##### Table of Contents









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    
|  |  | For the fiscal year ended December 31, 2005                                                 
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|  |  | For the Transition Period
    from           to                                             

Commission file number: 001-08205


Rand Capital Corporation


(Exact Name of Registrant as specified in its Charter)


|                                                                   |  |                                  
|------------------------------------------------------------------ |  | ---------------------------------
|New York                                                           |  | 16-0961359                       
|(State or Other Jurisdiction of
    Incorporation or organization) |  | (IRS Employer Identification No.)
|                                                                  
|2200 Rand Building, Buffalo, NY                                    |  | 14203                            
|(Address of Principal executive offices)                           |  | (Zip Code)                       

(716) 853-0802


(Registrants Telephone No. Including Area Code)


Securities registered pursuant to Section 12(b) of the
Act:




Securities registered pursuant to Section 12(g) of the
Act:




o þ


o þ


þ o


S-K 10-K 10-K. þ


12b-2


o o þ


12b-2 o þ


12b-2 o þ






DOCUMENTS INCORPORATED BY REFERENCE












---



##### 










RAND CAPITAL CORPORATION


TABLE OF CONTENTS FOR
FORM 10-K


|                                                             |  |                                                                                           |  |      |    | 
|------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                             |  |                                                                                           |  | Page |   
|                                                             |  |                                                                                           |  |      |   
|PART I                                                      
|Item 1.                                                      |  | Business                                                                                  |  |      | 1  | 
|Item 1A.                                                     |  | Risk Factors                                                                              |  |      | 4  | 
|Item 2.                                                      |  | Properties                                                                                |  |      | 6  | 
|Item 3.                                                      |  | Legal Proceedings                                                                         |  |      | 6  | 
|Item 4.                                                      |  | Submission of Matters to a Vote of Security
    Holders                                   |  |      | 6  | 
|                                                            
|PART II                                                     
|Item 5.                                                      |  | Market for Registrants Common Equity
    and Related Stockholder Matters                 |  |      | 6  | 
|Item 6.                                                      |  | Selected Financial Data                                                                   |  |      | 7  | 
|Item 7.                                                      |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations |  |      | 8  | 
|Item 7A.                                                     |  | Quantitative and Qualitative Disclosures
    about Market Risk                            |  |      | 19 | 
|Item 8.                                                      |  | Financial Statements and Supplementary
    Data                                           |  |      | 19 | 
|Item 9.                                                      |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure  |  |      | 36 | 
|Item 9A.                                                     |  | Controls and Procedures                                                                   |  |      | 36 | 
|Item 9B.                                                     |  | Other Information                                                                         |  |      | 36 | 
|                                                            
|PART III                                                    
|Item 10.                                                     |  | Directors and Executive Officers of the
    Registrant                                    |  |      | 36 | 
|Item 11.                                                     |  | Executive Compensation                                                                    |  |      | 36 | 
|Item 12.                                                     |  | Security Ownership of Certain Beneficial
    Owners and Management                        |  |      | 36 | 
|Item 13.                                                     |  | Certain Relationships and Related
    Transactions                                        |  |      | 37 | 
|Item 14.                                                     |  | Principal Accounting Fees and Services                                                    |  |      | 37 | 
|                                                            
|PART IV                                                     
|Item 15.                                                     |  | Exhibits and Financial Statement
    Schedules                                            |  |      | 37 | 
|Exhibit 31.1 302 Certification - Principal Executive Officer
|Exhibit 31.2 302 Certification - Principal Financial Officer
|Exhibit 32.1 906 Certification - Principal Executive Officer
|Exhibit 32.2 906 Certification - Principal Financial Officer







---



##### Table of Contents






PART I







|        |         
|------- | --------
|Item 1. | Business







10-K, 10-Q, 8-K


Regulation as a BDC




1



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##### Table of Contents





over-the








SBIC Subsidiary








2



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| |   |                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                          





Regulation of SBIC Subsidiary




| |                     
| | --------------------
| | Lending Restrictions









| |             
| | ------------
| | SBA Leverage



3



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##### Table of Contents







10-year


Employees







Item 1A.     Risk
Factors




| |                                                    
| | ---------------------------------------------------
| | The Corporations Portfolio Investments are Illiquid





| |                                                                  
| | -----------------------------------------------------------------
| | Investing in Private Companies involves a High Degree of
    Risk





4



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##### Table of Contents





| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | The Corporation is Subject to Risks Created by the
    Valuation of its Portfolio Investments





| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | Investing in the Corporations Shares May be
    Inappropriate for the Investors Risk Tolerance





| |                                                                             
| | ----------------------------------------------------------------------------
| | The Corporation is Subject to Risks Created by its
    Regulated Environment





| |                                                                                
| | -------------------------------------------------------------------------------
| | The Corporation is Subject to Risks Created by Borrowing
    Funds from the SBA





| |                                    
| | -----------------------------------
| | The Economic Environment May Change





| |                                                                                  
| | ---------------------------------------------------------------------------------
| | The Corporation is Dependent Upon Key Management Personnel
    for Future Success



