~agreement) coupled with a material change in the engagement status of Calypso Management or the employment status of its principal officers, Calypso Management will be paid a cash amount~~ ~~equal to a portion of the value of the underlying assets with such value determined pursuant to a predetermined valuation schedule~~agreement. Compensation to Calypso Management represents a percentage of such distributions, deemed distributions or distributions related to a change in control, which varies depending upon the source of the distribution and the cumulative amount of distributions since the Spin-off.

With respect to ongoing asset sales, Harbor Global accrues management fees at the earlier of (1) the formal declaration by the Board of Directors of a distribution or (2) the time when a distributable amount is estimable following the sale or liquidation of an asset. Harbor Global will also accrue management fees when a distribution to Calypso Management is triggered following a deemed sale of the Company or a change in control as defined in the amended and restated administration and liquidation agreement.

The Company recognizes deferred tax assets and liabilities based on the difference between the financial statement carrying amounts and the tax basis of assets and liabilities. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance based on historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences.

OVERVIEW

The Consolidated Financial Statements of Harbor Global’s principal operations include its Russian real estate management and investment management operations, real estate management operations and other operations. Management’s Discussion and Analysis of Financial Condition and Results of Operations are presented in three sections: Results of Operations for the three and six months ended June ~~March 31~~30, 2005 and 2004, Liquidity and Capital Resources, ~~Off-Balance~~and ~~Sheet~~Risk ~~Arrangements,~~Factors ~~and~~That ~~Future~~May ~~Operating~~Affect Future Results.

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED ~~MARCH~~JUNE 3130, 2005 AND 2004

Consolidated Operations.

Harbor Global ~~reported~~broke aeven ~~net loss of $0.5 million ($0.09 per share)~~ on revenues of $23.92 million in the ~~first~~second quarter of 2005 compared with a net loss of $02.68 million ($0.1149 per share) on revenues of $32.49 million for the ~~first~~second quarter of 2004. The $02.18 million ~~decrease~~increase in ~~losses~~net income during the second quarter of 2005 compared to the second quarter of 2004 was primarily attributable ~~principally~~ to a $01.71 million federal income tax liability incurred during the second quarter of 2004 in connection with the conversion of Pioglobal First Russia, Inc. into a Delaware limited liability company, a $1.0 million increase in realized portfolio gains ~~from~~during the ~~Russian~~second ~~real~~quarter ~~estate~~of ~~management~~2005, and ~~investment~~lower ~~management~~Russian withholding ~~operations~~taxes ~~and~~of a $0.29 million ~~reduction~~during inthe ~~management~~second ~~fees~~quarter ~~payable~~of 2005 related to ~~Calypso~~dividends ~~Management;~~payable ~~offset~~from the PIOGLOBAL Real Estate Investment Fund; partially offset by, a gain of $0.52 million ~~reduction~~during ~~in foreign~~the ~~exchange~~second ~~gains~~quarter ~~and~~of ~~lower~~2004 ~~dividend~~from ~~income~~the sale of ~~$0.3~~two Prospect ~~million~~Poland Fund investments.

14For the six months ended June 30, 2005, the Company reported a net loss of $0.5 million ($0.09 per share) compared to a net loss of $3.4 million ($0.60 per share) for the six months ended June 30, 2004. The $2.9 million decrease in net losses was attributable primarily to a $1.6 million increase in realized portfolio gains during the six months ended June 30, 2005, the $1.1 million federal income tax liability incurred during the six months ended June 30, 2004 in connection with the conversion of Pioglobal First Russia, Inc. into a Delaware limited liability company and lower dividend withholding taxes of $0.9 million during the second quarter of 2005 related to dividends payable from the PIOGLOBAL Real Estate Investment Fund; offset partially by, lower currency translation gains of $0.4 million and the 2004 gain of $0.2 million from the sale of two Prospect Poland Fund investments.

Set forth on the following table are the details of revenues and net (loss) income by business segment for the three and six months ended ~~March~~June 3130, 2005 and 2004:

REVENUES AND NET INCOME OR LOSS

(DOLLARS IN MILLIONS)

	REVENUES				NET INCOME(LOSS)						REVENUES				NET INCOME(LOSS)
	THREE MONTHS ENDED MARCH 31,				THREE MONTHSENDEDMARCH 31,
	THREE MONTHS ENDED JUNE 30,				THREE MONTHSENDED JUNE 30,						SIX MONTHSENDEDJUNE 30,				SIX MONTHSENDED JUNE 30,
BUSINESS SEGMENT	2005		2004		2005			2004			2005		2004		2005			2004
Russian Real Estate Management and Investment Management Operations	$	2.69	$	3.2.7	$	(0.2	)	$	(03.10	)	$	5.4	$	5.8	$	(0.5	)	$	(3.1	)
Real Estate Management Operations		0.3		0.2		(0.31	)		(0.32	)		0.6		0.5		(0.1	)		(0.5	)
Other		~~0.0~~—		~~0.0~~—		0.01			(0.24	)		—		—		0.1			0.2
Totals	$	23.92	$	32.49	$	~~(0.5~~—	)	$	(02.68	)	$	6.0	$	6.3	$	(0.5	)	$	(3.4	)

Russian Real Estate Management and Investment Management Operations.

