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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
 Commission File Number: 811-01825 Rand Capital Corporation  New York
    
    16-0961359(State or Other Jurisdiction of Incorporation
    
    (IRS Employeror organization)
    
    Identification No.)2200 Rand Building, Buffalo, NY
    
    14203(Address of Principal executive offices)
    
    (Zip Code)
 (Registrants Telephone No. Including Area Code) (716) 853-0802 Securities registered pursuant to Section 12(b) of the Act: None  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 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: þ     No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12B-2 of
the Exchange Act) Yes: o     No þ The aggregate market value of the registrants outstanding common stock held by non-affiliates of
the registrant as of June 30, 2004 was approximately $5,882,616 based upon the last sale price
as quoted by NASDAQ SmallCap Market on such date. As of March 18, 2005 there were 5,718,934 shares of the registrants common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Corporations definitive proxy statement for the Annual Meeting of Stockholders to be held on
April 28, 2005 is incorporated by reference into certain sections of Part III herein.




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RAND CAPITAL CORPORATION
TABLE OF CONTENTS FOR FORM 10-K PART IItem 1.
    
    BusinessItem 2.
    
    PropertiesItem 3.
    
    Legal ProceedingsItem 4.
    
    Submission of Matters to a Vote of Security HoldersPART IIItem 5.
    
    Market for Registrants Common Equity and Related Stockholder MattersItem 6.
    
    Selected Financial DataItem 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7A.
    
    Quantitative and Qualitative Disclosures about Market RiskItem 8.
    
    Financial Statements and Supplementary DataItem 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A.
    
    Controls and ProceduresPART IIIItem 10.
    
    Directors and Executive Officers of the RegistrantItem 11.
    
    Executive CompensationItem 12.
    
    Security Ownership of Certain Beneficial Owners and ManagementItem 13.
    
    Certain Relationships and Related TransactionsItem 14.
    
    Principal Accounting Fees and ServicesPART IVItem 15.
    
    Exhibits, Financial Statement Schedules, and Reports on Form 8-KExhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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PART I 
 Item 1. Business Rand Capital Corporation (Rand or Corporation) was incorporated under the law of New York
on February 24, 1969. Commencing in 1971, Rand operated as a publicly traded, closed-end,
diversified management company that was registered under Section 8(b) of the Investment Company Act
of 1940 (the 1940 Act). On August 16, 2001, Rand filed an election to be treated as a business
development company (BDC) under the 1940 Act, which became effective on the date of filing. On
January 16, 2002, Rand formed a wholly-owned subsidiary, Rand Capital SBIC, L.P., (Rand SBIC) for
the purpose of operating it as a small business investment company. At the same time, Rand
organized another wholly owned subsidiary, Rand Capital Management, LLC (Rand Management), as a
Delaware limited liability company, to act as the general partner of Rand SBIC. Rand transferred
$5 million in cash to Rand SBIC to serve as regulatory capital in January 2002 and on August 16,
2002, Rand received notification that its Small Business Investment Company (SBIC) application
had been approved and Rand SBIC had been licensed by the Small Business Administration (SBA). The
following discussion will include Rand, Rand SBIC and Rand Management (collectively, the
Corporation). Throughout its history, the Corporations principal business has been to make venture capital
investments in early-stage and/or developing enterprises that are principally engaged in the
development or exploitation of inventions, technological improvements, and new or unique products
and services typically in New York and its surrounding states. The Corporations principal
objective is to achieve long-term capital appreciation while maintaining a current cash flow from
its debenture instruments. The Corporation invests in a mixture of debenture and equity
instruments. The debt securities most often have an equity piece attached to the debenture in the
form of stock, warrants or options to acquire stock or the right to convert the debt securities
into stock. Rand SBIC was the primary investment vehicle in 2003 and 2004 and it is anticipated
that will continue in 2005. Consistent with its status as a BDC and the purposes of the regulatory
framework for BDCs under the 1940 Act, the Corporation provides managerial assistance, often in
the form of a board of directors seat, to the developing companies in which it invests. The Corporation operates as an internally managed investment company whereby its officers and
employees conduct its operations under the general supervision of its Board of Directors. It has
not elected to qualify to be taxed as a regulated investment company as defined under Subchapter M
of the Internal Revenue Code. Our website is www.randcapital.com. We make available through our website: our annual report
on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any other
reports filed with the Securities and Exchange Commission (SEC) . Regulation as a BDC Although the 1940 Act exempts a BDC from registration under that Act, it contains significant
limitations on the operations of BDCs. Among other things, the 1940 Act contains prohibitions and
restrictions relating to transactions between a BDC and its affiliates, principal underwriters and
affiliates of its affiliates or underwriters, and it requires that a majority of the BDCs
directors be persons other than interested persons, as defined under the 1940 Act. The 1940 Act
also prohibits a BDC from changing the nature of its business so as to cease to be, or to withdraw
its election as, a BDC unless so authorized by the vote of the holders of a majority of its
outstanding voting securities. BDCs are not required to maintain fundamental investment policies
relating to diversification and concentration of investments within a single industry.




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Generally, a BDC must be primarily engaged in the business of furnishing capital and providing
managerial expertise to companies that do not have ready access to capital through conventional
financial channels. Such portfolio companies are termed eligible portfolio companies. More
specifically, in order to qualify as a BDC, a company must (1) be a domestic company; (2) have
registered a class of its equity securities or have filed a registration statement with the
Commission pursuant to Section 12 of the Securities Exchange Act of 1934; (3) operate for the
purpose of investing in the securities of certain types of portfolio companies, namely immature or
emerging companies and businesses suffering or just recovering from financial distress; (4) extend
significant managerial assistance to such portfolio companies; and (5) have a majority of
disinterested directors (as defined in the 1940 Act). An eligible portfolio company is, generally, a U.S. company that is not an investment company
and that (1) does not have a class of securities registered on an exchange or included in the
Federal Reserve Boards over-the-counter margin list; or (2) is actively controlled by a BDC and
has an affiliate of a BDC on its board of directors; or (3) meets such other criteria as may be
established by the SEC. Control under the 1940 Act is generally presumed to exist where a BDC owns
25% of the outstanding voting securities of the company. The 1940 Act prohibits or restricts companies subject to the 1940 Act from investing in
certain types of companies, such as brokerage firms, insurance companies, investment banking firms
and investment companies. Moreover, the 1940 Act limits the type of assets that BDCs may acquire
to qualifying assets and certain assets necessary for its operations (such as office furniture,
equipment and facilities) if, at the time of acquisition, less than 70% of the value of the BDCs
assets consist of qualifying assets. Qualifying assets include: (1) securities of companies that
were eligible portfolio companies at the time the BDC acquired their securities; (2) securities of
bankrupt or insolvent companies that were eligible at the time of the BDCs initial acquisition of
their securities but are no longer eligible, provided that the BDC has maintained a substantial
portion of its initial investment in those companies; (3) securities received in exchange for or
distributed in or with respect to any of the foregoing; and (4) cash items, government securities
and high-quality short-term debt. The 1940 Act also places restrictions on the nature of the
transactions in which, and the persons from whom, securities can be purchased in order for the
securities to be considered qualifying assets. These restrictions include limiting purchases to
transactions not involving a public offering and acquiring securities from the portfolio company or
its officers, directors, or affiliates. A BDC is permitted to invest in the securities of public companies and other investments that
are not qualifying assets, but those kinds of investments may not exceed 30% of the BDCs total
asset value at the time of the investment. A BDC must make significant managerial assistance available to the issuers of eligible
portfolio securities in which it invests. Making available significant managerial assistance means,
among other things, any arrangement whereby the BDC, through its directors, officers or employees,
offers to provide, and, if accepted does provide, significant guidance and counsel concerning the
management, operations or business objectives and policies of a portfolio company.




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SBIC Subsidiary On January 16, 2002, Rand formed two wholly-owned subsidiaries, Rand SBIC and Rand Management.
On August 16, 2002, Rand received notification that its Small Business Investment Company
application had been approved and licensed by the Small Business Administration . The approval will
allow Rand SBIC to obtain loans up to two times its initial $5 million of regulatory capital from
the SBA for purposes of making new investments in portfolio companies. Rand formed Rand SBIC as a subsidiary for the purpose of causing it to be licensed as a small
business investment company (SBIC) under the Small Business Investment Act of 1958 (the SBA
Act) by the Small Business Administration (the SBA), in order to have access to various forms of
leverage provided by the SBA to SBICs. On May 28, 2002, the Corporation filed an Exemption Application with the SEC seeking an order
under Sections 6(c), 12(d)(1)(J), 57(c), and 57(i) of, and Rule 17d-1 under, the 1940 Act for
exemptions from the application of Sections 2(a)(3), 2(a)(19), 12(d)(1), 18(a), 21(b), 57(a)(1),
(2), (3), and (4), and 61(a) of the 1940 Act to certain aspects of its operations. The application
also seeks an order under Section 12(h) of the Securities Exchange Act of 1934 Act (the Exchange
Act) for an exemption from separate reporting requirements for Rand SBIC under Section 13(a) of
the Exchange Act. In general, the Corporations applications seek orders that would permit:  
    a BDC (Rand) to operate a BDC/small business investment company (Rand SBIC) as its
wholly owned subsidiary in limited partnership form;
    Rand, Rand Management and Rand SBIC to engage in certain transactions that the
Corporation would otherwise be permitted to engage in as a BDC if its component parts
were organized as a single corporation;
    Rand, as a BDC, and Rand SBIC, as its BDC/SBIC subsidiary, to meet asset coverage
requirements for senior securities on a consolidated basis;
    Rand SBIC, as a BDC/SBIC subsidiary of Rand as a BDC, to file Exchange Act reports
on a consolidated basis as part of Rands reports. The Corporation has not identified from among the similar exemption applications on file with
the SEC an example of a specific grouping of all of the exemptions requested by the Corporation in
its application, but the SEC has commonly granted applications to other companies for orders
applicable to each of the exemptions requested and for orders applicable to various combinations of
those exemptions, and the Corporations applications do not appear to raise any specific policy
issues that have not also been raised by applications for which exemptions have been granted. Rand operates Rand SBIC through Rand Management for the same investment purposes, and with
investments in similar kinds of securities, as Rand. Rand SBICs operations are consolidated with
those of Rand for both financial reporting and tax purposes.




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Regulation of SBIC Subsidiary Lending Restrictions The SBA licenses SBICs as part of a program designed to stimulate the flow of private debt
and/or equity capital to Eligible Concerns and Smaller Concerns. SBICs use funds borrowed from
the SBA, together with their own capital, to provide loans to, and make equity investments in,
concerns that (a) do not have a net worth in excess of $18 million and do not have average net
income after U.S. federal income taxes for the two years preceding any date of determination of
more than $6 million, or (b) meet size standards set by the SBA that are measured by either annual
receipts or number of employees, depending on the industry in which the concerns are primarily
engaged. The types and dollar amounts of the loans and other investments an SBIC may make are
limited by the 1940 Act, the SBA Act and SBA regulations. The SBA is authorized to examine the
operations of SBICs, and an SBICs ability to obtain funds from the SBA is also governed by SBA
regulations. In addition, at the end of each fiscal year, an SBIC must have at least 20% (in total dollars)
invested in Smaller Enterprises. The SBA defines Smaller Enterprises as concerns that (a) do
not have a net worth in excess of $6 million and have average net income after U.S. federal income
taxes for the preceding two years no greater than $2 million, or (b) meet size standards set by the
SBA that are measured by either annual receipts or number of employees, depending on the industry
in which the concerns are primarily engaged. SBICs may invest directly in the equity of their portfolio companies, but they may not become a
general partner of a non-incorporated entity or otherwise become jointly or severally liable for
the general obligations of a non-incorporated entity. An SBIC may acquire options or warrants in
its portfolio companies, and the options or warrants may have redemption provisions, subject to
certain restrictions. SBA Leverage The SBA raises capital to enable it to provide funds to SBICs by guaranteeing certificates or
bonds that are pooled and sold to purchasers of the government guaranteed securities. The amount of
funds that the SBA may lend to SBICs is determined by annual Congressional appropriations. In order to obtain SBA leverage, an SBIC must demonstrate its need to the SBA. To demonstrate
need, an SBIC must invest 50% of its Leverageable Capital (defined as Regulatory Capital less
unfunded commitments and federal funds) and any outstanding SBA leverage. Other requirements
include compliance with SBA regulations, adequacy of capital, and meeting liquidity standards. An
SBICs license entitles an SBIC to apply for SBA leverage, but does not assure that it will be
available, or if available, that it will be available at the level of the relevant matching ratio.
Availability depends on the SBICs continued regulatory compliance and sufficient SBA funds being
available when the SBIC applies to draw down SBA leverage. Under the provisions of the SBIC
regulations the Corporation may apply for SBAs conditional commitment to reserve a specific amount
of leverage for future use. The Corporation may then apply to draw down leverage against the
commitment. All SBICs must obtain a leverage commitment in order to draw leverage from the SBIC.
Commitments expire on September 30 of the fourth full fiscal year following issuance and require
the payment of a fee equal to 1 percent of the total commitment at the time of issuance. An
additional fee equal to 2 percent of the amount drawn is deducted at the time of each draw. The Corporation paid $100,000 to the SBA to reserve $10,000,000 of its approved debenture
leverage. The fees were paid in two installments of $50,000 each in July of 2003 and in August of