5



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| |                                                                                  
| | ---------------------------------------------------------------------------------
| | The Corporation Operates in a Competitive Market for
    Investment Opportunities





| |                                  
| | ---------------------------------
| | Fluctuations of Quarterly Results








|        |           
|------- | ----------
|Item 2. | Properties








|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings








|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security Holders






PART II







|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity and Related
    Stockholder Matters



|                     |  |      |      |  |     |   |      | 
|-------------------- |  | ---- | ---- |  | --- | - | ---- | 
|2005 Quarter ending: |  | High |      |  | Low |  
|                     |  |      |      |  |     |  
|March 31st           |  | $    | 1.67 |  |     | $ | 1.36 | 
|June 30th            |  | $    | 1.47 |  |     | $ | 1.17 | 
|September 30th       |  | $    | 1.34 |  |     | $ | 1.16 | 
|December 31st        |  | $    | 1.53 |  |     | $ | 1.09 | 

|                     |  |      |      |  |     |   |      | 
|-------------------- |  | ---- | ---- |  | --- | - | ---- | 
|2004 Quarter ending: |  | High |      |  | Low |  
|                     |  |      |      |  |     |  
|March 31st           |  | $    | 1.65 |  |     | $ | 1.15 | 
|June 30th            |  | $    | 2.45 |  |     | $ | 1.20 | 
|September 30th       |  | $    | 1.59 |  |     | $ | 1.31 | 
|December 31st        |  | $    | 3.10 |  |     | $ | 1.20 | 

6



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Profit Sharing and Stock Option Plans















|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



Balance Sheet Data as of December 31:


|                                      |  |      |            |  |      |   |            |      |  |   |           |  |  |      |           |  |  |   |            | 
|------------------------------------- |  | ---- | ---------- |  | ---- | - | ---------- | ---- |  | - | --------- |  |  | ---- | --------- |  |  | - | ---------- | 
|                                      |  | 2005 |            |  | 2004 |   |            | 2003 |  |   | 2002      |  |  | 2001 |          
|                                      |  |      |            |  |      |   |            |      |  |   |           |  |  |      |          
|Total assets                          |  | $    | 16,063,605 |  |      | $ | 12,743,109 |      |  | $ | 9,385,137 |  |  | $    | 9,685,673 |  |  | $ | 10,282,493 | 
|Total liabilities                     |  | $    | 7,447,671  |  |      | $ | 3,716,055  |      |  | $ | 146,649   |  |  | $    | 81,039    |  |  | $ | 224,209    | 
|Net assets                            |  | $    | 8,615,934  |  |      | $ | 9,027,054  |      |  | $ | 9,238,488 |  |  | $    | 9,604,634 |  |  | $ | 10,058,284 | 
|Net asset value per outstanding share |  | $    | 1.51       |  |      | $ | 1.58       |      |  | $ | 1.62      |  |  | $    | 1.67      |  |  | $ | 1.75       | 
|Common stock shares outstanding       |  |      | 5,718,934  |  |      |   | 5,718,934  |      |  |   | 5,718,934 |  |  |      | 5,738,634 |  |  |   | 5,763,034  | 

7



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##### Table of Contents



Operating Data for the year ended December 31:


|                                                      |  |      |           |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |            |  
|----------------------------------------------------- |  | ---- | --------- | - | ---- | - | -------- | ---- |  | - | -------- | - |  | ---- | -------- | - |  | - | ---------- | -
|                                                      |  | 2005 |           |   | 2004 |   |          | 2003 |  |   | 2002     |   |  | 2001 |         
|                                                      |  |      |           |   |      |   |          |      |  |   |          |   |  |      |         
|Investment income                                     |  | $    | 736,573   |   |      | $ | 757,704  |      |  | $ | 449,858  |   |  | $    | 261,230  |   |  | $ | 159,479    |  
|Total expenses                                        |  | $    | 1,265,846 |   |      | $ | 900,812  |      |  | $ | 942,799  |   |  | $    | 858,305  |   |  | $ | 825,765    |  
|Net investment loss                                   |  | $    | (175,179  | ) |      | $ | (112,384 | )    |  | $ | (346,043 | ) |  | $    | (738,046 | ) |  | $ | (1,551,001 | )
|Net realized (loss)gain on investments                |  | $    | (382,353  | ) |      | $ | 26,727   |      |  | $ | 87,841   |   |  | $    | 888,399  |   |  | $ | 3,286,078  |  
|Net (increase) decrease in unrealized depreciation    |  | $    | 146,412   |   |      | $ | (125,777 | )    |  | $ | (86,441  | ) |  | $    | (578,299 | ) |  | $ | (94,365    | )
|Net (decrease) increase in net assets from operations |  | $    | (411,120  | ) |      | $ | (211,434 | )    |  | $ | (344,643 | ) |  | $    | (427,946 | ) |  | $ | 1,640,712  |  






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations



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 contained in Part I, Item 1B, 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






8



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| |                                                                                   
| | ----------------------------------------------------------------------------------
| | 1) a qualified and experienced management team                                    
|
| | 2) new or unique products or services with a sustainable
    competitive advantage
|
| | 3) a potential for growth in cash flow                                            
|
| | 4) a potential to realize appreciation in our equity
    position, if any.        