The Russian real estate management and investment management operations reported a net loss of $0.2 million for the ~~first~~second quarter of 2005 compared to a net loss of $03.10 million for the ~~first~~second quarter of 2004. The ~~additional~~ $02.18 million ~~loss~~decrease in net losses during the second quarter of 2005 compared to the second quarter of 2004 was attributable principally to a the $01.51 million ~~reduction~~federal inincome ~~currency~~tax ~~translation~~liability ~~gains~~from ~~and~~the Pioglobal First Russia conversion during the second quarter of 2004, lower dividend withholding taxes of $0.39 million inrelating ~~lower~~to ~~dividend~~dividends ~~income~~payable ~~offset,~~from inthe ~~part,~~PIOGLOBAL byReal Estate Investment Fund and a $0.76 million increase in realized portfolio gains.

~~PIOGLOBAL~~During ~~Asset~~the ~~Management~~six ~~provides~~months ended June 30, 2005, the Russian real estate management ~~services~~and investment management business reported a net loss of $0.5 million compared to ~~PIOGLOBAL~~a ~~Real~~net ~~Estate~~loss ~~Investment~~of ~~Fund~~$3.1 ~~PIOGLOBAL~~million ~~Asset~~for ~~Management also~~the ~~serves~~comparable asperiod anin ~~investment~~2004. ~~manager~~The to$2.6 ~~three~~million ~~Russian~~decrease ~~open-end~~in ~~unit~~net ~~investment~~losses ~~funds,~~was anattributable ~~index~~principally ~~interval~~to ~~fund~~a ~~and~~$1.2 anmillion ~~institutional~~increase ~~interval~~in ~~fund~~realized portfolio gains, ~~whose~~the ~~assets~~$1.1 ~~under~~million ~~management~~federal atincome ~~March~~tax ~~31,~~liability ~~2005~~from the ~~and~~Pioglobal First Russia conversion incurred during 2004 ~~are~~and ~~set~~lower ~~forth~~dividend onwithholding taxes of $0.9 million relating to dividends payable from the ~~following~~PIOGLOBAL ~~table:~~Real Estate Investment Fund partially offset by lower net translation gains of $0.4 million and $0.2 million of lower dividend income.

	March 31,
	2005		2004
	(IN MILLIONS)
Open-end Unit Funds	$	63.0	$	43.3
Interval Funds		4.7		6.0
Trust Management		58.1		38.5
Assets under management	$	125.8	$	87.8

PIOGLOBAL Asset Management provides management services to PIOGLOBAL Real Estate Investment Fund. PIOGLOBAL Asset Management also serves as an investment manager to three Russian open-end unit investment funds, an index interval fund and an institutional interval fund, whose assets under management at June 30, 2005 and 2004 are set forth on the following table:


	June 30,
	2005		2004
	(IN MILLIONS)
Open-end Unit Funds	$	63.6	$	47.4
Interval Funds		3.8		4.2
Trust Management		55.8		40.9

Assets under management	$	123.2	$	92.5

Real Estate Management Operations.

The real estate management operations recorded net income of $0.1 million for the second quarter of 2005 compared to a net loss of $0.32 million in ~~both~~ the ~~first~~second quarter of ~~2005~~2004. ~~and~~For the ~~first~~six ~~quarter~~months ended June 30, 2005 the real estate management operations reported a net loss of $0.1 million compared to a net loss of $0.5 million for the six months ended June 30, 2004. ~~due~~The ~~primarily~~additional income for both the three and six months ended June 30, 2005 was attributable to ~~corporate~~a ~~overhead~~$0.4 ~~allocations~~million inrealized ~~each~~portfolio ~~comparative~~gain ~~quarter~~recorded on the sale of marketable securities.

~~Other.~~17

Harbor Global’s other operations broke even for the three months ended March 31, 2005 compared to a net loss of $0.2 million for the three months ended March 31, 2004. During the first quarter of 2004, the Company accrued $0.2 million of management fee expense in anticipation of a distribution to shareholders.

Other.

Harbor Global’s other operations reported net income of $0.1 million for the three months ended June 30, 2005 compared to net income of $0.4 million for the three months ended June 30, 2004. The Company recorded a gain of $0.2 million in the second quarter of 2004 from the sale of two Prospect Poland Fund investments.

For the six months ended June 30, 2005, Harbor Global’s other operations reported income of $0.1 million compared to income of $0.2 million for the six months ended June 30, 2004. The $0.1 million decrease in income was due to the gain of $0.2 million recorded in 2004 from the sale of two Prospect Poland Fund investments offset by higher interest income in 2005.

LIQUIDITY AND CAPITAL RESOURCES

Liquid assets ~~held directly by Harbor Global~~ consisting of cash and cash equivalents and marketable securities held directly by Harbor Global and maintained for general corporate purposes were approximately $7.54 million as of ~~March~~June 3130, 2005. This represents an approximately $12.90 million decrease from the 2004 fiscal year end and is attributable principally to the funding of operations and the settlement of year end accruals. Management believes that the cash currently available for general corporate purposes is sufficient to fund operations over the next two years.

The assets of the Company’s majority-owned Russian subsidiary, PIOGLOBAL Investment Fund, consist primarily of cash and cash equivalents, equity securities (both liquid and illiquid), marketable securities, and real estate holdings.