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2004. These fees were 1% of the face amount of the leverage reserved under the commitment. The
fee represents a partial prepayment of the SBAs nonrefundable 3% leverage fee. As of December
31, 2004, Rand Capital SBIC, L.P. had drawn $3,500,000 in leverage from the SBA. SBA debentures are issued with 10-year maturities. Interest only is payable semi-annually
until maturity. Ten-year SBA debentures may be prepaid with a penalty during the first 5 years, and
then are pre-payable without penalty. Rand initially capitalized Rand SBIC with $5 million in
Regulatory Capital. Rand SBIC was approved to obtain SBA leverage at a 2:1 matching ratio,
resulting in a total capital pool eligible for investment of $15 million. The Corporation expects
to use Rand SBIC as its primary investment vehicle. Employees As of December 31, 2004, the Corporation had four employees. Risk Factors and Other Considerations Investing in the Corporations Stock is Highly Speculative and an Investor Could Lose Some or All
of the Amount Invested The value of the Corporations common stock may decline and may be affected by numerous market
conditions, which could result in the loss of some or the entire amount invested in its shares. The
securities markets frequently experience extreme price and volume fluctuations which affect market
prices for securities of companies generally, and technology and very small capitalization
companies in particular. General economic conditions, and general conditions in the Internet and
information technology, life sciences, material sciences and other high technology industries, will
also affect the stock price. Investing in the Corporations Shares May be Inappropriate for the Investors Risk Tolerance The Corporations investments, in accordance with its investment objective and principal
strategies, result in a far above average amount of risk and volatility and may well result in loss
of principal. Its investments in portfolio companies are highly speculative and aggressive and,
therefore, an investment in its shares may not be suitable for investors for whom such risk is
inappropriate. Competition The Corporation faces competition in its investing activities from many entities including
other SBICs, private venture capital funds, investment affiliates of large companies, wealthy
individuals and other domestic or foreign investors. The competition is not limited to entities
that operate in the same geographical area as the Corporation. As a regulated BDC, the Corporation
is required to disclose quarterly and annually the name and business description of portfolio
companies and the value of its portfolio securities. Most of its competitors are not subject to
this disclosure requirement. The Corporations obligation to disclose this information could hinder
its ability to invest in certain portfolio companies. Additionally, other regulations, current and
future, may make the Corporation less attractive as a potential investor to a given portfolio
company than a private venture capital fund.




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The Corporation is Subject to Risks Created by its Regulated Environment Rand and Rand SBIC are subject to regulation as BDCs, and Rand SBIC is subject to regulation
as an SBIC. The loans and other investments that the Corporation makes in small business concerns
are extremely speculative. Substantially all of these concerns are and will be privately held. Even
if a public market for their securities later develops, the debt obligations and other securities
purchased by the Corporation are likely to be restricted from sale or other transfer for
significant periods of time. These securities will be very illiquid. The Corporations Leverageable Capital may include large amounts of debt securities issued
through the SBA, and all of the debentures will have fixed interest rates. Until and unless the
Corporation is able to invest substantially all of the proceeds from debentures at annualized
interest or other rates of return that substantially exceed annualized interest rates that Rand
SBIC must pay the SBA, the Corporations operating results may be adversely affected which may, in
turn, depress the market price of the Corporations common stock. The Corporation is Dependent Upon Key Management Personnel for Future Success The Corporation is dependent for the selection, structuring, closing and monitoring of its
investments on the diligence and skill of its two senior officers, Allen F. Grum and Daniel P.
Penberthy. The future success of the Corporation depends to a significant extent on the continued
service and coordination of its senior management team. The departure of either of its executive
officers could materially adversely affect its ability to implement its business strategy. The
Corporation does not maintain key man life insurance on any of its officers or employees. Investment in Private Companies There are significant risks inherent in the venture capital business. The Corporation
typically invests a substantial portion of its assets in small and medium sized private companies.
These private businesses may be thinly capitalized, unproven companies with risky technologies that
may lack management depth and have not attained profitability. Because of the speculative nature
and the lack of a public market for these investments, there is significantly greater risk of loss
than is the case with traditional investment securities. The Corporation expects that some of its
venture capital investments will be a complete loss or will be unprofitable and that some will
appear to be likely to become successful but never realize their potential. The Corporation has
been risk seeking rather than risk averse in its approach to venture capital and other investments.
Neither the Corporations investments nor an investment in the Corporation is intended to
constitute a balanced investment program. The Corporation has in the past relied upon proceeds from
sales of investments rather than investment income to defray a significant portion of its operating
expenses. Such sales are unpredictable and may not occur. Since Rand SBIC became licensed as a
debenture SBIC in August of 2002, the Corporation has increased its investment in interest bearing
debenture instruments. These instruments typically have a current or deferred interest income
component. In addition the Corporation seeks to provide stockholders with long-term capital growth
through the appreciation in the value of warrants we may receive when we invest in debt securities
or through direct investment in equity securities. Illiquidity of Portfolio Investments Most of the investments of the Corporation are or will be either equity securities acquired
directly from small companies or below investment grade subordinated debt securities. The
Corporations portfolio of equity securities is, and will usually be, subject to restrictions on
resale or otherwise have no established trading market. The illiquidity of most of the
Corporations portfolio




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may adversely affect the ability of the Corporation to dispose of such
securities at times when it may be advantageous for the Corporation to liquidate such investments. Even if the Corporations portfolio companies are able to develop commercially viable
products, the market for new products and services is highly competitive and rapidly changing.
Commercial success is difficult to predict and the marketing efforts of the portfolio companies may
not be successful. Valuation of Portfolio Investments There is typically no public market of equity securities of the small privately held companies
in which the Corporation invests. As a result, the valuation of the equity securities in the
Corporations portfolio are stated at fair value as determined by the good faith estimate of the
Corporations Board of Directors in accordance with the established SBA valuation policy. In the
absence of a readily ascertainable market value, the estimated value of the Corporations portfolio
of securities may differ significantly, favorably or unfavorably, from the values that would be
placed on the portfolio if a ready market for the equity securities existed. Any changes in
estimated net asset value are recorded in the statement of operations as Net increase (decrease)
in unrealized appreciation. Fluctuations of Quarterly Results The Corporations quarterly operating results could fluctuate as a result of a number of
factors. These factors include, among others, variations in and the timing of the recognition of
realized and unrealized gains or losses, the degree to which portfolio companies encounter
competition in their markets and general economic conditions. As a result of these factors, results
for any one quarter should not be relied upon as being indicative of performance in future
quarters. 
 Item 2. Properties Rand maintains its offices at 2200 Rand Building, Buffalo, New York 14203, where it leases
approximately 1,300 square feet of office space pursuant to a lease agreement that expires December
31, 2005. Rand believes that its leased facilities are adequate to support its current staff and
expected future needs. 
 Item 3. Legal Proceedings None 
 Item 4. Submission of Matters to a Vote of Security Holders Not applicable 
 Part II 
 Item 5. Market for Registrants Common Equity and Related Stockholder Matters Rands common stock, par value $0.10 per share (Common Stock), is traded on the NASDAQ Small
Cap Market (NASDAQ) under the symbol RAND. The following table sets




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forth, for the period
indicated, the range of high and low closing prices per share as reported by NASDAQ: 2004 Quarter ending:
    
    High
    
    
    LowMarch 31st
    
    $
    1.65
    
    
    $
    1.15June 30th
    
    $
    2.45
    
    
    $
    1.20September 30th
    
    $
    1.59
    
    
    $
    1.31December 31st
    
    $
    3.10
    
    
    $
    1.20
 2003 Quarter ending:
    
    High
    
    
    LowMarch 31st
    
    $
    1.22
    
    
    $
    1.00June 30th
    
    $
    1.27
    
    
    $
    1.00September 30th
    
    $
    1.30
    
    
    $
    1.07December 31st
    
    $
    1.47
    
    
    $
    1.02
 Rand did not sell any securities during the period covered by this report that were not registered
under the Securities Act. Rand has not paid any cash dividends in its most recent two fiscal years,
and it has no present intention of paying cash dividends in the coming fiscal year. Profit Sharing and Stock Option Plans In July 2001, the shareholders of the Corporation authorized the establishment of an Employee
Stock Option Plan (the Plan). The Plan provides for an award of options to purchase up to 200,000
common shares to eligible employees. In 2002, the Corporation placed the Plan on inactive status
as it developed a new profit sharing plan for the Corporations employees in connection with the
establishment of its SBIC subsidiary. As of December 31, 2004, no stock options had been awarded
under the Plan. Because Section 57(n) of the 1940 Act prohibits maintenance of a profit sharing
plan for the officers and employees of a BDC where any option, warrant or right is outstanding
under an executive compensation plan, no options will be granted under the Plan while any profit
sharing plan is in effect with respect to the Corporation. The Corporation established a Profit Sharing Plan for its executive officers in accordance
with Section 57(n) of the Investment Company Act of 1940 (the 1940 Act). There were no
contributions to the profit sharing plan for 2004, 2003 or 2002. On March 18, 2005 the Corporation had a total of 1,160 shareholders, which included 130 record
holders of its common stock, and an estimated 1,030 shareholders with shares beneficially owned in
nominee name or under clearinghouse positions of brokerage firms or banks. On October 18, 2001 the Board of Directors authorized the repurchase of up to 5% of the
Corporations outstanding stock through purchases on the open market which was extended through
October 28, 2005. During the years ended December 31, 2003 and 2002 the Corporation purchased
44,100 treasury shares for a total cost of $47,206. No shares were repurchased during the year
ended December 31, 2004. 
 Item 6. Selected Financial Data The following table provides selected consolidated financial data of the Corporation for the
periods indicated. You should read the selected financial data set forth below in conjunction with
Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations,
and with our financial statements and related notes appearing elsewhere in this report.




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Balance Sheet Data as of December 31: 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Total assets
    
    $
    12,743,109
    
    
    $
    9,385,137
    
    
    $
    9,685,673
    
    
    $
    10,282,493
    
    
    $
    8,441,884Total liabilities
    
    $
    3,716,055
    
    
    $
    146,649
    
    
    $
    81,039
    
    
    $
    224,209
    
    
    $
    56,187Net assets
    
    $
    9,027,054
    
    
    $
    9,238,488
    
    
    $
    9,604,634
    
    
    $
    10,058,284
    
    
    $
    8,385,697Net asset value per outstanding share
    
    $
    1.58
    
    
    $
    1.62
    
    
    $
    1.67
    
    
    $
    1.75
    
    
    $
    1.46Common stock shares outstanding
    
    
    5,718,934
    
    
    
    5,718,934
    
    
    
    5,738,634
    
    
    
    5,763,034
    
    
    
    5,708,034
 Operating Data for the year ended December 31: 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Investment income
    
    $
    757,704
    
    
    $
    449,858
    
    
    $
    261,230
    
    
    $
    159,479
    
    
    $
    239,769Total expenses
    
    $
    900,812
    
    
    $
    942,799
    
    
    $
    858,305
    
    
    $
    825,765
    
    
    $
    633,403Net investment loss
    
    ($
    112,384
    )
    
    
    (346,043
    )
    
    ($
    738,046
    )
    
    ($
    1,551,001
    )
    
    ($
    109,864
    )Net realized gain (loss) on investments
    
    $
    26,727
    
    
    $
    87,841
    
    
    $
    888,399
    
    
    $
    3,286,078
    
    
    ($
    296,298
    )Net (decrease) increase in unrealized
(depreciation) appreciation
    
    ($
    125,777
    )
    
    ($
    86,441
    )
    
    ($
    578,299
    )
    
    ($
    94,365
    )
    
    $
    1,129,416Net (decrease) increase in net assets
from operations
    
    ($
    211,434
    )
    
    ($
    344,643
    )
    
    ($
    427,946
    )
    
    $
    1,640,712
    
    
    $
    723,254




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results
of operations in conjunction with our financial statements and related notes included elsewhere in
this report. FORWARD LOOKING STATEMENTS Statements included in this Managements Discussion and Analysis of Financial Condition
and Results of Operations and elsewhere in this document that do not relate to present or
historical conditions are forward-looking statements within the meaning of that term in Section
27A of the Securities Act of 1933, and in Section 21F of the Securities Exchange Act of 1934.
Additional oral or written forward-looking statements may be made by the Corporation from time to
time, and those statements may be included in documents that are filed with the Securities and
Exchange Commission. Such forward-looking statements involve risks and uncertainties that could
cause results or outcomes to differ materially from those expressed in the forward-looking
statements. Forward-looking statements may include, without limitation, statements relating to the
Corporations plans, strategies, objectives, expectations and intentions and are intended to be
made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Words such as believes, forecasts, intends, possible, expects, estimates,
anticipates, or plans and similar expressions are intended to identify forward-looking
statements. Among the important factors on which such statements are based are assumptions
concerning the state of the national economy and the local markets in which the Corporations
portfolio companies operate, the state of the securities markets in which the securities of the
Corporations portfolio company trade or could be traded, liquidity within the national financial
markets, and inflation. Forward-looking statements are also subject to the risks and uncertainties
described under the caption Risk Factors and Other considerations contained in Part I, Item 1,
which is incorporated herein by reference. There may be other factors that we have not identified that affect the likelihood that the
forward-looking statements may prove to be accurate. Further, any forward-looking statement speaks
only as of the date it is made and, except as required by law, we undertake no obligation to update
any forward-looking statement to reflect events or circumstances after the date on which it is made
or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors
emerge from time to time that may cause our business not to develop as we expect, and we cannot
predict all of them. Overview The following discussion will include Rand Capital Corporation (Rand), Rand Capital SBIC,
L.P., (Rand SBIC), and Rand Capital Management, LLC (Rand Management), (collectively, the
Corporation) financial position and results of operations. Rand is incorporated under the law of New York and is regulated under the 1940 Act as a
business development company (BDC). In addition, a wholly-owned subsidiary, Rand SBIC is
regulated as a Small Business Investment Company (SBIC) by the Small Business Administration
(SBA). The Corporation anticipates that most, if not all, of its investments in the next year
will be originated through the SBIC subsidiary. The Corporations primary business is investing in businesses, usually through investments in
the form of subordinated debt, preferred/common stock or membership interests. We look for small
and medium-sized companies that meet certain criteria, including: 1) a highly qualified management team 2) new or unique products or services with favorable industry and competitive advantage 3) a potential for growth in cash flow 4) a potential to realize appreciation in our equity position, if any.