Critical Accounting Policies






9



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| |                         
| | ------------------------
| | Valuation of Investments













| |                                      
| | -------------------------------------
| | Revenue Recognition (Interest Income)





10



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| |                    
| | -------------------
| | Deferred Tax Assets



Financial Condition




| |          
| | ---------
| | Overview:

|                  |  |          |            |  |          |   |            |                     |  |   |           |  
|----------------- |  | -------- | ---------- |  | -------- | - | ---------- | ------------------- |  | - | --------- | -
|                  |  | 12/31/05 |            |  | 12/31/04 |   |            | Increase (Decrease) | 
|                  |  |          |            |  |          |   |            |                     | 
|Total assets      |  | $        | 16,063,605 |  |          | $ | 12,743,109 |                     |  | $ | 3,320,496 |  
|Total liabilities |  |          | 7,447,671  |  |          |   | 3,716,055  |                     |  |   | 3,731,616 |  
|                  |  |          |            |  |          |   |            |                     | 
|Net assets        |  | $        | 8,615,934  |  |          | $ | 9,027,054  |                     |  | $ | (411,120  | )
|                  |  |          |            |  |          |   |            |                     | 



|                             |  |          |            |   |          |          |            |            |  |   |           | 
|---------------------------- |  | -------- | ---------- | - | -------- | -------- | ---------- | ---------- |  | - | --------- | 
|                             |  |          |            |   |          | Increase |           
|                             |  | 12/31/05 |            |   | 12/31/04 |          |            | (Decrease) | 
|                             |  |          |            |   |          |          |            |            | 
|Investments, at cost         |  | $        | 13,712,890 |   |          | $        | 11,621,853 |            |  | $ | 2,091,037 | 
|Unrealized depreciation, net |  |          | (342,028   | ) |          |          | (586,047   | )          |  |   | 244,019   | 
|                             |  |          |            |   |          |          |            |            | 
|Investments at fair value    |  | $        | 13,370,862 |   |          | $        | 11,035,806 |            |  | $ | 2,335,056 | 
|                             |  |          |            |   |          |          |            |            | 



|                                                                                                   |  |        |           | 
|-------------------------------------------------------------------------------------------------- |  | ------ | --------- | 
|New Investments                                                                                    |  | Amount |          
|                                                                                                   |  |        |          
|Concentrix Corporation (Concentrix)                                                                |  | $      | 600,000   | 
|EmergingMed.com, Inc. (EmergingMed)                                                                |  |        | 500,000   | 
|Topps Meat Company LLC (Topps)                                                                     |  |        | 336,000   | 
|Innov-X Systems, Inc. (Innov-X)                                                                    |  |        | 285,000   | 
|Kionix, Inc. (Kionix)                                                                              |  |        | 260,584   | 
|Rocket Broadband Networks, Inc. (Rocket Broadband)                                                 |  |        | 204,082   | 
|Ultra-Scan Corporation (Ultra-Scan)                                                                |  |        | 200,000   | 
|G-Tec Natural Gas Systems (G-Tec)                                                                  |  |        | 125,000   | 
|APF Group, Inc. (APF)                                                                              |  |        | 94,594    | 
|                                                                                                   |  |        |          
|Total of investments made during the year ended
    December 31, 2005                              |  | $      | 2,605,260 | 
|                                                                                                   |  |        |          
|Interest conversions:                                                                              |  |        |           | 
|Somerset Gas Transmission Company (Somerset)                                                       |  |        | 19,097    | 
|Photonics Product Group (Photonics)                                                                |  |        | 10,000    | 
|Kionix                                                                                             |  |        | 1,756     | 
|                                                                                                   |  |        |          
|Total of new investments and interest conversions made during
    the year ended December 31, 2005 |  | $      | 2,636,113 | 
|                                                                                                   |  |        |          

11



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Results of Operations


Investment Income






| |                                                             
| | ------------------------------------------------------------
| | Comparison of the years ended December 31, 2005 and
    2004

|                                     |  |              |         |  |              |   |         |            |  |   |            |   |  |  |      |   
|------------------------------------ |  | ------------ | ------- |  | ------------ | - | ------- | ---------- |  | - | ---------- | - |  |  | ---- | --
|                                     |  | December 31, |         |  | December 31, |   |         | Increase   |  |   | % Increase |  
|                                     |  | 2005         |         |  | 2004         |   |         | (Decrease) |  |   | (Decrease) |  
|                                     |  |              |         |  |              |   |         |            |  |   |            |  
|Interest from portfolio companies    |  | $            | 593,125 |  |              | $ | 645,206 |            |  | $ | (52,081    | ) |  |  | (8.1 | )%
|Interest from other investments      |  |              | 3,601   |  |              |   | 2,581   |            |  |   | 1,020      |   |  |  | 39.5 | % 
|Dividend and other investment income |  |              | 94,930  |  |              |   | 64,823  |            |  |   | 30,107     |   |  |  | 46.4 | % 
|Other income                         |  |              | 44,917  |  |              |   | 45,094  |            |  |   | (177       | ) |  |  | (0.4 | )%
|                                     |  |              |         |  |              |   |         |            |  |   |            |  
|Total investment income              |  | $            | 736,573 |  |              | $ | 757,704 |            |  | $ | (21,131    | ) |  |  | (2.8 | )%
|                                     |  |              |         |  |              |   |         |            |  |   |            |  