~~OFF-BALANCE~~RISK ~~SHEET~~FACTORS ~~ARRANGEMENTS~~THAT MAY AFFECT FUTURE RESULTS

~~Harbor~~From ~~Global~~time ~~does not~~to ~~have~~time, ~~any~~management ~~off~~may make forward-~~balance~~looking ~~sheet~~statements ~~arrangements~~in this Quarterly Report on Form 10-Q, in other documents that ~~have~~the orCompany ~~are~~files ~~reasonably~~with the ~~likely~~Securities toand ~~have~~Exchange aCommission ~~current~~(including orthose ~~future~~documents ~~effect~~incorporated onby ~~the~~reference ~~Company’s~~into ~~financial~~the ~~condition~~Form 10-Q), ~~changes~~in press releases or in ~~financial~~other ~~condition,~~public ~~revenues~~discussions. orThe ~~expenses,~~Private ~~results~~Securities Litigation Reform Act of ~~operations~~1995 provides a “safe harbor” for these statements. For this purpose, ~~liquidity~~a forward-looking statement is any statement that is not a statement of historical fact. Forward-looking statements include those about asset realization plans and strategies, ~~capital~~ ~~expenditures~~anticipated expenses, orliquidity and capital resources and expectations about market conditions. Forward-looking statements can be identified by the words “may,” “believes,” “anticipates,” “plans,” “expects,” “estimates” and similar expressions. Forward-looking statements are based on currently available information and management’s expectations of future results but involve certain assumptions. Management cautions readers that assumptions involve substantial risks and uncertainties. Consequently, any forward-looking statement could turn out to be wrong. Many factors could cause actual results to differ materially from expectations. Described below are ~~material~~some of the important factors that could affect the Company’s revenues, results of operations or ability to ~~investors~~liquidate its assets on economically advantageous terms.

DISCLOSURE OF CONTRACTUAL OBLIGATIONS

On March 31, 2005, the Company entered into an amendment to its lease for its principal executive offices, extending the term from October 25, 2005 through October 15, 2006 at an annual rent of approximately $161,000. Accordingly, the known contractual obligations of Harbor Global between October 2005 and October 2006 have increased by approximately $161,000.

FUTURE OPERATING RESULTS

From time to time, management may make forward-looking statements in this Quarterly Report on Form 10-Q, in other documents that the Company files with the Securities and Exchange Commission (including those documents incorporated by reference into the Form 10-Q), in press releases or in other public discussions. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for these statements. For this purpose, a forward-looking statement is any statement that is not a statement of historical fact. Forward-looking statements include those about asset realization plans and strategies, anticipated expenses, liquidity and capital resources and expectations about market conditions. Forward-looking statements can be identified by the words “may,” “believes,” “anticipates,” “plans,” “expects,” “estimates” and similar expressions. Forward-looking statements are based on currently available information and management’s expectations of future results but involve certain assumptions. Management cautions readers that assumptions involve substantial risks and uncertainties. Consequently, any forward-looking statement could turn out to be wrong. Many factors could cause actual results to differ materially from expectations. Described below are some of the important factors that could affect revenues or results of operations.

THE POTENTIAL VALUES TO BE REALIZED UPON THE SALE OR LIQUIDATION OF MOST OF HARBOR GLOBAL’S ASSETS, IF ANY, ARE SPECULATIVE.

The potential values to be realized upon the sale of Harbor Global’s Russian real estate management and investment management operations, if any, are speculative.

A significant portion of Harbor Global’s Russian real estate management and investment management operations consists of its approximately 52% interest in PIOGLOBAL Real Estate Investment Fund, a company that invests in Russian real estate, and to a lesser extent, securities of Russian companies. Generally, the Russian real estate and securities markets are significantly smaller and less liquid than the markets in the United States, and as a result, a portion of the assets held by PIOGLOBAL Real Estate Investment Fund are illiquid. There is also limited liquidity in some of the publicly traded securities ofheld by PIOGLOBAL Real Estate Investment Fund. Consequently, Harbor Global may have difficulty selling ~~some of~~ its investment in PIOGLOBAL Real Estate Investment Fund ~~or causing PIOGLOBAL Real Estate Investment Fund to liquidate some of its underlying assets,~~ and may only be able to do so at prices, which may not reflect the long-term value of ~~its~~the ~~investments~~investment.

1618

AN INCREASE IN COMPETITION IN THE RUSSIAN COMMERCIAL REAL ESTATE MARKET MAY ADVERSELY AFFECT THE COMPANY’S REVENUES AND THE VALUE OF THE COMPANY’S PRINCIPAL ASSET, THE MERIDIAN COMMERCIAL TOWER.

PIOGLOBAL Real Estate Investment Fund is Harbor Global’s principal asset. A significant portion of the assets of PIOGLOBAL Real Estate Investment Fund consists of its ownership of the Meridian Commercial Tower, an office building located in Moscow, Russia. ~~During~~For the ~~first~~six ~~quarter of~~months ended June 30, 2005, revenues from the PIOGLOBAL Real Estate Investment Fund comprised approximately 74% of Harbor Global’s total revenue. Furthermore, for the six months ended June 30, 2005, Meridian Commercial Tower lease revenues accounted for approximately 9894% of the revenues of PIOGLOBAL Real Estate Investment Fund, ~~and~~ approximately 8077% of the total revenue generated by Harbor Global’s Russian real estate management and investment management operations and approximately 70% of Harbor Global’s total revenue.