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The Corporation makes investments in portfolio companies that typically range from $250,000 to
$1,000,000 and it invest either directly in the equity of a company through equity shares or
through a debt instrument. Our debt instruments usually have a maturity of not more than five years
and usually have detachable equity warrants. Interest is either current pay (paid monthly) or
deferred. Investment opportunities are identified for the Corporation by the management team.
Throughout our history we have established an extensive network of investment referral
relationships. Investment proposals may, however, come to the Corporation from many other sources,
and may include unsolicited proposals from the public and referrals from banks, lawyers,
accountants and other members of the financial community. The Corporation believes that its
reputation in the community and experience provide a competitive advantage in originating new
investments.. In a typical private financing, the management team of the Corporation will review,
analyze, and confirm, through due diligence, the business plan and operations of the potential
portfolio company. The Corporation will also familiarize themselves with the portfolio companys
industry and competitive landscape and may conduct additional reference checks with customers and
suppliers of the portfolio company. Following an initial investment in a portfolio company, the Corporation may be requested to
make follow-on investments in the company. Follow-on investments may be made to take advantage of
warrants or other preferential rights granted to the Corporation or otherwise to increase or
maintain the Corporations position in a promising portfolio company. The Corporation may also be
called upon to provide an additional investment to a portfolio company in order for that company to
fully implement its business plans, to develop a new line of business or to recover from unexpected
business problems. Follow-on investments in a portfolio company are evaluated on a case-by-case
basis. The Corporation will exit private finance investments generally through the maturation of the
debt security or when a liquidity event takes place, such as the sale, recapitalization, or initial
public offering of a portfolio company. The method and timing of the disposition of the
Corporations portfolio investments can be critical to the realization of maximum total return.
The Corporation generally expects to dispose of its equity securities through the private sales of
securities to other investors or through an outright sale of the company or a merger. The
Corporation anticipates its debentures will be repaid with interest and hopes to realize further
appreciation from the warrants or other equity type instruments it receives in connection with the
origination of the debenture. The Corporation anticipates generating cash for new investments and
operating expenses through SBA leverage draw downs and interest and principal payments from its
portfolio concerns. Critical Accounting Policies The Corporation prepares its financial statements in accordance with accounting principles
generally accepted in the United States of America (GAAP), which requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities. For a summary of all of
our significant accounting policies, including critical accounting policies, see Note 1 to the
consolidated financial statements in Item 8. The increasing complexity of the business environment and applicable authoritative accounting
guidance require us to closely monitor our accounting policies. The Corporation has identified
three critical accounting policies that require significant judgment. The following summary




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of our
critical accounting policies is intended to enhance your ability to assess our financial condition
and results of operations and the potential volatility due to changes in estimates. Valuation of Investments The most significant estimate inherent in the preparation of the Corporations consolidated
financial statements is the valuation of its investments and the related unrealized appreciation or
depreciation. The Corporation has adopted the SBAs valuation guidelines for SBICs, which describe
the policies and procedures used in valuing investments. Investments are valued in accordance with the Corporations established valuation policy and
are stated at fair value as determined in good faith by the management of the Corporation and
submitted to the Board of Directors for approval. There is no single standard for determining fair
value in good faith. As a result, determining fair value requires that judgment be applied to the
specific facts and circumstances of each portfolio investment while employing a consistently
applied valuation process for our investments. The Board of Directors considers fair value to be
the amount which the Corporation may reasonably expect to receive for portfolio securities when
sold on the valuation date. The Corporation analyzes and values each individual investment on a
quarterly basis, and records unrealized depreciation for an investment that it believes has become
impaired, including where collection of a loan or realization of an equity security is doubtful.
Conversely, the Corporation will record unrealized appreciation if we believe that the underlying
portfolio company has appreciated in value and, therefore, our equity security has also appreciated
in value. Without a readily ascertainable market value and because of the inherent uncertainty of
valuation, the fair value of our investments is determined in good faith by the Board of Directors.
These estimated fair values may differ from the values that would have been used had a ready market
for the investments existed. In the valuation process, the Corporation uses financial information received monthly,
quarterly, and annually from its portfolio companies, which includes both audited and unaudited
financial statements, annual projections and budgets prepared by the portfolio company and other
financial information supplied by the portfolio companies management. This information is used to
determine financial condition, performance, and valuation of the portfolio investments. Valuation
should be reduced if a companys performance and potential have significantly deteriorated. If the
factors which led to the reduction in valuation are overcome, the valuation may be restored. Another key factor used in valuing equity investments is recent arms-length equity
transactions entered into by the portfolio company that the Corporation utilizes to form a basis
for its underlying value. Many times the terms of these equity transactions may not be identical
to those of the Corporation, and the impact on these variations as it relates to market value may
be impossible to quantify. Any changes in estimated fair value are recorded in our statement of operations as Net
increase (decrease) in unrealized (depreciation) appreciation. Revenue Recognition (Interest Income) Interest income generally is recognized on the accrual basis except where the investment is in
default or otherwise presumed to be in doubt. In such cases, interest is recognized at the time of
receipt. A reserve for possible losses on interest receivable is maintained when appropriate.
Certain investments of the Corporation are structured to provide a deferred interest period where
interest is not currently due. The Rand SBIC interest accrual is regulated by the SBAs Accounting Standards and Financial
Reporting Requirements for Small Business Investment Companies. Under these rules




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interest income
cannot be recognized if collection is doubtful, and a 100% reserve must be established. The
collection of interest is presumed to be in doubt when there is substantial doubt about a portfolio
companys ability to continue as a going concern or the loan is in default more than
120 days. Management also utilizes other qualitative and quantitative measures to determine
the value of a portfolio investment and the collectability of any accrued interest. Deferred Tax Assets The deferred tax assets are primarily related to future tax benefits associated with the
utilization of the Corporations net operating loss carryforwards (NOLs). The realization of
these deferred tax assets is dependent on the Corporation generating sufficient taxable income
through operations and realization of gains on its investments to utilize these NOLs. Management
has determined that a valuation allowance is not required based upon future estimated income and
historical significant gains realized on the liquidation of its portfolio investments. In the
event that managements estimates or expectations regarding its future profitability do not come to
fruition, the Corporation may be required to record a valuation allowance against the deferred tax
asset. Financial Condition Overview: 12/31/04
    
    
    12/31/03
    
    
    Increase(Decrease)Total Assets
    
    $
    12,743,109
    
    
    $
    9,385,137
    
    
    $
    3,357,972Total Liabilities
    
    
    3,716,055
    
    
    
    146,649
    
    
    
    3,569,406Net Assets
    
    
    9,027,054
    
    
    
    9,238,488
    
    
    
    (211,434
    )
 The Corporations financial condition is dependent on the success of its portfolio holdings.
It has invested a substantial portion of its assets in small and medium-sized companies. The
following summarizes the Corporations investment portfolio at the year-ends indicated. December 31, 2004
    
    
    December 31, 2003
    
    
    IncreaseInvestments, at cost
    
    $
    11,621,853
    
    
    $
    7,616,309
    
    
    
    4,005,544Unrealized depreciation, net
    
    
    (586,048
    )
    
    
    (379,310
    )
    
    
    (206,738
    )Investments at fair value
    
    $
    11,035,805
    
    
    $
    7,236,999
    
    
    $
    3,798,806
 The increase in investments is due to the effect of the Corporations new investments during
the twelve months ended December 31, 2004 in the following portfolio companies: New Investments
    
    AmountAPF Group, Inc.
    
    $
    500,000Carolina Skiff, LLC (Carolina Skiff)
    
    
    1,000,000DLisi Food Systems, Inc (DLisi)
    
    
    400,000Gemcor II, LLC (Gemcor)
    
    
    750,000Innov-X Systems, Inc.
    
    
    350,000New Monarch Machine Tool, Inc (Monarch)
    
    
    250,000Rexford Albany Municipal
Supply Company (RAMSCO)
    
    
    210,000Somerset Gas Transmission
    
    
    200,000Synacor
    
    
    400,000USTec
    
    
    150,000Wineisit.com
    
    
    250,000Ultra-Scan Corporation (Ultra-Scan)
    
    
    4,000Total of investments made during 2004
    
    $
    4,464,000




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##### Table of Contents



New Investments
    
    AmountInterest Conversions:WineIsIt.com, Corp. (WineIsIt)
    
    
    51,918Contract Staffing
    
    
    41,400Synacor
    
    
    35,000Photonics Product Group (Photonics)
    
    
    10,000Total of Interest Conversions made during 2004
    
    $
    138,132Total of new and additions to previous investments
during the twelve months ended December 31, 2004
    
    $
    4,602,318
 The unrealized depreciation increased in the year ended December 31, 2004 by ($206,738). See
the section below labeled Net Change in Unrealized Appreciation/Depreciation of Investments for
an explanation of this change. A significant development during the year ended December 31, 2004 was the increase in the SBA
Debenture Loan Payable amount by $3,500,000. The Corporation began drawing leverage from the SBA
during the twelve months ended December 31, 2004. These debentures are due in 10 years and provide
for semi-annual interest only payments which are currently at approximately 5%. Net asset value per share (NAV) was $1.58/share at December 31, 2004 versus $1.62/share at
December 31, 2003. The Corporations total investments at fair value, whose fair value have been estimated by the
Board of Directors, approximated 122% of net assets at December 31, 2004 and 78% of net assets at
December 31, 2003. The increase in this percentage during the twelve month period ended December
31, 2004 is due to the increase in new investments which were partially funded by the $3,500,000
draw down on the Corporations SBA leverage. The cash and cash equivalents approximated 7% of net assets at December 31, 2004 compared to 14% at
December 31, 2003. The effect of the increase in tax net operating loss carry forwards and the change in
unrealized depreciation on investments resulted in a net increase in the net deferred tax asset
from $430,000 at December 31, 2003 to a net deferred tax asset of $566,000 at December 31, 2004. Results of Operations Investment Income The Corporations investment objective is to achieve long-term capital appreciation on its
equity investments while maintaining a current cash flow from its debenture instruments.
Therefore, the Corporation will invest in a mixture of debenture and equity instruments which will
provide a current return on a portion of the portfolio. The equity features contained in our
investment portfolio are structured to realize capital appreciation over the long-term and may not
necessarily generate current income in the form of dividends or interest. In addition, the
Corporation earns interest income from investing its idle funds in money market instruments.




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##### Table of Contents



Comparison of the years ended December 31, 2004 and 2003 12/31/04
    
    
    12/31/03
    
    
    Increase(Decrease)
    
    
    %Increase(Decrease)Portfolio Interest Income
    
    $
    645,206
    
    
    $
    369,517
    
    
    $
    275,689
    
    
    
    74.6
    %Other Interest Income
    
    
    2,581
    
    
    
    20,970
    
    
    
    (18,389
    )
    
    
    (87.7
    %)Dividend
    
    
    64,823
    
    
    
    49,787
    
    
    
    15,036
    
    
    
    30.2
    %Other Income
    
    
    45,094
    
    
    
    9,584
    
    
    
    35,510
    
    
    
    370.5
    %Total Investment Income
    
    
    757,704
    
    
    
    449,858
    
    
    
    307,846
    
    
    
    68.4
    %
 Total investment income increased 68.4% for the year ended December 31, 2004 due to an almost 75% increase in
portfolio interest income during fiscal year 2004. This reflected an increase in investments in
interest earning debentures during the fiscal years ended December 31, 2004 and 2003. During the
year ended December 31, 2004 66% of the investments made, or approximately $2,900,000, was invested
in debenture instruments that had a blended interest rate of approximately 10%. The portfolio interest income for the year ended December 31, 2004 includes $105,977 of
interest income on a Somerset note. The original Somerset note matured on January 15, 2003, and
went into default at an interest rate of 14%. In September 2003 the Corporation had stopped
accruing interest on the Somerset note and had established a 100% reserve. In April 2004 Somerset
paid the accrued interest in full. In addition, portfolio interest income for the year ended
December 31, 2004 includes $99,321 in accrued interest income from Carolina Skiff LLC. The other interest income is comprised on interest income from idle cash balances which
decreased (87.7%) during the year ended December 31, 2004. This decrease is due to the fact that
the Corporation had a reduction in its idle cash balances during 2004 as a result of new
investments and therefore earned little, if any, interest on the idle cash balances. Dividend income is comprised of distributions from limited liability companies (LLCs) that
the Corporation has invested in. The Corporations investment agreements with certain LLCs require
the entities to distribute funds to the Corporation for payment of income taxes on its allocable
share of the entities profits. These dividends will fluctuate based upon the profitability of the
entities. Dividend income was $64,823 for the year ended December 31, 2004 and $49,787 for the same
period in 2003. This increase is due to the fact that the Corporation invested in three portfolio
companies during 2003 and 2004 that were LLCs that had taxable income. The LLC investment income
for the twelve months ended December 31, 2004 consisted of LLC distributions from Topps Meat
Company LLC (Topps) for $35,195, Carolina Skiff LLC for $28,384 and Vanguard Modular Building
Systems (Vanguard) for $1,244. The LLC investment income for the prior year ended December 31, 2003
was comprised of distributions from Topps for $18,887 and G-Tec for $28,781 and $2,119 for
Vanguard. Other income consists of the revenue associated with the amortization of financing fees
charged to the portfolio companies upon successful closing of Rand SBIC financing. The SBA
regulations limit the amount of fees that can be charged to a portfolio company and the Corporation
typically charges 1 to 3% to the portfolio companies. These fees are amortized ratably over the
life of the instrument associated with the fees. The unamortized fees are carried on the balance
sheet under Deferred Revenue. The increase during the twelve month period ended December 31, 2004
can be attributed to the fact that the Corporation generated more investments through Rand SBIC in
2004 and, therefore, more closing fees were collected and are being amortized.