Interest from portfolio companies


12



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|             |  |          |    |   |            |  |         |                    |  |  |      | 
|------------ |  | -------- | -- | - | ---------- |  | ------- | ------------------ |  |  | ---- | 
|             |  | Interest |    |   | Investment |  |         | Year that Interest | 
|Company      |  | Rate     |    |   | Cost       |  |         | Accrual Ceased     | 
|             |  |          |    |   |            |  |         |                    | 
|G-Tec        |  |          | 8  | % |            |  | 400,000 |                    |  |  | 2004 | 
|Vanguard     |  |          | 14 | % |            |  | 270,000 |                    |  |  | 2003 | 
|WineIsIt.com |  |          | 10 | % |            |  | 801,918 |                    |  |  | 2005 | 

Interest from other investments


Dividend and other investment income




Other income






| |                                                             
| | ------------------------------------------------------------
| | Comparison of the years ended December 31, 2004 and
    2003

|                                     |  |              |         |  |              |   |         |            |  |   |            |   |  |  |       |   
|------------------------------------ |  | ------------ | ------- |  | ------------ | - | ------- | ---------- |  | - | ---------- | - |  |  | ----- | --
|                                     |  | December 31, |         |  | December 31, |   |         | Increase   |  |   | % Increase |  
|                                     |  | 2004         |         |  | 2003         |   |         | (Decrease) |  |   | (Decrease) |  
|                                     |  |              |         |  |              |   |         |            |  |   |            |  
|Interest from portfolio companies    |  | $            | 645,206 |  |              | $ | 369,517 |            |  | $ | 275,689    |   |  |  | 74.6  | % 
|Interest from other investments      |  |              | 2,581   |  |              |   | 20,970  |            |  |   | (18,389    | ) |  |  | (87.7 | )%
|Dividend and other investment income |  |              | 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  | % 
|                                     |  |              |         |  |              |   |         |            |  |   |            |  

13



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##### Table of Contents



Interest from portfolio companies




Interest from other investments


Dividend and other investment income


Other Income


Operating Expenses




| |                                                             
| | ------------------------------------------------------------
| | Comparison of the years ended December 31, 2005 and
    2004

|               |  |              |           |  |              |   |         |          |  |            |  |  |       | 
|-------------- |  | ------------ | --------- |  | ------------ | - | ------- | -------- |  | ---------- |  |  | ----- | 
|               |  | December 31, |           |  | December 31, |   |         |          |  |           
|               |  | 2005         |           |  | 2004         |   |         | Increase |  | % Increase | 
|               |  |              |           |  |              |   |         |          |  |            | 
|Total expenses |  | $            | 1,265,846 |  |              | $ | 900,812 |          |  | $365,034   |  |  | 40.5% | 









14



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| |                                                             
| | ------------------------------------------------------------
| | Comparison of the years ended December 31, 2004 and
    2003

|               |  |              |         |  |              |   |         |            |  |   |              |   |  |  |      |   
|-------------- |  | ------------ | ------- |  | ------------ | - | ------- | ---------- |  | - | ------------ | - |  |  | ---- | --
|               |  | December 31, |         |  | December 31, |   |         |            |  |  
|               |  | 2004         |         |  | 2003         |   |         | (Decrease) |  |   | % (Decrease) |  
|               |  |              |         |  |              |   |         |            |  |   |              |  
|Total expenses |  | $            | 900,812 |  |              | $ | 942,799 |            |  | $ | (41,987      | ) |  |  | (4.4 | )%





Net Realized Gains and Losses on Investments




| |                                                             
| | ------------------------------------------------------------
| | Comparison of the years ended December 31, 2005 and
    2004







| |                                                             
| | ------------------------------------------------------------
| | Comparison of the years ended December 31, 2004 and
    2003





Net Change in Unrealized Appreciation/ Depreciation of
Investments




| |                                               
| | ----------------------------------------------
| | For the years ended December 31, 2005 and 2004



15



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##### Table of Contents





|                                                |                                         |   |          |         | 
|----------------------------------------------- | --------------------------------------- | - | -------- | ------- | 
|Reclass DLisi unrealized loss to realized loss |                                         | $ | 400,000  |        
|Topps                                           |                                         |   | 332,000  |        
|Minrad International, Inc. (Minrad)             |                                         |   | 272,000  |        
|Carolina Skiff                                  |                                         |   | 38,000   |        
|Kionix                                          |                                         |   | (284,477 | )      
|Wineisit.com                                    |                                         |   | (250,000 | )      
|Vanguard                                        |                                         |   | (135,000 | )      
|Ultrascan                                       |                                         |   | (73,174  | )      
|Somerset                                        |                                         |   | (50,349  | )      
|Photonics                                       |                                         |   | (4,980   | )      
|                                                |                                         |   |         
|                                                | Total change in unrealized depreciation |   | $        | 244,020 | 
|                                                |                                         |   |         



















| |                                               
| | ----------------------------------------------
| | For the years ended December 31, 2004 and 2003