There is currently a shortage of commercial real estate in Moscow, Russia, which has brought about a significant increase in planned commercial real estate construction. If and when such new buildings are commissioned, competition for tenants may increase and adversely affect the Company’s ability to attract new, and retain existing, tenants. The loss of more than a few tenants could materially adversely affect the Company’s revenues. In addition, an increase in supply of commercial real estate in Russia may adversely affect the value of the Meridian Commercial Tower, the Company’s ~~principal~~interest ~~asset.~~in PIOGLOBAL Real Estate Investment Fund and the Company’s ability to sell its interest in PIOGLOBAL Real Estate Investment Fund on economically advantageous terms.

HARBOR GLOBAL’S RUSSIAN BUSINESSES ARE SUSCEPTIBLE TO NUMEROUS RISKS AND UNCERTAINTIES ASSOCIATED WITH INTERNATIONAL OPERATIONS.

Harbor Global conducts business primarily in Russia. Harbor Global will continue to operate its Russian businesses until those businesses are liquidated and will continue to be subject to the risks of doing business in Russia, including:

•

unexpected changes in regulatory requirements and the legal system;

•

tariffs and other trade barriers;

•

difficulties in staffing and managing Russian operations;

•

political and economic instability;

•

fluctuations in currency exchange rates;

•

restrictions on currency exchange and repatriation;

•

restrictions on foreign investment in its businesses; and

•

potentially adverse tax consequences.

For example, in recent years Russia has undergone substantial political, economic and social change. As is typical of an emerging market, Russia does not possess a well-developed business, legal and regulatory infrastructure that would generally exist in the United States or in a more mature free market economy. The Russian ruble is not freely convertible in most countries outside of Russia and the country possesses restrictive currency controls and relatively high inflation. In addition, the tax, currency and customs legislation within Russia is subject to varying interpretations and changes, which can occur frequently. Consequently, Harbor Global’s Russian real estate management and investment management operations involve significant risks, such as those listed above, which are not typically associated with developed markets. While there have been improvements in economic trends, the future economic direction of Russia is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the government, together with tax, legal, regulatory, and political developments. The liquidation of these businesses, as well as the successful operation of these businesses pending their liquidation, will depend on the stability of, and economic conditions in, Russia.

THE LOSS OF KEY OFFICERS AND MANAGERS COULD IMPAIR THE ABILITY OF HARBOR GLOBAL TO SUCCESSFULLY OPERATE AND MANAGE ITS ASSETS PRIOR TO THEIR LIQUIDATION.

Mr. Kasnet is the President and Chief Executive Officer, and Mr. Hunter is the Chief Operating Officer and Chief Financial Officer of Harbor Global. Mr. Kasnet previously served as the President, and Mr. Hunter previously served as the Chief Operating Officer and Senior Vice President of Pioneer Global Investments, a division of Pioneer. As executive officers of Pioneer Global Investments, Mr. Kasnet and Mr. Hunter operated substantially all the businesses that Harbor Global now owns. In addition Calypso Management, an entity owned and operated by Mr. Kasnet and Mr. Hunter, manages the liquidation of Harbor Global and operates Harbor Global’s assets pending their liquidation pursuant to the terms of an amended and restated administration and liquidation agreement.

owns. In addition Calypso Management, an entity owned and operated by Mr. Kasnet and Mr. Hunter, manages the liquidation of Harbor Global and operates Harbor Global’s assets pending their liquidation pursuant to the terms of an amended and restated administration and liquidation agreement.

Because Harbor Global’s assets are a diverse range of businesses and are generally located in Russia, where successfully conducting and selling businesses requires significant experience, Harbor Global believes that its success in liquidating its assets and operating its assets pending their liquidation will depend to a significant extent upon the continued efforts of Mr. Kasnet and Mr. Hunter. The loss of the services of either Mr. Kasnet or Mr. Hunter could have a material adverse effect upon Harbor Global’s results of operations and financial condition. The services of Mr. Kasnet and Mr. Hunter may also be critical to Harbor Global’s ability to liquidate its assets at prices that will enable Harbor Global to make meaningful distributions to its shareholders.

Mr. Kasnet and Mr. Hunter both entered into employment agreements with Calypso Management. On December 8, 2004, the term of Mr. Kasnet’s employment agreement was extended until October 24, 2006 to coincide with the term of the amended and restated administration and liquidation agreement. Mr. Hunter’s employment agreement provides that Mr. Hunter’s employment with Calypso Management is at will, subject to termination by either Calypso Management or Mr. Hunter upon 60 days prior written notice. If either Mr. Kasnet’s or Mr. Hunter’s employment with Calypso Management is terminated, the individual whose agreement is terminated will cease to be an officer of Harbor Global. Harbor Global has obtained key officer life insurance policies ~~with~~on ~~benefits payable to Harbor Global for~~ Mr. Kasnet and Mr. Hunter with benefits payable to Harbor Global.

HARBOR GLOBAL WILL INDEMNIFY PIONEER FOR SOME LIABILITIES ACCRUING AFTER THE SPIN-OFF.