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##### Table of Contents



Comparison of the years ended December 31, 2003 and 2002 12/31/03
    
    
    12/31/02
    
    
    Increase(Decrease)
    
    
    % Increase(Decrease)Portfolio Income
    
    $
    369,517
    
    
    $
    145,771
    
    
    $
    223,746
    
    
    
    153.5
    %Other Interest Income
    
    
    20,970
    
    
    
    99,085
    
    
    
    (78,115
    )
    
    
    (78.8
    %)Dividend
    
    
    49,787
    
    
    
    16,374
    
    
    
    33,413
    
    
    
    204.1
    %Other Income
    
    
    9,584
    
    
    
    
    
    
    
    9,584
    
    
    
    Total Investment Income
    
    
    449,858
    
    
    
    261,230
    
    
    
    188,628
    
    
    
    72.2
    %
 Total investment income increased 72.2% for the year ended December 31, 2003 from December 31,
2002. This income is comprised mainly of interest and dividend income from portfolio companies as
well as interest income on idle cash. Portfolio interest income increased 153.5% during the year ended December 31, 2003 due to the
fact that 63% or $850,000 of the new 2003 investments originated out of Rand SBIC are in debenture
instruments that earn interest income at a blended interest rate of approximately 10%. The portfolio interest income for the year ended December 31, 2003 includes $122,914 in
accrued interest on a $900,000 convertible note from Somerset. The Somerset note matured on
January 15, 2003, and accrued interest at a 14% rate subsequent to that date. The Corporation
issued a demand letter to Somerset regarding its repayment, however, as the note was in technical
default at December 31, 2003 and was more that 120 days due to non-payment, the Corporations
accounting policies required a 100% reserve to be established for the unpaid interest. In September
2003, the Corporation established a reserve for the accrued interest of $122,914 and ceased further
accrual of interest under the note during the remainder of 2003. The remaining interest income which was generated from idle cash was $20,970 in 2003 and
$99,085 in 2002. The reduction is primarily due to the redeployment of cash from idle cash money
market accounts into investment instruments. This, coupled with lower short term interest rates,
accounted for the ($78,115) decrease in the income from idle cash balances category. The dividend and other investment income was $49,787 in 2003 and $16,374 in 2002. This income
increased due to an increase in LLC related distributions generated by Topps and G-Tec Natural Gas
Systems (G-Tec). The Corporations investment agreements with certain pass through entities
require the entities to distribute funds to the Corporation for payment of income taxes on its
allocable share of the entities profits. These dividends will fluctuate based upon the
profitability of the entities. Other income consists of the revenue associated with the amortization of financing fees
charged to the portfolio companies upon successful closing of Rand SBIC financing. The SBA
regulations limit the amount of fees that can be charged to a portfolio company and the Corporation
typically charges 1 to 3% to the portfolio concerns. These fees are amortized ratably over the
life of the instrument associated with the fees. The unamortized fees are carried on the balance
sheet under Deferred Revenue. The Corporation began investing through the SBIC subsidiary in 2003
and generated $9,584 in amortization revenue for the year ended December 31, 2003. The category did
not exist for the year ended December 31, 2002 because there were not any SBIC financing fees
collected during 2002.




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##### Table of Contents



Operating Expenses Comparison of the years ended December 31, 2004 and 2003 12/31/04
    
    
    12/31/03
    
    
    Increase(Decrease)
    
    
    %Increase(Decrease)Total Expenses
    
    
    900,812
    
    
    
    942,799
    
    
    
    ($41,987
    )
    
    
    (4.4
    %)
 Total operating expenses decreased 4.4% in the year ended December 31, 2004. The operating
expenses predominately consist of employee compensation and benefits, shareholder related costs,
office expenses, professional fees, expenses related to identifying and reviewing investment
opportunities and bad debt expense. In analyzing the change in operating expenses, the most significant changes from year to year
was in the categories of interest costs and bad debt expense. During the year ended December 31,
2004, the Corporation incurred $107,407 in interest expense related to the new SBA Debentures
originated during the year. The Corporation will continue to recognize interest costs going forward
and which will increase as the Corporation continues to draw down on its SBA leverage to fund
future investments. The expense for the twelve month period ending December 31, 2003 included $122,914 in bad debt
expense related to the full reserve against accrued interest receivable for the Somerset
investment. This reserve was established in accordance with our established revenue recognition
policy discussed above. In April 2004 Somerset paid $400,000 in principal on the $900,000 note and
$190,449 in accrued interest. The remaining $500,000 balance of the note was converted to a new
debenture instrument earning interest at 10%. Comparison of the years ended December 31, 2003 and 2002 12/31/03
    
    
    12/31/02
    
    
    Increase(Decrease)
    
    
    % Increase(Decrease)Total Expenses
    
    
    942,799
    
    
    
    858,305
    
    
    $
    84,494
    
    
    
    10
    %
 Total operating expenses increased $84,494, or 10%, in the year ended December 31, 2003 versus
December 31, 2002. The increase in operating expenses during 2003 can be attributed to the establishment of a bad
debt reserve for $122,914 on Somerset Gas, an increase in the provision for future anticipated
health benefits for the spouse of a former officer of the Corporation by approximately $26,500 and
the establishment of a vacation accrual reserve for $18,000. Increases in salaries and
professional costs contributed to the remaining increase in operating expense for the year ended
December 31, 2003. Professional fees increased in the 2003 due to the additional accounting and
legal expenses related to the increasingly more complex regulatory environment in which the
Corporation operates. The operating expenses for 2002 included $135,251 of organizational costs that related to the
professional costs incurred for preparing an application for the Small Business Administration
(SBA) for participation in the SBIC program. The Corporation became a licensed SBIC in August of
2002.




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Net Realized Gains and Losses on Investments: Comparison of the years ended December 31, 2004 and 2003 During the year ended December 31, 2004, the Corporation realized a $32,956 gain on the sale
of the remaining Advanced Digital Information Corporation (ADIC) stock. In addition, the
Corporation realized a ($6,229) loss on its investment in Clearview Cable. During the year ended December 31, 2003, the Corporation realized an $87,841 gain on the sale
of the ADIC stock. The realized gain for 2003 resulted from the sale of 7,500 shares of ADIC stock
with an average cost of $2.28 at an average sale price of $14. Comparison of the years ended December 31, 2003 and 2002 Net realized gains were $87,841 in 2003 and $888,399 in 2002, a decrease of $800,558. The realized gain for 2003 resulted from the sale of 7,500 shares of ADIC stock at an average
sale price of $14 and an average cost of $2.28. The net realized gain for 2002 resulted from the sale of 61,051 shares of ADIC stock with gross proceeds of
approximately $1.1 million and a net realized gain of $938,399. The Corporation also realized a
loss of ($50,000) for the equity portion of its investment in MemberWare for the year ended
December 31, 2002. Net Change in Unrealized Appreciation/Depreciation of Investments For the years ended December 31, 2004, 2003 and 2002 The Corporation recorded a net change in unrealized (depreciation) on investments before
income tax benefits of ($206,737) during the year ended December 31, 2004, as compared to
($230,045) during the prior year ended December 31, 2003. This net change in unrealized
(depreciation) on investments of ($206,737) is the net effect of decreases in fair value of five
portfolio companies totaling ($674,859), increases in fair value of three portfolio companies
totaling $491,576, and the reversal of unrealized appreciation related to the sale of ADIC stock of
($23,456). The decrease in fair value of ($674,859) is comprised of decreases in the fair value of DLisi
($400,000), Dataview, LLC (Dataview) ($155,179), G-Tec ($100,000) and SmartPill Diagnostics, Inc.
(SmartPill) ($19,680). The write downs of Dataview and SmartPill were done in accordance the
Corporations established valuation policies. The write down of DLisi was precipitated by the fact
that DLisi filed for Chapter 11 bankruptcy protection on August 13, 2004. Accordingly, the
collection of our subordinated debenture principal is presumed in doubt and/or there is substantial
doubt about the ability for DLisi to pay the principal. Although the company has continued to
operate while it submits its reorganization plan to the courts, there exists some doubt as to the
future of the company. Management of the Corporation evaluated its investment in G-Tec and
determined that the companys performance and potential have significantly deteriorated. In the
future, if the factors which led to the reduction in valuation are overcome, the valuation may be
restored. The increase in fair value of $491,576 is primarily attributable to the valuation of Minrad
Inc. (Minrad). The Corporation recognized appreciation of $338,500 on its investment in Minrad
following its recent equity financing at a price greater than the fair value previously recorded by
the Corporation. On December 16, 2004 Minrad merged into a publicly traded shell company,




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##### Table of Contents



Technology Acquisition Corporation (TAC) which was previously traded under the symbol
TAQC.OB. The new trading symbol after the merger is MNRD.OB and the new name of the company is
Minrad International, Inc. The Corporation currently holds 677,980 shares of Minrad. The
Corporation is restricted in its ability to immediately trade its shares in Minrad and therefore
has not priced its holding in Minrad at the December 31, 2004 closing price of $3.50. The
Corporation also increased the valuation of its 0.88 membership interest in Somerset Gas
Transmission Company, LLC (Somerset) by $118,000. The Somerset membership units were previously
written down in September 2003 to zero. Additionally, the Corporation increased the fair value of
its investment in Clearview Cable (Clearview) by $27,541 to reflect the amount received in October
2004 from the sale and realized exit in the Clearview investment. These adjustments were done in
accordance with the Corporations established valuation policies. The unrealized depreciation increase before income tax benefits of ($230,045) for the year
ended December 31, 2003 is primarily attributable to the establishment of a reserve on the Somerset
membership interest for ($183,333) and the revaluation of the Corporations holdings in USTec by
($25,000). These adjustments were done in accordance with the Corporations established valuation
policies. The decrease in unrealized appreciation (depreciation) of the investments is primarily
attributable to the realized gain recognized on the sale of ADIC stock in 2002 and the net effect
of the unrealized portfolio valuation adjustments to the following portfolio companies during the
year ended December 31, 2002: ADIC Minrad ($652,058), Ultra-Scan Corporation Inc. $239,805,
MemberWare ($50,000), ADIC escrow share valuation ($63,745) and the valuation of $183,333 in
membership interests in Somerset Gas Transmission Company, LLC (Somerset) received with the 2002
debenture instrument. These adjustments were done in accordance with the Corporations established
valuation policies. Net Increase (Decrease) in Net Assets from Operations The Corporation accounts for its operations under accounting principles generally accepted in
the United States of America for investment companies. The principal measure of its financial
performance is net increase (decrease) in net assets from operations on its consolidated
statements of operations. For 2004, the net decrease was ($211,434), as compared to net decrease in
net assets from operations of ($344,643) in 2003 and ($427,946) for 2002. The net decrease in net assets from operations in 2004 can primarily be attributed to the net
investment loss of ($112,384) and the increase in unrealized depreciation of ($206,737). The 2003
net decrease in net assets from operations is due to the investment loss of ($346,043). The 2002
net decrease in net assets from operations is due to a net investment loss of ($738,046), a
realized gain on investments of $888,399 and a net decrease in unrealized appreciation of
investments of ($578,299). Liquidity and Capital Resources The Corporations principal objective is to achieve capital appreciation. Therefore, a
significant portion of the investment portfolio is structured to maximize the potential for capital
appreciation and certain of the Corporations portfolio investments may be structured to provide
little or no current yield in the form of dividends or interest payments. The Corporation does earn
interest income on idle cash balances and has historically relied on and continues to rely to a large extent
upon proceeds from sales of investments rather than investment income to defray a significant
portion of its operating expenses. Because such sales cannot be predicted with certainty, the
Corporation attempts to maintain adequate working capital necessary for short-term needs.