16



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##### Table of Contents





|                                         |                                         |   |          |          |  
|---------------------------------------- | --------------------------------------- | - | -------- | -------- | -
|Minrad                                   |                                         | $ | 338,500  |         
|Somerset                                 |                                         |   | 118,000  |         
|Clearview Cable                          |                                         |   | 27,541   |         
|Synacor                                  |                                         |   | 4,337    |         
|Photonics                                |                                         |   | 3,200    |         
|DLisi                                   |                                         |   | (400,000 | )       
|Dataview, LLC (Dataview)                 |                                         |   | (155,179 | )       
|G-Tec                                    |                                         |   | (100,000 | )       
|Reclass ADIC unrealized loss to realized |                                         |   | (23,456  | )       
|SmartPill Diagnostics, Inc. (SmartPill)  |                                         |   | (19,680  | )       
|                                         |                                         |   |         
|                                         | Total change in unrealized depreciation |   | $        | (206,737 | )
|                                         |                                         |   |         











|                                   |                                         |   |          |          |  
|---------------------------------- | --------------------------------------- | - | -------- | -------- | -
|Ultrascan                          |                                         | $ | 5,116    |         
|Synacor                            |                                         |   | 4,337    |         
|Somerset                           |                                         |   | (183,333 | )       
|USTec                              |                                         |   | (25,000  | )       
|Reclass ADIC valuation to realized |                                         |   | (18,645  | )       
|Photonics (formerly Inrad)         |                                         |   | (7,520   | )       
|American Tactile                   |                                         |   | (5,000   | )       
|                                   |                                         |   |         
|                                   | Total change in unrealized depreciation |   | $        | (230,045 | )
|                                   |                                         |   |         

17



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##### Table of Contents







Net Decrease in Net Assets from Operations






Liquidity and Capital Resources












|                                                   |  |                           |           |          |      |   |           |      |  |   |         |  |  |        |         |  |  |   |           | 
|-------------------------------------------------- |  | ------------------------- | --------- | -------- | ---- | - | --------- | ---- |  | - | ------- |  |  | ------ | ------- |  |  | - | --------- | 
|                                                   |  | Cash Receipts due by Year |          
|                                                   |  |                           |          
|                                                   |  |                           |           | 2010 and |     
|                                                   |  | 2006                      |           |          | 2007 |   |           | 2008 |  |   | 2009    |  |  | beyond |        
|                                                   |  |                           |           |          |      |   |           |      |  |   |         |  |  |        |        
|Anticipated Cash Receipts from Portfolio Companies |  | $                         | 1,011,000 |          |      | $ | 2,960,000 |      |  | $ | 945,000 |  |  | $      | 600,000 |  |  | $ | 2,400,000 | 

18



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##### Table of Contents



Disclosure of Contractual Obligations




|                                                   |       |                        |           |           |        |   |        |        |  |     |        |        |      |            |        |        |  |   |           |           | 
|-------------------------------------------------- | ----- | ---------------------- | --------- | --------- | ------ | - | ------ | ------ |  | --- | ------ | ------ | ---- | ---------- | ------ | ------ |  | - | --------- | --------- | 
|                                                   |       | Payments due by period |          
|                                                   |       |                        |          
|                                                   |       |                        |           | Less than |        |   | 1-3    |        |  | 4-5 |        |        | More |           
|                                                   |       | Total                  |           |           | 1 Year |   |        | Years  |  |     | Years  |        |      | than 5 yrs |       
|                                                   |       |                        |           |           |        |   |        |        |  |     |        |        |      |            |       
|SBA Debentures                                     |       | $                      | 7,200,000 |           |        | $ | 0      |        |  | $   | 0      |        |      | $          | 0      |        |  | $ | 7,200,000 |          
|Operating Lease Obligations (Rent of office space) |       | $                      | 78,600    |           |        | $ | 15,000 |        |  | $   | 47,160 |        |      | $          | 16,440 |        |  | $ | 0         |          
|                                                   | Total |                        | $         | 7,278,600 |        |   | $      | 15,000 |  |     | $      | 47,160 |      |            | $      | 16,440 |  |   | $         | 7,200,000 | 