Under the Distribution Agreement, Harbor Global agreed to indemnify Pioneer for liabilities, other than tax liabilities, incurred by Pioneer relating to the businesses or operations of the Harbor Global assets. Additionally, under a tax separation agreement between Harbor Global and Pioneer, generally, Harbor Global agreed to indemnify Pioneer for tax liabilities relating to the Harbor Global businesses. Currently, there are no suits pending that would require payment by Harbor Global to Pioneer under the indemnification provisions of the Distribution Agreement or tax separation agreement. However, Harbor Global cannot provide assurances that no legal proceeding or other claim will occur that would require Harbor Global to indemnify Pioneer. Furthermore, Harbor Global and its subsidiaries may be subject to legal proceedings or other claims arising in the ordinary course of business, including employment related claims, environmental claims and regulatory fees or fines associated with its international operations.

DEFICIENCIES IN THE DESIGN AND OPERATION OF THE COMPANY’S DISCLOSURE CONTROLS AND PROCEDURES, INCLUDING ITS INTERNAL CONTROLS OVER FINANCIAL REPORTING, MAY ADVERSELY IMPACT THE COMPANY’S BUSINESS AND TRADING PRICE OF ITS COMMON SHARES.

As discussed in Part I, Item 4, the Company has identified certain material weaknesses in it’s disclosure controls and procedures.

The Company’s management has begun taking steps that it believes will remediate the identified material weaknesses. These remediative actions are discussed in Item 4.

The Company is working toward documenting and evaluating its internal control systems in order to allow management to report on, and the Company’s independent auditors to attest to, its internal control over financial reporting beginning with the Company’s 2006 completed fiscal year, as required by Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). Additional deficiencies or weaknesses in the Company’s disclosure controls and procedures or internal controls over financial reporting may be identified in the future, which may result in

management being unable to conclude that the Company’s disclosure controls and procedures are effective or that the Company has effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Effective internal controls are necessary for the Company to produce reliable financial reports and are important to help prevent financial fraud. Any deficiencies or weaknesses in internal controls, or the inability of the Company’s management to conclude that, the Company’s disclosure controls and procedures or internal controls over financial reporting are effective could erode investor confidence in the accuracy and completeness of the Company’s financial reports and adversely affect the price at which the Company’s common shares are traded.

THERE CAN BE NO ASSURANCE THAT SHAREHOLDERS WILL BE ABLE TO SELL THEIR HARBOR GLOBAL COMMON SHARES.

Harbor Global common shares are not listed on any securities exchange or on The Nasdaq Stock Market(R).

Furthermore, Harbor Global does not intend to:

•

engage the services of any market maker;

•

facilitate the development of an active public trading market in Harbor Global common shares, or encourage others to do so;

•

place any advertisements in the media promoting an investment in Harbor Global; or

•

except as required by the Securities Exchange Act of 1934, collect or publish information about prices at which Harbor Global common shares may be traded.

Harbor Global cannot provide assurances as to the prices at which Harbor Global common shares may trade or provide assurances that shareholders will be able to sell their Harbor Global common shares.

AS A RESULT OF HOLDING HARBOR GLOBAL COMMON SHARES, HARBOR GLOBAL’S SHAREHOLDERS MAY RECOGNIZE TAXABLE INCOME AND BE REQUIRED TO PAY TAX WITHOUT A CORRESPONDING DISTRIBUTION OF CASH FROM HARBOR GLOBAL TO ITS SHAREHOLDERS.

For United States federal income tax purposes, Harbor Global is treated as a partnership. For United States federal income tax purposes, Harbor Global’s shareholders will be treated as partners in a Bermuda partnership and their Harbor Global common shares will represent partnership interests. Because of its classification as a partnership for United States federal income tax purposes, Harbor Global is not itself subject to United States federal income tax. Instead, items of income, gain, loss, deduction and expense will flow through to Harbor Global’s shareholders, and they will be required to include their allocable share of these items in computing their own United States federal income tax for each taxable year of Harbor Global. Cash distributions made by Harbor Global to its shareholders generally will not be taxable, except to the extent that those distributions exceed a shareholder’s adjusted tax basis in the Harbor Global common shares.

Harbor Global believes that one or more of its foreign subsidiaries may be classified as a foreign personal holding company or passive foreign investment company for United States federal income tax purposes. If any such subsidiary is classified as a foreign personal holding company or passive foreign investment company, Harbor Global’s shareholders may be required to recognize taxable income and pay tax with respect to a portion of the subsidiary’s income, even in the absence of the receipt of any payment of cash or other property from the subsidiary. The tax rules regarding foreign partnerships, foreign personal holding companies and passive foreign investment companies are complicated. Harbor Global’s shareholders should consult their tax advisors to determine the tax consequences to them of holding Harbor Global common shares.

HARBOR GLOBAL WILL BE SUBJECT TO SIGNIFICANT RESTRICTIONS IF IT BECOMES AN INVESTMENT COMPANY.

Harbor Global intends to conduct its businesses and operations so as to avoid being required to register as an investment company. If, nevertheless, Harbor Global were to be required to register as an investment company, because Harbor Global is a foreign company, the Investment Company Act of 1940 would prohibit Harbor Global and any person deemed to be an underwriter of Harbor Global’s securities from offering for sale, selling or delivering after sale, in connection with a public offering, any security issued by Harbor Global in the United States.

RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD

~~None~~During December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment,” which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires companies to measure and recognize compensation expense for all stock-based payments at fair value. In April 2005, the Securities and Exchange Commission amended the effective date of SFAS 123R to the first interim period of the first fiscal year beginning after June 15, 2005. SFAS No. 123R is not anticipated to have an impact on the Company’s operating results or financial condition when adopted.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Harbor Global monitors its exposure to adverse changes in interest rates, foreign currency exchange rates and market fluctuations.

The Company’s interest rate risk involves the short-term investment of excess cash. This risk impacts fair values, earnings and cash flows. Excess cash is primarily invested in foreign government bonds and United States treasury bills. These short-term investments are reported either as cash and cash equivalents or marketable securities. The balance of such securities at ~~March 31,~~June 30, 2005 and December 31, 2004 was approximately $0.29 million and $0.7 million, respectively, of cash and cash equivalents and approximately $1715.16 million and $17.5 million, respectively, of marketable securities. Earnings from excess cash invested were approximately $0.48 million for the six months ended June 30, 2005. Based on excess cash invested at June 30, 2005, a one percent increase or decrease in current market interest rates would have the effect of causing an approximately $0.2 million additional pre-tax credit or charge to the Consolidated Statements of Operations.

19Harbor Global is exposed to changes in foreign currency exchange rates, primarily as a result of its operations in Russia. The United States dollar (the Company’s reporting currency) has been designated as the Company’s functional currency. Translation gains and losses that result from remeasuring into the United States dollar are included in the Consolidated Statements of Operations. To mitigate against currency translation risk, the Company primarily transacts business in United States dollars by contracting for most of its costs and revenues in United States dollars. This acts as a natural hedge to protect against currency fluctuations from the Company’s operations. For the three months ended June 30, 2005 and 2004, the Company reported net currency exchange losses of approximately $428,000 and $482,000, respectively. For the six months ended June 30, 2005, the Company reported net currency exchange losses of approximately $453,000 compared to net currency exchange gains of $403,000 for the six months ended June 30, 2004.

the three months ended March 31, 2005. Based on excess cash invested at March 31, 2005, a one percent increase or decrease in current market interest rates would have the effect of causing an approximately $0.2 million additional pre-tax credit or charge to the Consolidated Statements of Operations.

Harbor Global is exposed to certain changes in foreign currency exchange rates, primarily as a result of its operations in Russia. The United States dollar (the Company’s reporting currency) has been designated as the Company’s functional currency. Translation gains and losses that result from remeasuring into the United States dollar are included in the Consolidated Statements of Operations. To mitigate against currency translation risk, the Company primarily transacts in United States dollars by contracting for most of its costs and revenues in United States dollars. This acts as a natural hedge to protect against currency fluctuations from the Company’s operations. During the first quarter of 2005 and 2004, the Company reported net exchange losses of approximately $25,000 and net exchange gains of approximately $918,000, respectively.

The Russian ruble is not a fully convertible currency outside of Russia. The translation of ruble denominated assets and liabilities into United States dollars for the purpose of these financial statements does not indicate that the Company could realize or settle in United States dollars the reported values of these assets and liabilities. The Company reports all of its non-monetary assets and liabilities held in Russia at historical exchange rates, and any fluctuation in foreign exchange rates would not have any impact on reported non-monetary assets and liabilities.

~~The~~22 ~~table below sets forth in the Company’s reporting currency a summary of the monetary assets and liabilities held in rubles at March 31, 2005 and December 31, 2004 .~~

	(IN THOUSANDS)
	March 31,2005		December 31,2004
Monetary Assets
Cash and Cash Equivalents	$	5,075	$	3,651
Restricted Cash		12,983		13,035
Securities Held for Sale		37,517		36,713
Other		2,671		2,182
	$	58,246	$	55,581
Monetary Liabilities
Dividend Payable	$	12,983	$	13,035
Taxes Payable		695		196
Deferred Taxes		2,230		2,132
Other		544		959
	$	16,452	$	16,322
Net Position	$	41,794	$	39,259

The Company indirectly invests in equity instruments of privately-held companies through its approximately 52% interest in the PIOGLOBAL Investment Fund and its approximately 8% interest in the Prospect Poland Fund. Investments in privately held companies by the PIOGLOBAL Investment Fund are recorded at cost in long-term investments. With respect to the Company’s limited partnership interest in the Prospect Poland Fund, such interests are recorded under Polish Venture Capital Investment using the equity method of accounting. The Company is exposed to market risk as it relates to the market value of its indirect investments in privately held companies. The carrying value of the Company’s interest in the Prospect Poland Fund was written down by approximately $14,000 and $10,000 in the first quarter of 2005 and 2004, respectively, reflecting the Company’s proportional share of operating expenses.

The PIOGLOBAL Real Estate Investment Fund is also invested in equity instruments of public companies, which are classified as available-for-sale pursuant to SFAS No.