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##### Table of Contents



As of December 31, 2004, 2003 and 2002, the Corporations total liquidity, consisting of cash
and cash equivalents, was $626,744, $1,251,546 and $3,092,189 respectively. As of December 31, 2004 the Corporation had paid $100,000 to the SBA to reserve its approved
$10,000,000 leverage. It had drawn down $3,500,000 of this leverage as of December 31, 2004. Management expects that it will be necessary to draw down SBA leverage in the next fiscal year
in order to fund operations and new investments. Net cash used in operating activities has
averaged $479,000 over the last three years and management anticipates this amount will continue at
similar levels. The cash flow may fluctuate based on possible expenses associated with compliance
with potential new regulatory rules. Management believes that the cash and cash equivalents at
December 31, 2004 coupled with the anticipated additional SBIC leverage draw downs and interest and
dividend payments on its portfolio investments will provide the Corporation with the liquidity
necessary to fund operations over the next twelve months. The following table summarizes the cash to be received over the next five years from portfolio
companies based on contractual obligations as of December 31, 2004. These payments represent
scheduled principal and interest payments that are contained in the investment documents of each
portfolio company. Cash Receipts due by year2009 and2005
    
    
    
    2006
    
    
    
    2007
    
    
    
    2008
    
    
    
    beyondAnticipated Cash
Receipts from
Portfolio Companies
    
    
    $
    880,000
    
    
    
    $
    1,100,000
    
    
    
    $
    1,975,000
    
    
    
    $
    800,000
    
    
    
    $
    435,000
 Disclosure of Contractual Obligations The following table shows the Corporations contractual obligation at December 31, 2004. The
Corporation does not have any capital lease obligations, or other long-term liabilities reflected
on its balance sheet. Payments due by periodLess than
    
    
    
    1-3
    
    
    
    3-5
    
    
    
    MoreTotal
    
    
    
    1 year
    
    
    
    years
    
    
    
    years
    
    
    
    than 5 yrsSBA Debentures
    
    
    $
    3,500,000
    
    
    
    $
    0
    
    
    
    $
    0
    
    
    
    $
    0
    
    
    
    $
    3,500,000Operating Lease
Obligations (Rent
of office space)
    
    
    $
    16,380
    
    
    
    $
    16,380
    
    
    
    $
    0
    
    
    
    $
    0
    
    
    
    $
    0Total
    
    
    $
    3,516,380
    
    
    
    $
    16,380
    
    
    
    $
    0
    
    
    
    $
    0
    
    
    
    $
    3,500,000




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##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures about Market Risk The Corporations investment activities contain elements of risk. The portion of the
Corporations investment portfolio consisting of equity and equity-linked debt securities in
private companies is subject to valuation risk. Because there is typically no public market for the
equity and equity-linked debt securities in which it invests, the valuation of the equity interests
in the portfolio is stated at fair value as determined in good faith by the Board of Directors in
accordance with the Corporations investment valuation policy. (The discussion of valuation policy
contained in the Notes to Schedule of Portfolio Investments in the financial statements contained
in Item 8 of this report is hereby incorporated herein by reference.) In the absence of a readily
ascertainable market value, the estimated value of the Corporations portfolio may differ
significantly from the values that would be placed on the portfolio if a ready market for the
investments existed. Any changes in valuation are recorded in the Corporations consolidated
statement of operations as Net unrealized appreciation (depreciation) on investments. At times a portion of the Corporations portfolio may include marketable securities traded in
the over-the-counter market. In addition, there may be a portion of the Corporations portfolio for
which no regular trading market exists. In order to realize the full value of a security, the
market must trade in an orderly fashion or a willing purchaser must be available when a sale is to
be made. Should an economic or other event occur that would not allow the markets to trade in an
orderly fashion, the Corporation may not be able to realize the fair value of its marketable
investments or other investments in a timely manner. As of December 31, 2004, the Corporation did not have any off-balance sheet investments or
hedging investments.




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data The following consolidated financial statements and consolidated supplemental schedules of the
Corporation and report of independent auditors thereon are set forth below: Statements of Financial Position as of December 31, 2004 and 2003Statements of Operations for the three years in the period ended December 31, 2004Statements of Cash Flows for the three years in the period ended December 31, 2004Statements of Changes in Net Assets for the three years in the period ended December 31, 2004Schedule of Portfolio Investments as of December 31, 2004Schedules of Selected Per Share Data and Ratios for the five years in the period ended December 31, 2004Notes to the Consolidated Financial StatementsSupplemental Schedule of Consolidated Changes in Investments at Cost and Realized Gain (Loss) for the year ended December 31, 2004Independent Auditors Reports  Freed Maxick & Battaglia, CPAs, PC and Deloitte and Touche, LLP.




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION December 31,
 
 2004
    
    
    2003ASSETSInvestments at fair value (identified cost: 2004 -
$11,621,853; 2003 - $7,616,309)
    
    $
    11,035,806
    
    
    $
    7,236,999Cash and cash equivalents
    
    
    626,744
    
    
    
    1,251,546Interest receivable (net of allowance 2004 - $122,000;
2003 - $122,914)
    
    
    260,490
    
    
    
    334,734Deferred tax asset
    
    
    566,000
    
    
    
    430,000Promissory notes receivable
    
    
    36,195
    
    
    
    72,330Prepaid income taxes
    
    
    11,579
    
    
    
    Other assets
    
    
    206,295
    
    
    
    59,528Total assets
    
    $
    12,743,109
    
    
    $
    9,385,137LIABILITIES AND STOCKHOLDERS
EQUITY (NET ASSETS)Liabilities:SBA debenture obligations
    
    $
    3,500,000
    

    
    $
    Accounts payable and accrued expenses
    
    
    132,897
    
    
    
    93,522Income taxes payable
    
    
    
    
    
    
    6,374Deferred revenue
    
    
    83,158
    
    
    
    46,753Total liabilities
    
    
    3,716,055
    
    
    
    146,649Stockholders equity (net assets):Common stock, $.10 par; shares authorized -
10,000,000; issued 5,763,034
    
    
    576,304
    
    
    
    576,304Capital in excess of par value
    
    
    6,973,454
    
    
    
    6,973,454Accumulated net investment loss
    
    
    (4,813,146
    )
    
    
    (4,700,763
    )Undistributed net realized gain on investments
    
    
    6,689,277
    
    
    
    6,662,551Net unrealized depreciation on investments
    
    
    (351,629
    )
    
    
    (225,852
    )Treasury stock, at cost, 2004 and 2003 - 44,100 shares
    
    
    (47,206
    )
    
    
    (47,206
    )Net assets (per share 2004 - $1.58; 2003 - $1.62)
    
    
    9,027,054
    
    
    
    9,238,488Total liabilities and stockholders equity
(net assets)
    
    $
    12,743,109
    
    
    $
    9,385,137
 See accompanying notes.




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS For The Years Ended December 31, 2004, 2003 and 2002
 
 2004
    
    
    2003
    
    
    2002Investment income:Interest from portfolio companies
    
    $
    645,206
    
    
    $
    369,517
    
    
    $
    145,771Interest from other investments
    
    
    2,581
    
    
    
    20,970
    
    
    
    99,085Dividend and other investment income
    
    
    64,823
    
    
    
    49,787
    
    
    
    16,374Other income
    
    
    45,094
    
    
    
    9,584
    
    
    
    757,704
    
    
    
    449,858
    
    
    
    261,230Expenses:Salaries
    
    
    380,154
    
    
    
    333,846
    
    
    
    317,794Employee benefits
    
    
    85,200
    
    
    
    95,208
    
    
    
    77,852Directors fees
    
    
    45,100
    
    
    
    46,050
    
    
    
    32,000Professional fees
    
    
    63,594
    
    
    
    118,916
    
    
    
    91,120Stockholders and office operating
    
    
    116,032
    
    
    
    105,062
    
    
    
    106,725Insurance
    
    
    46,062
    
    
    
    43,000
    
    
    
    45,000Corporate development
    
    
    44,723
    
    
    
    34,107
    
    
    
    38,090Other operating
    
    
    13,454
    
    
    
    43,696
    
    
    
    14,473794,319
    
    
    
    819,885
    
    
    
    723,054Interest on SBA obligations
    
    
    107,407
    
    
    
    
    
    
    
    Bad debt (recovery) expense
    
    
    (914
    )
    
    
    122,914
    
    
    
    Organizational costs
    
    
    
    
    
    
    
    
    
    
    135,251Total expenses
    
    
    900,812
    
    
    
    942,799
    
    
    
    858,305Investment loss before income taxes
    
    
    (143,108
    )
    
    
    (492,941
    )
    
    
    (597,075
    )Current income tax expense (benefit)
    
    
    24,316
    
    
    
    27,498
    
    
    
    (21,870
    )Deferred income tax (benefit) expense
    
    
    (55,040
    )
    
    
    (174,396
    )
    
    
    162,841Net investment loss
    
    
    (112,384
    )
    
    
    (346,043
    )
    
    
    (738,046
    )Realized and unrealized gain (loss) on investments:Net realized gain on sales and dispositions
    
    
    26,727
    
    
    
    87,841
    
    
    
    888,399Unrealized appreciation (depreciation) on
investments:Beginning of year
    
    
    (379,311
    )
    
    
    (149,266
    )
    
    
    853,874End of year
    
    
    (586,048
    )
    
    
    (379,311
    )
    
    
    (149,266
    )Change in unrealized (depreciation)
appreciation before income taxes
    
    
    (206,737
    )
    
    
    (230,045
    )
    
    
    (1,003,140
    )Deferred income tax benefit
    
    
    (80,960
    )
    
    
    (143,604
    )
    
    
    (424,841
    )Net increase in unrealized depreciation
    
    
    (125,777
    )
    
    
    (86,441
    )
    
    
    (578,299
    )Net realized and unrealized (loss) gain on
investments
    
    
    (99,050
    )
    
    
    1,400
    
    
    
    310,100Net decrease in net assets from operations
    
    $
    (211,434
    )
    
    $
    (344,643
    )
    
    $
    (427,946
    )Weighted average shares outstanding
    
    
    5,718,934
    
    
    
    5,722,776
    
    
    
    5,759,260Basic and diluted net decrease in
net assets from operations per share
    
    $
    (0.04
    )
    
    $
    (0.06
    )
    
    $
    (0.07
    )
 See accompanying notes.




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RAND CAPITAL CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS For The Years Ended December 31, 2004, 2003 and 2002
 
 2004
    
    
    2003
    
    
    2002Net assets at beginning of year
    
    $
    9,238,488
    
    
    $
    9,604,634
    
    
    $
    10,058,284Net investment loss
    
    
    (112,384
    )
    
    
    (346,043
    )
    
    
    (738,046
    )Net realized gain on investments
    
    
    26,727
    
    
    
    87,841
    
    
    
    888,399Net increase in unrealized depreciation
on investments
    
    
    (125,777
    )
    
    
    (86,441
    )
    
    
    (578,299
    )Net decrease in net assets
from operations
    
    
    (211,434
    )
    
    
    (344,643
    )
    
    
    (427,946
    )Other changes:Purchase of treasury stock
    
    
    
    
    
    
    (21,503
    )
    
    
    (25,704
    )Net assets at end of year (including
accumulated net investment loss of $4,813,146,
$4,700,763 and $4,354,718 respectively)
    
    $
    9,027,054
    
    
    $
    9,238,488
    
    
    $
    9,604,634
 See accompanying notes.




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS For The Years Ended December 31, 2004, 2003 and 2002
 
 2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net decrease in net
assets from operations
    
    $
    (211,434
    )
    
    $
    (344,643
    )
    
    $
    (427,946
    )Adjustments to reconcile net decrease
in net assets to net cash used
in operating activities:Depreciation and amortization
    
    
    14,890
    
    
    
    8,803
    
    
    
    7,443Change in interest receivable allowance
    
    
    (914
    )
    
    
    122,914
    
    
    
    Decrease in unrealized appreciation
of investments
    
    
    206,737
    
    
    
    230,045
    
    
    
    1,003,140Deferred tax benefit
    
    
    (136,000
    )
    
    
    (318,000
    )
    
    
    (262,000
    )Net realized gain on portfolio investments
    
    
    (26,727
    )
    
    
    (87,841
    )
    
    
    (888,399
    )Non-cash conversion of debenture interest
    
    
    (138,319
    )
    
    
    (69,811
    )
    
    
    (16,766
    )Changes in operating assets and liabilities:Decrease (increase) in interest receivable
    
    
    75,158
    
    
    
    (181,976
    )
    
    
    (107,828
    )(Increase) decrease in other assets
    
    
    (29,504
    )
    
    
    
    
    
    
    517Increase (decrease) in accounts
payable and other accrued liabilities
    
    
    33,001
    
    
    
    55,936
    
    
    
    (29,836
    )Increase in deferred revenue
    
    
    36,405
    
    
    
    10,087
    
    
    
    36,666Total adjustments
    
    
    34,727
    
    
    
    (229,843
    )
    
    
    (257,063
    )Net cash used in operating activities
    
    
    (176,707
    )
    
    
    (574,486
    )
    
    
    (685,009
    )Cash flows from investing activities:Investments originated
    
    
    (4,464,000
    )
    
    
    (1,359,000
    )
    
    
    (3,300,000
    )Proceeds from sale of portfolio investments
    
    
    86,813
    
    
    
    104,301
    
    
    
    1,136,729Proceeds from loan repayments
    
    
    572,824
    
    
    
    62,011
    
    
    
    37,135Capital expenditures
    
    
    (6,232
    )
    
    
    (1,967
    )
    
    
    (12,479
    )Net cash used in investing activities
    
    
    (3,810,595
    )
    
    
    (1,194,655
    )
    
    
    (2,138,615
    )Cash flows from financing activities:Proceeds from SBA debenture
    
    
    3,500,000
    
    
    
    
    
    
    
    Origination costs to SBA
    
    
    (87,500
    )
    
    
    
    
    
    
    Purchase of SBA commitment
    
    
    (50,000
    )
    
    
    (50,000
    )
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    (21,502
    )
    
    
    (25,704
    )Net cash provided (used) by
financing activities
    
    
    3,362,500
    
    
    
    (71,502
    )
    
    
    (25,704
    )Net decrease in cash and cash equivalents
    
    
    (624,802
    )
    
    
    (1,840,643
    )
    
    
    (2,849,328
    )Cash and cash equivalents:Beginning of year
    
    
    1,251,546
    
    
    
    3,092,189
    
    
    
    5,941,517End of year
    
    $
    626,744
    
    
    $
    1,251,546
    
    
    $
    3,092,189
 See accompanying notes.