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures about Market
    Risk



over-the









|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data





| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | Statements of Financial Position as of December 31, 2005
    and 2004                                                          
|
| | Statements of Operations for the three years in the period ended
    December 31, 2005                                         
|
| | Statements of Cash Flows for the three years in the period ended
    December 31, 2005                                         
|
| | Statements of Changes in Net Assets for the three years in the
    period ended December 31, 2005                              
|
| | Schedule of Portfolio Investments as of December 31, 2005                                                                      
|
| | Schedules of Selected Per Share Data and Ratios for the five
    years in the period ended December 31, 2005                   
|
| | Notes to the Consolidated Financial Statements                                                                                 
|
| | Supplemental Schedule of Consolidated Changes in Investments at
    Cost and Realized Loss for the year ended December 31, 2005
|
| | Report of Independent Registered Public Accounting Firm                                                                        

19



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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF FINANCIAL POSITION


December 31,


|                                                                                            |                                                                              |                   |            |            |           |   |            |            |           | 
|------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ----------------- | ---------- | ---------- | --------- | - | ---------- | ---------- | --------- | 
|                                                                                            |                                                                              | 2005              |            |            | 2004      |  
|                                                                                            |                                                                              |                   |            |            |           |  
|Assets                                                                                      |                                                                              |                   |            |            |           |   |            |           
|Investments at fair value (identified cost: 2005 
    $13,712,890;
    2004  $11,621,853) |                                                                              | $                 | 13,370,862 |            |           | $ | 11,035,806 |           
|Cash and cash equivalents                                                                   |                                                                              |                   | 1,209,839  |            |           |   | 626,744    |           
|Interest receivable (net of allowance: 2005 
    $236,870;
    2004  $122,000)            |                                                                              |                   | 297,619    |            |           |   | 260,490    |           
|Deferred tax asset                                                                          |                                                                              |                   | 846,000    |            |           |   | 566,000    |           
|Promissory notes receivable                                                                 |                                                                              |                   |           |            |           |   | 36,195     |           
|Prepaid income taxes                                                                        |                                                                              |                   | 15,582     |            |           |   | 11,579     |           
|Other assets                                                                                |                                                                              |                   | 323,703    |            |           |   | 206,295    |           
|                                                                                            |                                                                              |                   |            |            |           |  
|Total assets                                                                                |                                                                              | $                 | 16,063,605 |            |           | $ | 12,743,109 |           
|                                                                                            |                                                                              |                   |            |            |           |  
|                                                                                           
|Liabilities and Stockholders Equity (net assets)                                          
|Liabilities:                                                                                |                                                                              |                   |            |            |           |   |            |           
|                                                                                            | SBA debenture obligations                                                    |                   | $          | 7,200,000  |           |   | $          | 3,500,000  |          
|                                                                                            | Accounts payable and accrued expenses                                        |                   |            | 167,788    |           |   |            | 132,897    |          
|                                                                                            | Deferred revenue                                                             |                   |            | 79,883     |           |   |            | 83,158     |          
|                                                                                            |                                                                              |                   |            |            |           |  
|                                                                                            |                                                                              | Total liabilities |            |            | 7,447,671 |   |            |            | 3,716,055 | 
|                                                                                            |                                                                              |                   |            |            |           |  
|Stockholders equity (net assets):                                                          |                                                                              |                   |            |            |           |   |            |           
|                                                                                            | Common stock, $.10 par; shares authorized 
    10,000,000; issued 5,763,034 |                   |            | 576,304    |           |   |            | 576,304    |          
|                                                                                            | Capital in excess of par value                                               |                   |            | 6,973,454  |           |   |            | 6,973,454  |          
|                                                                                            | Accumulated net investment loss                                              |                   |            | (4,988,326 | )         |   |            | (4,813,146 | )        
|                                                                                            | Undistributed net realized gain on investments                               |                   |            | 6,306,925  |           |   |            | 6,689,277  |          
|                                                                                            | Net unrealized depreciation on investments                                   |                   |            | (205,217   | )         |   |            | (351,629   | )        
|                                                                                            | Treasury stock, at cost, 44,100 shares                                       |                   |            | (47,206    | )         |   |            | (47,206    | )        
|                                                                                            |                                                                              |                   |            |            |           |  
|                                                                                            | Net assets (per share 2005  $1.51; 2004 
    $1.58)                        |                   |            | 8,615,934  |           |   |            | 9,027,054  |          
|                                                                                            |                                                                              |                   |            |            |           |  
|Total liabilities and stockholders equity (net
    assets)                                 |                                                                              | $                 | 16,063,605 |            |           | $ | 12,743,109 |           
|                                                                                            |                                                                              |                   |            |            |           |  



20



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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