~~115.~~The ~~Those~~table ~~publicly~~below ~~traded~~sets ~~equity~~forth ~~investments~~in ~~that have evinced a sufficient breadth and scope of market activity are valued based on~~ the ~~quoted~~Company’s ~~price~~reporting ~~for such~~currency ~~securities according to the Russian Trading System and MICEX and are recorded in long-term marketable securities. Investments that do not have~~ a ~~readily~~summary determinable fair value are recorded in long term investments at cost with adjustments for other than temporary impairment. These available-for-sale equity investments, primarily in oil and gas companies, energy companies and the telecommunications industry, are subject to significant fluctuations in fair value due to the volatility of ~~the~~ ~~stock market and~~ the ~~industries~~monetary inassets ~~which these companies participate. As of March 31, 2005~~ and ~~December~~liabilities ~~31, 2004, the fair value of equity investments contained~~ held in ~~long-term~~rubles ~~marketable securities aggregated $16.1 million and $13.3 million, respectively. The Company recorded unrealized gains after deferred taxes and after minority interest of $3.0 million and $2.8 million~~ at ~~March~~June 3130, 2005 and December 31, 2004~~, respectively, as a separate component of stockholder’s equity~~. ~~Although~~ the breadth of industries represented on the Russian Trading System is severely limited, the Company attempts to manage its exposure to stock market fluctuations and minimize the impact of stock market declines to the Company’s earnings and cash flow by increased diversification of the portfolio.


	(IN THOUSANDS)
	June 30, 2005		December 31, 2004
Monetary Assets
Cash and Cash Equivalents	$	9,956	$	3,651
Restricted Cash		13,210		13,035
Securities Held for Sale		28,572		36,713
Other		7,473		2,182

	$	59,211	$	55,581

Monetary Liabilities
Dividend Payable	$	13,210	$	13,035
Taxes Payable		468		196
Deferred Taxes		1,701		2,132
Other		3,769		959

	$	19,148	$	16,322

Net Position	$	40,063	$	39,259

The Company indirectly invests in equity instruments of privately-held companies through its approximately 52% interest in the PIOGLOBAL Investment Fund and its approximately 8% interest in the Prospect Poland Fund. Investments in privately held companies by the PIOGLOBAL Investment Fund are recorded at cost in long-term investments. With respect to the Company’s limited partnership interest in the Prospect Poland Fund, such interests are recorded under Polish Venture Capital Investment using the equity method of accounting. The Company is exposed to market risk as it relates to the market value of its indirect investments in privately held companies. The carrying value of the Company’s interest in the Prospect Poland Fund was written down by approximately $20,000 for the six months ended June 30, 2005, reflecting the Company’s proportional share of operating expenses. For the first half of 2004, the Company recorded a gain on its investment of approximately $198,000, reflecting the Company’s proportional share of $217,000 from the realized gain on the sale of two investments less $19,000 of operating expenses.

The PIOGLOBAL Real Estate Investment Fund is also invested in equity instruments of public companies, which are classified as available-for-sale pursuant to SFAS No. 115. Those publicly traded equity investments that have evinced a sufficient breadth and scope of market activity are valued based on the quoted price for such securities according to the Russian Trading System and MICEX and are recorded in long-term marketable securities. Investments that do not have a readily determinable fair value are recorded in long term investments at cost with adjustments for other than temporary impairment. These available-for-sale equity investments, primarily in oil and gas companies, energy companies and the telecommunications industry, are subject to significant fluctuations in fair value due to the volatility of the stock market and the industries in which these companies participate. As of June 30, 2005 and December 31, 2004, the fair value of equity investments contained in long-term marketable securities aggregated $15.9 million and $13.3 million, respectively. The Company recorded unrealized gains after deferred taxes and after minority interest of $2.4 million and $2.8 million at June 30, 2005 and December 31, 2004, respectively, as a separate component of stockholder’s equity. Although the breadth of industries represented on the Russian Trading System is severely limited, the Company attempts to manage its exposure to stock market fluctuations and minimize the impact of stock market declines to the Company’s earnings and cash flow by increased diversification of the portfolio.

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as ~~defined~~of inJune 30, ~~Rules~~2005. ~~13a-15(e)~~The ~~and~~Company ~~15d-15(e)~~has ~~under~~identified ~~the~~two ~~Exchange~~material ~~Act)~~weaknesses asin ofinternal ~~March~~controls ~~31,~~described ~~2005~~below (and accordingly, the ~~“Evaluation~~Company’s ~~Date”).~~Chief ~~Based~~Executive onOfficer ~~such~~and ~~evaluation,~~Chief ~~such~~Financial ~~officers~~Officer have concluded that, as of ~~the~~June 30, ~~Evaluation Date~~2005, the Company’s disclosure controls and procedures ~~are effective to provide reasonable~~ ~~assurance~~were ~~that~~not information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in applicable Securities and Exchange Commission rules and formseffective.