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS December 31, 2004
 
 (b)Date
    
    (c)
    
    
    
    
    
    (d)Company and Business
    
    Type of Investment
    
    Acquired
    
    Equity
    
    Cost
    
    ValueAPF Group, Inc. (e) (g)
Mount Vernon, NY. Manufacturer of museum
quality picture frames and framed mirrors for
museums, art galleries, retail frame shops,
upscale designers and prominent collectors.
www.apfgroup.com
    
    $500,000 Senior Subordinated
note at 12.5% due July 1,
2009. Warrants to purchase
10.2941 shares common stock.
    
    7/8/04
    
    
    6
    %
    
    $
    500,000
    
    
    $
    500,000Carolina Skiff LLC (e) (g)
Waycross, GA. Manufacturer of fresh water,
ocean fishing and pleasure boats.
www.carolinaskiff.com
    
    $985,000 Class A preferred
membership interest at 11%.
Redeemable January 31, 2010.
5% common membership interest.
    
    1/30/04
    
    
    5
    %
    
    
    1,000,000
    
    
    
    1,000,000Contract Staffing
Buffalo, NY. PEO providing human resource
administration for small businesses.
www.contract-staffing.com
    
    Preferred Stock Repurchase
Agreement through March 31,
2010 at 5%.
    
    11/8/99
    
    
    10
    %
    
    
    141,400
    
    
    
    141,400DLisi Food Systems, Inc. (g)
Rochester, NY. Produces private label and
branded frozen pizzas for distribution to
convenience stores, supermarkets, large club
stores and food services.
www.dlisi.com
    
    $400,000 note at 10% due
December 31, 2008. Warrant
for up to 5% of common stock.
Filed for bankruptcy
protection August 13, 2004.
    
    1/7/04
    
    
    5
    %
    
    
    400,000
    
    
    Gemcor II, LLC (e) (g)
West Seneca, NY.
Designs and sells
automatic riveting
machines used in the
assembly of aircraft
components.
www.gemcor.com
    
    $250,000 note at 8% due June 28,
2009 with warrant to purchase
6.25 membership units.
25 membership units.
    
    6/28/04
    
    
    31
    %
    
    
    750,000
    
    
    
    750,000G-TEC Natural Gas Systems
Buffalo, NY.
Manufactures and
distributes systems that
allow natural gas to be
used as an alternative
fuel to gases.
www.gas-tec.com
    
    41.67% Class A membership interest.
8% cumulative dividend.
    
    8/31/99
    
    
    42
    %
    
    
    300,000
    
    
    
    200,000
 See accompanying notes.




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 2004 (CONTINUED) 
 (b)Date
    
    (c)
    
    
    
    
    
    (d)Company and Business
    
    Type of Investment
    
    Acquired
    
    Equity
    
    Cost
    
    ValueInnov-X Systems, Inc. (e) (g)
Woburn, MA. Manufactures portable x-ray fluorescence (XRF)
analyzers used in metals/alloy analysis.
www.innovx-sys.com
    
    $350,000 Subordinated Debenture at 8.5%
due September 27, 2009 with detachable
warrants.
    
    9/27/04
    
    
    10
    %
    
    
    350,000
    
    
    
    350,000Kionix, Inc. (g)
Ithaca, NY. Develops innovative MEMS based technology
applications.
www.kionix.com
    
    2,862,091 shares Series A preferred stock.
    
    5/17/02
    
    
    2
    %
    
    
    1,000,000
    
    
    
    1,000,000MINRAD International, Inc. (OTC: MNRD:OB)*
Buffalo, NY. Developer of acute care devices and anesthetics.
www.minrad.com
    
    677,980 common shares.
    
    8/4/97
    
    
    3
    %
    
    
    919,422
    
    
    
    847,000New Monarch Machine Tool, Inc. (e) (g)
Cortland, NY. Manufactures and services vertical/horizontal
machining centers.
www.monarchmt.com
    
    $500,000 note at 12% due September 24,
2006. Warrant for 11.59 shares of common
stock. $250,000 note at 14% due March 2,
2005.
    
    9/24/03
    
    
    12
    %
    
    
    640,909
    
    
    
    640,909Photonic Products Group, Inc (OTC: PHPG.OB)*
(Formerly INRAD, Inc.) Northvale, NJ. Develops and
manufactures products for laser photonics industry.
www.inrad.com
    
    100 shares convertible Series B preferred
stock, 10% dividend. 14,000 shares
common stock.
    
    10/31/00
    
    <1%
    
    
    135,000
    
    
    
    118,200RAMSCO (e) (g)
Albany, NY. Distributor of water, sanitary, storm sewer and
specialty construction materials to the contractor, highway
and municipal markets.
www.ramsco.com
    
    $916,947.23 notes at 13% due November 18,
2007. Warrants to purchase 12.5% of
common shares.
    
    11/19/02
    
    
    13
    %
    
    
    916,947
    
    
    
    916,947Somerset Gas Transmission Company, LLC (e) (g)
Buffalo, NY. Natural gas transportation company.
www.somersetgas.com
    
    $500,000 convertible note at 12% due on
demand after July 30, 2004.
$200,000 note at 12% due December 31,
2005. 0.88 membership units.
    
    7/10/02
    
    <1%
    
    
    700,000
    
    
    
    818,000
 See accompanying notes.




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RAND CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 2004 (CONTINUED)  (b)Date
    
    (c)
    
    
    
    
    
    (d)Company and Business
    
    Type of Investment
    
    Acquired
    
    Equity
    

Cost
    
    ValueSynacor, Inc. (g)
Buffalo, NY. Develops
provisioning platforms for
aggregation and delivery of
content for broadband access
providers.www.synacor.com
    
    $350,000 convertible note at 10% due
November 18, 2007.
200,000 shares of Series B preferred stock.
59,828 Series A preferred shares. Warrants
for 299,146 common shares.
    
    11/18/02
    
    
    4
    %
    
    
    820,000
    
    
    
    828,674Topps Meat Company LLC (e) (g)
Elizabeth, NJ  Producer and
supplier of premium branded
frozen hamburgers and portion
controlled meat products.
www.toppsmeat.com
    
    Preferred A and Class A common membership
interest.
    
    4/3/03
    
    
    3
    %
    
    
    259,000
    
    
    
    259,000Ultra - Scan Corporation
Amherst, NY. Biometrics
application developer of
ultrasonic fingerprint
technology.
www.ultra-scan.com
    
    536,596 common shares, 107,104 Series A-1
preferred shares.
    
    12/11/92
    
    
    3
    %
    
    
    738,164
    
    
    
    1,076,174UStec, Inc. (e)
Victor, NY. Markets digital
wiring systems for new home
construction.
www.ustecnet.com
    
    $100,000 note at 5% due February 2006.
50,000 common shares. Warrants for
139,395 common shares.
^ $350,000 Senior Subordinated Convertible
Debenture at 6% due February 2, 2008.
    
    6/26/98
    
    <1%
    
    
    450,500
    
    
    
    475,000Vanguard Modular Building Systems
Philadelphia, PA. Leases and
sells high-end modular space
solutions.www.vanguardmodular.com
    
    2,673 preferred units with warrants, 14%
accrued distribution rate.
    
    12/16/99
    
    <1%
    
    
    270,000
    
    
    
    270,000WineIsIt.com, Corp. (e) (g)
Amherst, NY. Marketing company
specializing in customer loyalty
programs supporting the wine and
spirit industry.www.wineisit.com
    
    $500,000 Senior Subordinated note at 10%
due December 17, 2009. $250,000 note at
10% due April 16, 2005. Warrants to
purchase 100,000 shares Class B common
stock.
    
    12/18/02
    
    
    2
    %
    
    
    801,918
    
    
    
    801,918Other Investments
    
    Other
    
    Various
    
    
    
    
    
    
    528,593
    
    
    
    42,584(f) $11,621,853
    
    
    $
    11,035,806
 See accompanying notes.




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 2004 (CONTINUED) NOTES TO CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS   (a)
    
    Unrestricted securities (indicated by *) are freely marketable securities having readily
available market quotations. All other securities are restricted securities, which are
subject to one or more restrictions on resale and are not freely marketable. At December 31,
2004 restricted securities represented 91% of the value of the investment portfolio. Freed
Maxick & Battaglia, CPAs, PC has not examined the business descriptions of the portfolio
companies.(b)
    
    The Date Acquired column indicates the year in which the Corporation acquired its first
investment in the company or a predecessor company.(c)
    
    The equity percentages estimate the Corporations ownership interest in the portfolio
investment. The estimated ownership is calculated based on the percent of outstanding voting
securities held by the Corporation or the potential percentage of voting securities held by
the Corporation or the potential percentage of voting securities held by the Corporation upon
exercise of its warrants or conversion of debentures, or other available data. Freed Maxick &
Battaglia, CPAs, PC has not audited the equity percentages of the portfolio companies. The
symbol <1% indicates that the Company holds equity interest of less than one percent.(d)
    
    The Corporation has adopted the SBAs valuation guidelines for SBICs which describes the
policies and procedures used in valuing investments. Under the valuation policy of the
Corporation, unrestricted securities are valued at the closing price for publicly held
securities for the last three days of the month. Restricted securities, including securities
of publicly-held companies, which are subject to restrictions on resale, are valued at fair
value as determined by the Board of Directors. Fair value is considered to be the amount
which the Corporation may reasonably expect to receive for portfolio securities when sold on
the valuation date. Valuations as of any particular date, however, are not necessarily
indicative of amounts which may ultimately be realized as a result of future sales or other
dispositions of securities and these favorable or unfavorable differences could be material.
Among the factors considered by the Board of Directors in determining the fair value of
restricted securities are the financial condition and operating results, projected operations,
and other analytical data relating to the investment. Also considered are the market prices
for unrestricted securities of the same class (if applicable) and other matters which may have
an impact on the value of the portfolio company.(e)
    
    These investments are income producing. All other investments are non-income producing.
Income producing investments have generated cash payments of interest or dividends within the
last twelve months.(f)
    
    Income Tax Information - As of December 31, 2004, the aggregate cost of investment securities
approximated $11.622 million. Net unrealized depreciation aggregated approximately $586,000,
of which $489,000 related to appreciated investment securities and $1,075,000 related to
depreciated investment securities.(g)
    
    Rand Capital SBIC, L.P. investment*
    
    Publicly owned company




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES 
 SCHEDULES OF SELECTED PER SHARE DATA AND RATIOS For the Five Years Ended December 31, 2004, 2003, 2002, 2001 and 2000
  Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Income from investment operations (1):Investment income
    
    $
    0.13
    
    
    $
    0.08
    
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    0.04Expenses
    
    
    0.16
    
    
    
    0.16
    
    
    
    0.15
    
    
    
    0.14
    
    
    
    0.11Investment (loss) before income taxes
    
    
    (0.03
    )
    
    
    (0.08
    )
    
    
    (0.10
    )
    
    
    (0.12
    )
    
    
    (0.07
    )Income tax expense (benefit)
    
    
    (0.01
    )
    
    
    (0.03
    )
    
    
    0.03
    
    
    
    0.15
    
    
    
    (0.05
    )Net investment (loss)
    
    
    (0.02
    )
    
    
    (0.05
    )
    
    
    (0.13
    )
    
    
    (0.27
    )
    
    
    (0.02
    )Net realized and unrealized gain (loss) on investments
    
    
    (0.02
    )
    
    
    0.00
    
    
    
    0.05
    
    
    
    0.55
    
    
    
    0.14Net proceeds from private stock offering
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.01
    
    
    
    0.01(Decrease) increase in net asset value
    
    
    (0.04
    )
    
    
    (0.05
    )
    
    
    (0.08
    )
    
    
    0.29
    
    
    
    0.13Net asset value, beginning of year
    
    
    1.62
    
    
    
    1.67
    
    
    
    1.75
    
    
    
    1.46
    
    
    
    1.33Net asset value, end of year
    
    $
    1.58
    
    
    $
    1.62
    
    
    $
    1.67
    
    
    $
    1.75
    
    
    $
    1.46Per share market value, end of year
    
    $
    1.56
    
    
    $
    1.45
    
    
    $
    1.03
    
    
    $
    1.27
    
    
    $
    2.19Total return based on market value
    
    
    7.6
    %
    
    
    40.8
    %
    
    
    (18.9
    )%
    
    
    (42.0
    )%
    
    
    27.3
    %Total return based on net asset value
    
    
    (2.5
    )%
    
    
    (3.0
    )%
    
    
    (4.6
    )%
    
    
    19.9
    %
    
    
    9.8
    %Supplemental data:Ratio of expenses before income taxes to
average net assets
    
    
    9.86
    %
    
    
    10.01
    %
    
    
    8.73
    %
    
    
    8.95
    %
    
    
    7.92
    %Ratio of expenses including taxes to
average net assets
    
    
    9.53
    %
    
    
    8.45
    %
    
    
    10.16
    %
    
    
    18.55
    %
    
    
    4.37
    %Ratio of net investment loss to average net assets
    
    
    (1.23
    )%
    
    
    (3.67
    )%
    
    
    (7.51
    )%
    
    
    (16.82
    )%
    
    
    (1.37
    )%Portfolio turnover
    
    
    50.4
    %
    
    
    24.3
    %
    
    
    65.4
    %
    
    
    6.3
    %
    
    
    26.2
    %Net assets end of year
    
    $
    9,027,054
    
    
    $
    9,238,488
    
    
    $
    9,604,634
    
    
    $
    10,058,284
    
    
    $
    8,385,697Weighted average shares outstanding at end of year
    
    
    5,718,934
    
    
    
    5,722,776
    
    
    
    5,759,260
    
    
    
    5,762,294
    
    
    
    5,746,776
   (1)
    
    Per share data are based on weighted average shares outstanding and results are rounded.