For The Years Ended December 31, 2005, 2004 and 2003


|                                                                           |                                                    |                                                         |                |          |          |           |           |         |          |         |           |          |          |         | 
|-------------------------------------------------------------------------- | -------------------------------------------------- | ------------------------------------------------------- | -------------- | -------- | -------- | --------- | --------- | ------- | -------- | ------- | --------- | -------- | -------- | ------- | 
|                                                                           |                                                    | 2005                                                    |                |          | 2004     |           |           | 2003    |         
|                                                                           |                                                    |                                                         |                |          |          |           |           |         |         
|Investment income:                                                         |                                                    |                                                         |                |          |          |           |           |         |          |         |           |         
|                                                                           | Interest from portfolio companies                  |                                                         | $              | 593,125  |          |           | $         | 645,206 |          |         | $         | 369,517  |         
|                                                                           | Interest from other investments                    |                                                         |                | 3,601    |          |           |           | 2,581   |          |         |           | 20,970   |         
|                                                                           | Dividend and other investment income               |                                                         |                | 94,930   |          |           |           | 64,823  |          |         |           | 49,787   |         
|                                                                           | Other income                                       |                                                         |                | 44,917   |          |           |           | 45,094  |          |         |           | 9,584    |         
|                                                                           |                                                    |                                                         |                |          |          |           |           |         |         
|                                                                           |                                                    |                                                         | 736,573        |          |          |           | 757,704   |         |          |         | 449,858   |         
|                                                                           |                                                    |                                                         |                |          |          |           |           |         |         
|Expenses:                                                                  |                                                    |                                                         |                |          |          |           |           |         |          |         |           |         
|                                                                           | Salaries                                           |                                                         |                | 400,340  |          |           |           | 380,154 |          |         |           | 333,846  |         
|                                                                           | Employee benefits                                  |                                                         |                | 99,569   |          |           |           | 85,200  |          |         |           | 95,208   |         
|                                                                           | Directors fees                                    |                                                         |                | 54,200   |          |           |           | 45,100  |          |         |           | 46,050   |         
|                                                                           | Professional fees                                  |                                                         |                | 96,917   |          |           |           | 63,594  |          |         |           | 118,916  |         
|                                                                           | Stockholders and office operating                  |                                                         |                | 115,386  |          |           |           | 116,032 |          |         |           | 105,062  |         
|                                                                           | Insurance                                          |                                                         |                | 46,017   |          |           |           | 46,062  |          |         |           | 43,000   |         
|                                                                           | Corporate development                              |                                                         |                | 51,875   |          |           |           | 44,723  |          |         |           | 34,107   |         
|                                                                           | Other operating                                    |                                                         |                | 9,385    |          |           |           | 13,454  |          |         |           | 43,696   |         
|                                                                           |                                                    |                                                         |                |          |          |           |           |         |         
|                                                                           |                                                    |                                                         | 873,689        |          |          |           | 794,319   |         |          |         | 819,885   |         
|                                                                           | Interest on SBA obligations                        |                                                         |                | 277,287  |          |           |           | 107,407 |          |         |           |         |         
|                                                                           | Bad debt expense (recovery)                        |                                                         |                | 114,870  |          |           |           | (914    | )        |         |           | 122,914  |         
|                                                                           |                                                    |                                                         |                |          |          |           |           |         |         
|                                                                           |                                                    |                                                         | Total expenses |          |          | 1,265,846 |           |         |          | 900,812 |           |          |          | 942,799 | 
|                                                                           |                                                    |                                                         |                |          |          |           |           |         |         
|Investment loss before income taxes                                        |                                                    |                                                         | (529,273       | )        |          |           | (143,108  | )       |          |         | (492,941  | )       
|                                                                           |                                                    |                                                         |                |          |          |           |           |         |         
|                                                                           | Current income tax expense                         |                                                         |                | 23,514   |          |           |           | 24,316  |          |         |           | 27,498   |         
|                                                                           | Deferred income tax benefit                        |                                                         |                | (377,608 | )        |           |           | (55,040 | )        |         |           | (174,396 | )       
|                                                                           |                                                    |                                                         |                |          |          |           |           |         |         
|Net investment loss                                                        |                                                    |                                                         | (175,179       | )        |          |           | (112,384  | )       |          |         | (346,043  | )       
|                                                                           |                                                    |                                                         |                |          |          |           |           |         |         
|Realized and unrealized gain (loss) on investments:                        |                                                    |                                                         |                |          |          |           |           |         |          |         |           |         
|                                                                           | Net realized (loss) gain on sales and dispositions |                                                         |                | (382,353 | )        |           |           | 26,727  |          |         |           | 87,841   |         
|                                                                           |                                                    |                                                         |                |          |          |           |           |         |         
|                                                                           | Unrealized (depreciation) on investments:          |                                                         |                |          |          |           |           |         |          |         |           |          |         
|                                                                           |                                                    | Beginning of year                                       |                |          | (586,048 | )         |           |         | (379,311 | )       |           |          | (149,266 | )      
|                                                                           |                                                    | End of year                                             |                |          | (342,028 | )         |           |         | (586,048 | )       |           |          | (379,311 | )      
|                                                                           |                                                    |                                                         |                |          |          |           |           |         |         
|                                                                           |                                                    | Change in unrealized (depreciation) before income taxes |                |          | 244,020  |           |           |         | (206,737 | )       |           |          | (230,045 | )      
|                                                                           |                                                    | Deferred income tax expense (benefit)                   |                |          | 97,608   |           |           |         | (80,960  | )       |           |          | (143,604 | )      
|                                                                           |                                                    |                                                         |                |          |          |           |           |         |         
|Net decrease (increase) in unrealized depreciation                         |                                                    |                                                         | 146,412        |          |          |           | (125,777  | )       |          |         | (86,441   | )       
|                                                                           |                                                    |                                                         |                |          |          |           |           |         |         
|Net realized and unrealized (loss) gain on investments                     |                                                    |                                                         | (235,941       | )        |          |           | (99,050   | )       |          |         | 1,400     |         
|                                                                           |                                                    |                                                         |                |          |          |           |           |         |         
|Net decrease in net assets from operations                                 |                                                    | $                                                       | (411,120       | )        |          | $         | (211,434  | )       |          | $       | (344,643  | )       
|                                                                           |                                                    |                                                         |                |          |          |           |           |         |         
|Weighted average shares outstanding                                        |                                                    |                                                         | 5,718,934      |          |          |           | 5,718,934 |         |          |         | 5,722,776 |         
|Basic and diluted net decrease in net assets from operations
    per share |                                                    | $                                                       | (0.07          | )        |          | $         | (0.04     | )       |          | $       | (0.06     | )       