~~Internal~~On ~~Control~~July 15, ~~Over~~2005, the Company and the ~~Financial~~audit ~~Reporting.~~committee ~~There~~of ~~have~~the ~~not~~Board ~~been~~of ~~any~~Directors ~~significant~~(the ~~changes~~“Audit inCommittee”) determined that due to the omission of certain lease-related disclosures from the notes to the Company’s ~~internal~~consolidated ~~controls over~~ financial ~~reporting~~statements (included as ~~such~~part ~~term~~of isthe ~~defined~~Form 10-K, init ~~Rules~~would ~~13a-15(f)~~restate ~~and~~its ~~15d-15(f)~~financial ~~under~~statements for the ~~Exchange~~years ~~Act)~~ended ~~during~~December 31, ~~the~~2004, ~~first~~2003 ~~fiscal~~and ~~quarter that~~2002 ~~have~~to ~~materially affected~~include, orin ~~are~~Note ~~reasonably~~3 ~~likely~~ to ~~materially~~such ~~affect~~financial statements, the ~~Company’s~~following ~~internal~~previously ~~control~~omitted ~~over~~lease-related ~~financial~~disclosure ~~reporting~~required by paragraph 23 of Statement of Financial Accounting Standards No. 13, Accounting for Leases (“SFAS 13”):

•

The amount of contingent rentals included within the income statements forming a part of the Company’s Consolidated Financial Statements included as part of the Form 10-K;

•

A description of leasing arrangements pertaining to the operation of the Meridian Commercial Tower ; and

•

Minimum future rentals on noncancellable leases.

The Company determined to include this information in the notes to its Consolidated Financial Statements because rental income from the Meridian Commercial Tower, a commercial office building in Moscow, Russia, is a significant source of the Company’s revenues.

In connection with the preparation of the Company’s restated consolidated financial statements described above, the Company identified errors in the classification of securities held to maturity, trading securities and restricted cash as presented in the Company’s consolidated statements of cash flows for the years ended December 31, 2004, 2003 and 2002, and related interim periods within those years (including the six month period ended June 30, 2004, which has been revised in this Form 10Q), and the fiscal quarter ended March 31, 2005. Accordingly, on August 15, 2005, the Company and its Audit Committee determined that the Company’s Consolidated Statement of Cash Flows for the years ended December 31, 2004, 2003, and 2002, and fiscal quarter ended March 31, 2005, should be restated to properly reflect purchases of and proceeds from the sale of securities held to maturity in “Cash Flows from Investing Activities” rather than “Cash Flows from Operating Activities” and purchases of and proceeds from the sale of trading securities in “Cash Flows from Operating Activities” rather than “Cash Flows from Investing Activities” pursuant to Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company also determined to restate the line item entitled “Reclassification of Restricted Cash” from “Cash Flows from Financing Activities” to “Cash Flows from Investing Activities” at this time.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The Company’s management has concluded that, as of June 30, 2005, the Company did not maintain effective controls over the (i) identification and determination of required lease-related disclosures in accordance with accounting principles generally accepted in the United States and (ii) determination and verification of the reporting of trading securities and securities held to maturity in the statements of cash flows to ensure such disclosure was accurate and in conformity with accounting principles generally accepted in the United States. These deficiencies in internal control over financial reporting resulted in the restatements described above. Accordingly, management has concluded that each of the control deficiencies described above constitutes a material weakness.

In response to the identified material weaknesses in internal control over financial reporting, the Company is reviewing its disclosure controls and procedures relating to lease-related accounting disclosures and the proper classification of certain securities held by the Company and its subsidiaries in its consolidated statements of cash flows, implementing additional training of the Company’s accounting staff regarding lease accounting and disclosure and the proper classification of certain securities and modifying certain disclosure and internal controls that management believes will improve the Company’s ability to process and report complete and correct financial information required by applicable rules and regulations. The Company’s management believes that these additional efforts, together with pre-existing disclosure controls and procedures and other internal controls, will remediate the identified material weaknesses.

Internal Control Over Financial Reporting. There have not been any significant changes in the Company's internal controls over financial reporting during second quarter of 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Since June 30, 2005, the Company has begun implementing the changes in its internal controls described above to ensure that (1) required lease-related disclosures are made in accordance with accounting principles generally accepted in the United States and (2) securities held to maturity, trading securities and restricted cash are accurately reflected in the Company’s consolidated statements of cash flows in conformity with accounting principles generally accepted in the United States.

PART II — OTHER INFORMATION

ITEM 6. EXHIBITS

(a) Exhibits: The Exhibit Index immediately precedes the Exhibits filed herein and is incorporated by reference.

2124

SIGNATURES

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

Dated: ~~April~~August 2718, 2005

HARBOR GLOBAL COMPANY LTD.

/s/ Donald H. Hunter

Donald H. Hunter

Chief Operating Officer

Chief Financial Officer

(Duly authorized officer and principal financial

and accounting officer)

2225

EXHIBIT INDEX


EXHIBIT NUMBER		DESCRIPTION
3.1+		Memorandum of Association of Harbor Global Company Ltd.

3.2+		Bye-Laws of Harbor Global Company Ltd.

4.1*		Specimen Common Share Certificate

31.1**		Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2**		Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1**		Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2**		Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

EXHIBITNUMBER		DESCRIPTION
3.1+		Memorandum of Association of Harbor Global Company Ltd.
3.2+		Bye-Laws of Harbor Global Company Ltd.
4.1*		Specimen Common Share Certificate
10.1**		Second Amendment to Lease dated March 28, 2005 by and between Faneuil Hall Marketplace, LLC, and Harbor Global Company Ltd.
31.1**		Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2**		Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**		Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**		Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

**	Filed herewith.

*	Incorporated by reference to Harbor Global Company Ltd.’s Quarterly Report on Form 10-Q (file number 0-30889) filed on November 13, 2000.

+	Incorporated by reference to Harbor Global Company Ltd.’s Registration Statement on Form 10 (file number 0-30889) filed on June 26, 2000

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Filing Compare · HARBOR GLOBAL CO LTD