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business- Effective August 16, 2002, Rand Capital Corporation (Rand) made an
election, following an authorized vote of its stockholders to become a Business Development
Company, or BDC. Generally, a BDC is a specialized type of investment company that is primarily
engaged in the business of furnishing capital and managerial expertise to companies that do not
have ready access to capital through conventional finance channels. There was no impact on the
corporate structure as a result of the change to a BDC. Prior to this election, Rand operated as a
diversified closed-end management investment company registered under the Investment Company Act of
1940. Rand continues to operate as a publicly-held venture capital company, listed on the NASDAQ
Small Cap Market under the symbol RAND. Rand was founded in 1969 and is headquartered in
Buffalo, New York. Rands investment strategy is to seek capital appreciation through venture
capital investments in small, unseasoned, developing companies, primarily in the northeastern
United States. During the first quarter of 2002, Rand formed a wholly-owned subsidiary, Rand Capital SBIC,
L.P., (Rand SBIC) for the purpose of operating it as a small business investment company.
Simultaneously with the formation of Rand SBIC, Rand Capital Management, LLC (Rand Management),
also a wholly-owned subsidiary, was formed to act as the general partner of Rand SBIC. On January
25, 2002, Rand transferred $5 million in cash to Rand SBIC to serve as regulatory capital. On
August 16, 2002, Rand received notification that its Small Business Investment Company (SBIC)
application had been approved and licensed by the Small Business Administration (SBA). The
approval allows Rand SBIC to obtain loans up to two times its initial $5 million of regulatory
capital from the SBA for purposes of making new investments in portfolio companies. As of
December 31, 2004, the Corporation had drawn down $3,500,000 on its leverage commitments (see Notes
4 and 9). Principles of Consolidation- The consolidated financial statements include the accounts of
Rand, Rand SBIC and Rand Management, collectively, the Corporation. All intercompany accounts
and transactions have been eliminated in consolidation. Investments- Investments are stated at fair value as determined in good faith by the Board of
Directors, as described in the Notes to Consolidated Schedule of Portfolio Investments. Certain
investment valuations have been determined by the Board of Directors in the absence of readily
ascertainable fair values. The estimated valuations are not necessarily indicative of amounts
which may ultimately be realized as a result of future sales or other dispositions of securities,
and these favorable or unfavorable differences could be material. Certain investment agreements require the companies to meet certain financial and
non-financial covenants. At December 31, 2004 one of its portfolio investments was in violation of
its loan covenants. Management of the Corporation is pursuing compliance and has considered this
in determining the appropriateness of the carrying value of the investment.




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Amounts reported as realized gains and losses are measured by the difference between the
proceeds from the sale or exchange and the cost basis of the investment without regard to
unrealized gains or losses reported in prior periods. The cost of securities that have, in the
Board of Directors judgment, become worthless, are written off and reported as realized losses. Cash and Cash Equivalents- Temporary cash investments having a maturity of three months or
less when purchased are considered to be cash equivalents. Revenue Recognition  Interest Income- Interest income generally is recognized on the accrual
basis except where the investment is in default or otherwise presumed to be in doubt. In such
cases, interest is recognized at the time of receipt. A reserve for possible losses on interest
receivable is maintained when appropriate. Deferred Debenture Costs- SBA debenture origination and commitment costs, which are included
in other assets, will be amortized ratably over the terms of the SBA debentures. Amortization
expense was $7,852 in 2004. Annual amortization expense for the next five years is estimated to
average $19,000 per year. Organizational Costs- During 2002, the Corporation expensed $135,251 in legal and accounting
related services in conjunction with the formation of its wholly-owned subsidiary Rand SBIC. Net Assets Per Share- Net assets per share are based on the number of shares of common stock
outstanding. There are no common stock equivalents. Supplemental Cash Flow Information- Income taxes paid (refunded) for fiscal 2004, 2003 and
2002 was $42,273, $22,913 and $(18,230), respectively. Interest paid for fiscal 2004 was $44,564.
No interest was paid for fiscal 2003 and 2002. Concentration of Credit and Market Risk- Financial instruments that potentially subject the
Corporation to concentrations of credit risk consisted of cash and cash equivalents. Cash is
invested with banks in amounts, which, at times, exceed insurable limits. Management does not
anticipate non-performance by the banks. As of December 31, 2004, 51% of the Corporations total investment value was held in six notes
and equity securities. As of December 31, 2003, 51% of the Corporations total investment value
was held in five notes and equity securities. Accounting Estimates- The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those
estimates.




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  NOTE 2.  PROMISSORY NOTES RECEIVABLE In January 2001, the Corporation received promissory notes from certain principals of its
former portfolio companies. Principal payments commenced in January 2001. Interest, at the rate
of 12%, will accrue during the term of the promissory notes and will be waived by the Corporation
if the payers meet certain of the promissory notes provisions. Through December 31, 2004, the
provisions have been met and the interest has been waived. Principal installments due subsequent
to December 31, 2004 are as follows: 2005  $36,195. NOTE 3.  INCOME TAXES Deferred tax assets and liabilities are recorded for temporary differences between the
financial statement and tax bases of assets and liabilities using the currently enacted tax rate
expected to be in effect when the taxes are actually paid or recovered. The tax effect of the major temporary difference and carryforwards that give rise to the
Corporations net deferred tax assets at December 31, 2004 and 2003 are as follows: 2004
    
    
    2003Operations
    
    $
    (42,000
    )
    
    $
    (28,000
    )Investments
    
    
    234,000
    
    
    
    153,000Net operating loss carryforwards
    
    
    374,000
    
    
    
    305,000Deferred tax assets, net
    
    $
    566,000
    
    
    $
    430,000
 The Company assesses annually the recoverability of its deferred tax asset to determine if a
valuation allowance is necessary. In performing this assessment, it considers estimated future
taxable income and ongoing tax planning strategies. At December 31, 2004 and 2003 it was
determined that a valuation allowance was not required. The components of income tax (benefit) expense reported in the statements of operations are as
follows for the years ended December 31: 2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    (34,243
    )State
    
    
    24,316
    
    
    
    27,498
    
    
    
    12,37324,316
    
    
    
    27,498
    
    
    
    (21,870
    )Deferred:Federal
    
    
    (85,000
    )
    
    
    (260,000
    )
    
    
    (193,098
    )State
    
    
    (51,000
    )
    
    
    (58,000
    )
    
    
    (68,902
    )(136,000
    )
    
    
    (318,000
    )
    
    
    (262,000
    )Total
    
    $
    (111,684
    )
    
    $
    (290,502
    )
    
    $
    (283,870
    )




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  NOTE 3.  INCOME TAXES (CONTINUED) A reconciliation of the expense (benefit) for income taxes at the federal statutory rate to
the expense reported is as follows: 2004
    
    
    2003
    
    
    2002Net investment (loss) income and
realized gain (loss) before income
tax expense (benefit)
    
    $
    (323,118
    )
    
    $
    (635,145
    )
    
    $
    (711,816
    )Expected tax (benefit) at statutory
rate
    
    $
    (109,860
    )
    
    $
    (215,950
    )
    
    $
    (242,017
    )State  net of federal effect
    
    
    (19,387
    )
    
    
    (38,110
    )
    
    
    (37,310
    )Other
    
    
    17,564
    
    
    
    (36,442
    )
    
    
    (4,543
    )Total
    
    $
    (111,684
    )
    
    $
    (290,502
    )
    
    $
    (283,870
    )
 At December 31, 2004 and 2003, the Corporation had a federal net operating loss carryforward
of approximately $894,000 and $683,000, respectively, which expire commencing in 2015. For state
tax purposes the Corporation had a net operating loss carryforward of approximately $877,000 and
$703,000, respectively, which expire commencing 2014. NOTE 4.  SBA DEBENTURE OBLIGATIONS Rand SBIC paid a non-refundable commitment fee of $100,000 to the SBA to reserve $10,000,000
of its approved SBA Guaranteed Debenture leverage. This fee was paid in two installments of $50,000
each in July of 2003 and August of 2004. The fee represents 1% of the face amount of the leverage
reserved under the commitment and is a partial prepayment of the SBAs nonrefundable 3% leverage
draw fees. As of December 31, 2004, Rand SBIC has debentures payable to and guaranteed by the SBA
totaling $3,500,000 ($0  2003) against this commitment. The debenture terms require semiannual
payments of interest at annual interest rates ranging from 4.120% to 4.684%, plus an annual charge
that was .887% during 2004. The debentures outstanding at December 31, 2004 mature in 2014.




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  NOTE 5.  STOCKHOLDERS EQUITY (NET ASSETS) At December 31, 2004 and 2003, there were 500,000 shares of $10.00 par value preferred stock
authorized and unissued. On October 18, 2001 the Board of Directors authorized the repurchase of up to 5% of the
Corporations outstanding stock through purchases on the open market which was extended through
October 28, 2005. During the years ended December 31, 2003 and 2002 the Corporation purchased a
total of 44,100 treasury shares at a total cost of $47,206. Summary of change in equity accounts: Accumulated
    
    
    Undistributed
    
    
    Net unrealizdNet
    
    
    Net Realized
    
    
    AppreciationInvestment
    
    
    Gain on
    
    
    (Depreciation)Loss
    
    
    Investments
    
    
    on InvestmentsBalance, December 31, 2002
    
    $
    (4,354,719
    )
    
    $
    6,574,710
    
    
    $
    (139,411
    )Net (decrease) increase in net
assets from operations
    
    
    (346,044
    )
    
    
    87,841
    
    
    
    (86,441
    )Balance, December 31, 2003
    
    $
    (4,700,763
    )
    
    $
    6,662,551
    
    
    $
    (225,852
    )Net (decrease) increase in net
assets from operations balance
    
    
    (112,383
    )
    
    
    26,726
    
    
    
    (125,777
    )Balance, December 31, 2004
    
    $
    (4,813,146
    )
    
    $
    6,689,277
    
    
    $
    (351,629
    )




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  NOTE 6.  STOCK OPTION PLANS In July 2001, the stockholders of the Corporation authorized the establishment of an Employee
Stock Option Plan (the Plan). The Plan provides for an award of options to purchase up to
200,000 common shares to eligible employees. In 2002, the Corporation placed the Plan on inactive
status as it developed a new profit sharing plan for the Corporations employees in connection with
the establishment of its SBIC subsidiary. As of December 31, 2004 and 2003, no stock options had
been awarded under the Plan. Because Section 57(n) of the 1940 Act prohibits maintenance of a
profit sharing plan for the officers and employees of a BDC where any option, warrant or right is
outstanding under an executive compensation plan, no options will be granted under the Plan while
any profit sharing plan is in effect with respect to the Corporation. In July 2001, the Corporation also formed a Non-Employee Director Plan. In September 2003,
the Corporation withdrew its application to the SEC regarding its exemption application for the
Non-Employee Director Plan and terminated the plan because of the requirements of Section 57(n).
No shares had been issued under the plan. NOTE 7.  EMPLOYEE BENEFIT PLANS The Corporation has a defined contribution 401(k) Plan. The Plan provides a base contribution
of 1% for eligible employees and also provides up to 5% matching contributions. Pension plan
expense was $20,304, $18,379 and $18,079 in 2004, 2003 and 2002, respectively. In 2002, the Corporation established a Profit Sharing Plan for its executive officers in
accordance with Section 57(n) of the Investment Company Act of 1940 (the 1940 Act). There were
no contributions to the Plan for 2004, 2003 and 2002. NOTE 8.  COMMITMENTS AND CONTINGENCIES The Corporation has an agreement, which provides health benefits for the spouse of a former
officer of the Corporation. Remaining payments projected to be paid to the surviving spouse have
been fully accrued. Total accrued health benefits under this agreement at December 31, 2004 and
2003 were $38,277 and $43,090, respectively. The Corporation has a lease for office space which expires December 2005. Rent expense under
this operating lease was approximately $17,000 for the year ended December 31, 2004 ($16,000 for
2003 and $15,000 for 2002). The future operating lease obligation for 2005 is approximately
$17,000. NOTE 9.  SUBSEQUENT EVENTS Subsequent to the year ended December 31, 2004, the Corporation made one investment totaling
$200,000.




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  NOTE 10.  QUARTERLY OPERATIONS AND EARNINGS DATA  UNAUDITED 4th
    
    
    3rd
    
    
    2nd
    
    
    1stQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter2004Investment income
    
    $
    185,205
    
    
    $
    197,684
    
    
    $
    188,621
    
    
    $
    186,194Net increase (decrease) in net assets
from operations
    
    
    97,674
    
    
    
    (407,625
    )
    
    
    157,394
    
    
    
    (58,877
    )Basic and diluted net increase
(decrease) in net assets from operations
per share
    
    
    0.02
    
    
    
    (0.07
    )
    
    
    0.03
    
    
    
    (0.01
    )2003Investment income
    
    $
    81,994
    
    
    $
    146,111
    
    
    $
    109,740
    
    
    $
    112,013Net decrease in net assets
from operations
    
    
    (37,659
    )
    
    
    (181,356
    )
    
    
    (37,614
    )
    
    
    (88,014
    )Basic and diluted net decrease
in net assets from operations
per share
    
    
    (0.01
    )
    
    
    (0.03
    )
    
    
    (0.01
    )
    
    
    (0.02
    )




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES 
 SCHEDULE OF CONSOLIDATED CHANGES IN INVESTMENTS AT
COST AND REALIZED GAIN (LOSS)
Year Ended December 31, 2004  CostIncrease
    
    
    Realized(Decrease)
    
    
    Gain(Loss)NEW AND ADDITIONS TO PREVIOUS
INVESTMENTSAPF Group, Inc.
    
    $
    500,000Carolina Skiff LLC
    
    
    1,000,000Contract Staffing
    
    
    41,400DLisi Food Systems, Inc.
    
    
    400,000Gemcor II, LLC
    
    
    750,000Innov-X Systems, Inc.
    
    
    350,000New Monarch Machine Tool, Inc.
    
    
    250,000Photonics
    
    
    10,000RAMSCO
    
    
    210,000Somerset Gas Transmission Company, Inc.
    
    
    200,000Synacor, Inc.
    
    
    435,000Ultra-Scan Corporation
    
    
    4,000US Tec, Inc.
    
    
    150,000WineIsIt.com Corp.
    
    
    301,9184,602,318INVESTMENTS SOLD/LIQUIDATIONADIC
    
    
    (4,543
    )
    
    $
    32,956Clearview Cable
    
    
    (55,541
    )
    
    
    (6,229
    )(60,084
    )
    
    
    26,727OTHER CHANGESDebenture repayments, distributions and
other
    
    
    (536,690
    )
    
    
    NET CHANGE IN INVESTMENTS AT COST
AND REALIZED GAIN
    
    $
    4,005,544
    
    
    $
    26,727




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Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders
Rand Capital Corporation and Subsidiaries We have audited the accompanying consolidated statements of financial position of Rand Capital
Corporation and Subsidiaries (the Corporation) as of December 31, 2004 and 2003, including the
consolidated schedule of portfolio investments as of December 31, 2004, and the related
consolidated statements of operations, cash flows and changes in net assets for the years then
ended, and the selected per share data and ratios for each of the five years in the period then
ended. These financial statements and the selected per share data and ratios are the
responsibility of the Corporations management. Our responsibility is to express an opinion on
these financial statements and selected per share data and ratios based on our audits. The
consolidated financial statements of the Corporation for the year ended December 31, 2002 were
audited by other auditors whose reports dated January 13, 2003, expressed an unqualified opinion on
those statements. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and selected per share data and
ratios are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our procedures included
examination and confirmation of securities owned as of December 31, 2004 and 2003. An audit also
includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements and selected per share data and ratios
referred to above present fairly, in all material respects, the financial position of the
Corporation as of December 31, 2004 and 2003, and the results of their operations, their cash flows
and the changes in their net assets for the years then ended in conformity with accounting
principles generally accepted in the United States of America. As discussed in Note 1, the investment securities included in the consolidated financial
statements valued at $11,035,806 (122% of net assets) and $7,236,999 (78% of net assets) as of
December 31, 2004 and 2003, respectively, include securities valued at $11,035,806 and $7,208,999,
respectively, whose fair values have been estimated by the Board of Directors in the absence of
readily ascertainable market value. We have reviewed the procedures used by the Directors in
preparing the valuations of investment securities and have inspected the underlying documentation,
and in the circumstances we believe the procedures are reasonable and the documentation
appropriate. Those estimated values may differ from the values that would have been used had a
ready market for the investments existed.




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Our audits were made for the purpose of forming an opinion on the basic consolidated financial
statements taken as a whole. The supplementary schedule of consolidated changes in investments at
cost and realized gain is presented for purposes of additional analysis and is not a required part
of the basic consolidated financial statements. The information has been subjected to the auditing
procedures applied in the audits of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic consolidated financial
statements taken as a whole. /s/ Freed Maxick & Battaglia, CPAs, PC
Buffalo, New York
January 14, 2005




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders
Rand Capital Corporation
Buffalo, New York We have audited the accompanying consolidated statement of operations, cash flows, and changes in
net assets of Rand Capital Corporation and subsidiary (the Corporation) for the year ended
December 31, 2002, and the selected per share data and ratios for each of the three years in the
period then ended. These financial statements and the selected per share data and ratios are the
responsibility of the Corporations management. Our responsibility is to express an opinion on
these financial statements and selected per share data and ratios based on our audits. We conducted our audits in accordance with auditing standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and selected per share data and
ratios are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, such consolidated financial statements and selected per share data and ratios
referred to above present fairly, in all material respects, the results of operations of Rand
Capital Corporation and subsidiary, their cash flows and the changes in their net assets for the
year ended December 31, 2002, and the selected per share data and ratios for each of the three
years in the period then ended, in conformity with accounting principles generally accepted in the
United States of America. (DELOITTE & TOUCHE LLP) Buffalo, New York
January 13, 2003




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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None 
 Item 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures.Our management, with the
participation of our principal executive officer and principal financial officer, has evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the
end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our
principal executive officer and principal financial officer have concluded that as of such date,
our disclosure controls and procedures were designed to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in applicable SEC rules and forms and
were effective. Changes in Internal Control Over Financial Reporting.There have been no significant
changes in our internal control or in other factors that could significantly affect those controls
subsequent to our evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses. 
 Part III 
 Item 10. Directors and Executive Officers of the Registrant Information in response to this Item is incorporated herein by reference to the information
under the heading ELECTION OF DIRECTORS and EXECUTIVE OFFICERS provided in the Corporations
definitive Proxy Statement for its Annual Meeting of Shareholders to be held April 28, 2005, to be
filed under Regulation 14A (the 2005 Proxy Statement). The Corporation has adopted a written code of ethics and officer Code of Ethics that applies
to our principal executive officer, principal financial officer, and controller and a Business
Ethics Policy applicable to the Corporations directors, officers and employees. Information in
response to this Item is incorporated herein by reference to the information under the heading
COMMITTEES AND MEETING DATA and the section labeled Code of Business Conduct and Ethics
provided in the Corporations 2005 Proxy Statement. The Corporations Code of Ethics and Business
Ethics Policy are available, free of charge, in the Governance section of the Corporations website
located at randcapital.com. 
 Item 11. Executive Compensation Information in response to this Item is incorporated herein by reference to the information
provided in the 2005 Proxy Statement under the heading COMMITTEES AND MEETING DATA,
COMPENSATION and DIRECTOR COMPENSATION.




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Item 12. Security Ownership of Certain Beneficial Owners and Management Information in response to this Item is incorporated herein by reference to the information
provided in the 2005 Proxy Statement under the heading BENEFICIAL OWNERSHIP OF SHARES. 
 Item 13.Certain Relationships and Related Transactions None. 
 Item 14. Principal Accounting Fees and Services Information concerning the Corporations independent auditors, the audit committees
pre-approval policy for audit services and our principal accountant fees and services is contained
in the Corporations 2005 Proxy Statement under the heading COMMITTEES AND MEETING DATA and the
section labeled Audit Committee, and Independent Accountant Fees.




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Part IV 
 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K  (a)
    The following documents are filed as part of this report and included
in Item 8:  (1)
    CONSOLIDATED FINANCIAL STATEMENTSStatements of Financial Position as of December 31, 2004 and 2003Statements of Operations for the three years in the period ended December
31, 2004Statements of Cash Flows for the three years in the period ended December
31, 2004Statements of changes in Net Assets for the three years in the period ended
December 31, 2004Schedule of Portfolio Investments as of December 31, 2004Schedules of Selected Per Share Data and Ratios for the five years in the
period ended December 31, 2004Notes to the Consolidated Financial StatementsSupplemental Schedule of Consolidated Changes in Investments at Cost and
Realized Gain (Loss) for the year ended December 31, 2004Independent Auditors Reports(2)
    FINANCIAL STATEMENT SCHEDULESThere were no schedules required to be filed as part of this report  (b)
    Reports on Form 8-K On February 5, 2004, the Corporation furnished a Current Report on Form 8-K
pursuant to Item 9. Regulation FD Disclosure attaching our press release dated February
4, 2004 announcing our earnings results and net asset value for the fiscal year ended
December 31, 2003. On April 29, 2004 the Corporation furnished a Current Report on Form 8-K pursuant
to Item 9. Regulation FD Disclosure attaching our press release dated April 29, 2004
announcing our earnings results and net asset value for the quarter ended March 31,
2004. On July 29, 2004 the Corporation furnished a Current Report on Form 8-K pursuant
to Item 9. Regulation FD Disclosure attaching our press release




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dated July 29, 2004
announcing our earnings results and net asset value for the quarter ended June 30,
2004. On October 29, 2004 the Corporation furnished a Current Report on Form 8-K
pursuant to Item 2.02 attaching our press release
dated October 29, 2004 announcing our
earnings results and net asset value for the quarter ended September 30, 2004.  (c)
    The following exhibits are filed with this report or are incorporated herein
by reference to a prior filing, in accordance with Rule 12b-32 under the Securities
Exchange Act of 1934.  (3)(i)
    Certificate of Incorporation of the Corporation, incorporated by reference
to Exhibit (a)(1) of Form N-2 filed with the Securities Exchange Commission on
April 22, 1997.(3)(ii)
    By-laws of the Corporation incorporated by reference to Exhibit (b) of Form
N-2 filed with the Securities Exchange Commission on April 22, 1997.(4)
    Specimen certificate of common stock certificate,
incorporated by reference to Exhibit (b) of Form N-2 filed with the Securities
Exchange Commission on April 22, 1997.(10.1)
    Employee Stock Option Plan  incorporated by reference Appendix B to the
Corporations definitive Proxy Statement filed on June 1, 2002.*(10.3)
    Agreement of Limited Partnership for Rand Capital SBIC, L.P.  incorporated
by reference to Exhibit 10.3 to the Corporations Form 10-K filed for the year
ended December 31, 2001.(10.4)
    Certificate of Formation of Rand Capital SBIC, L.P.  incorporated by
reference to Exhibit 10.3 to the Corporations Form 10-K filed for the year
ended December 31, 2001.(10.5)
    Limited Liability Corporation Agreement of Rand Capital Management, LLC -
incorporated by reference to Exhibit 10.3 to the Corporations Form 10-K filed
for the year ended December 31, 2001.(10.6)
    Certificate of Formation of Rand Capital Management, LLC  incorporated by
reference to Exhibit 10.3 to the Corporations Form 10-K filed for the year
ended December 31, 2001.(10.8)
    Profit Sharing Plan  incorporated by reference to Exhibit 10.8 to the
Corporations Form 10-K filed for the year ended December 31, 2002.*(21)
    Subsidiaries of the Corporation  filed on the Corporations
Form 10-K filed December 31, 2001.(31.1)
    Certification of Principal Executive Officer Pursuant to Rules
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as
amended-filed herewith(31.2)
    Certification of Principal Financial Officer Pursuant to Rules
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended -
filed herewith(32.1)
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
Rand Capital Corporation  filed herewith(32.2)
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
Rand Capital SBIC, L.P.  filed herewith   *
    
    Management contract or compensatory plan.




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Signatures Pursuant to the requirements of Section 13 or15(d)of Securities Exchange Act of 1934, the
registrant has duly caused this Report onForm 10-Kto be signed on its behalf by the undersigned
thereunto duly authorized. Date: March 28, 2005
    
    RAND CAPITAL CORPORATIONBy:
    
    /s/ Allen F. GrumAllen F. Grum, President
 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has
been signed below by the following persons on behalf of the Corporation in the capacities and on
the date indicated. Signature/Title(i) Principal Executive Officer:/s/ Allen F. GrumAllen F. Grum / President
    
    March 28, 2005(ii) Principal Accounting & Financial Officer:/s/ Daniel P. PenberthyDaniel P. Penberthy / Treasurer
    
    March 28, 2005(iii) Directors:/s/ Allen F. GrumAllen F. Grum / Director
    
    March 28, 2005/s/ Luiz F. KahlLuiz F. Kahl / Director
    
    March 28, 2005/s/ Erland E. KailbourneErland E. Kailbourne / Director
    
    March 28, 2005/s/ Ross B. KenzieRoss B. Kenzie / Director
    
    March 28, 2005/s/ Willis S. McLeeseWillis S. McLeese / Director
    
    March 28, 2005/s/ Reginald B. Newman IIReginald B. Newman II / Director
    
    March 28, 2005/s/ Jayne K. RandJayne K. Rand / Director
    
    March 28, 2005