21



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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS


For The Years Ended December 31, 2005, 2004 and 2003


|                                                                                                                                    |                            |      |           |   |      |   |           |      |  |   |           |         |  
|----------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | ------- | -
|                                                                                                                                    |                            | 2005 |           |   | 2004 |   |           | 2003 | 
|                                                                                                                                    |                            |      |           |   |      |   |           |      | 
|Net assets at beginning of year                                                                                                     |                            | $    | 9,027,054 |   |      | $ | 9,238,488 |      |  | $ | 9,604,634 |        
|                                                                                                                                    |                            |      |           |   |      |   |           |      | 
|Net investment loss                                                                                                                 |                            |      | (175,179  | ) |      |   | (112,384  | )    |  |   | (346,043  | )      
|Net realized (loss) gain on investments                                                                                             |                            |      | (382,353  | ) |      |   | 26,727    |      |  |   | 87,841    |        
|Net decrease (increase) in unrealized depreciation on investments                                                                   |                            |      | 146,412   |   |      |   | (125,777  | )    |  |   | (86,441   | )      
|                                                                                                                                    |                            |      |           |   |      |   |           |      | 
|Net decrease in net assets from operations                                                                                          |                            |      | (411,120  | ) |      |   | (211,434  | )    |  |   | (344,643  | )      
|                                                                                                                                    |                            |      |           |   |      |   |           |      | 
|Other changes:                                                                                                                      |                            |      |           |   |      |   |           |      |  |   |           |        
|                                                                                                                                    | Purchase of treasury stock |      |           |  |      |   |           |     |  |   |           | (21,503 | )
|                                                                                                                                    |                            |      |           |   |      |   |           |      | 
|Net assets at end of year (including accumulated net
    investment loss of $4,988,326 $4,813,146, and $4,700,763
    respectively) |                            | $    | 8,615,934 |   |      | $ | 9,027,054 |      |  | $ | 9,238,488 |        
|                                                                                                                                    |                            |      |           |   |      |   |           |      | 



22



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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


For The Years Ended December 31, 2005, 2004 and 2003


|                                                     |                                                                                                   |                                                               |                                                            |                                                  |          |          |            |            |          |         |            |            |          |          |            |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | ---------------------------------------------------------- | ------------------------------------------------ | -------- | -------- | ---------- | ---------- | -------- | ------- | ---------- | ---------- | -------- | -------- | ---------- | -
|                                                     |                                                                                                   | 2005                                                          |                                                            |                                                  | 2004     |          |            | 2003       |         
|                                                     |                                                                                                   |                                                               |                                                            |                                                  |          |          |            |            |         
|Cash flows from operating activities:                |                                                                                                   |                                                               |                                                            |                                                  |          |          |            |            |          |         |            |           
|                                                     | Net decrease in net assets from operations                                                        |                                                               | $                                                          | (411,120                                         | )        |          | $          | (211,434   | )        |         | $          | (344,643   | )       
|                                                     | Adjustments to reconcile net decrease in net assets to net cash
    used in operating activities: |                                                               |                                                            |                                                  |          |          |            |            |          |         |            |            |         
|                                                     |                                                                                                   | Depreciation and amortization                                 |                                                            |                                                  | 23,297   |          |            |            | 14,890   |         |            |            | 8,803    |         
|                                                     |                                                                                                   | Change in interest receivable allowance                       |                                                            |                                                  | 114,870  |          |            |            | (914     | )       |            |            | 122,914  |         
|                                                     |                                                                                                   | (Decrease) increase in unrealized depreciation of investments |                                                            |                                                  | (244,020 | )        |            |            | 206,737  |         |            |            | 230,045  |         
|                                                     |                                                                                                   | Deferred tax benefit                                          |                                                            |                                                  | (280,000 | )        |            |            | (136,000 | )       |            |            | (318,000 | )       
|                                                     |                                                                                                   | Net realized loss (gain) on portfolio investments             |                                                            |                                                  | 382,353  |          |            |            | (26,727  | )       |            |            | (87,841  | )       
|                                                     |                                                                                                   | Non-cash conversion of debenture interest                     |                                                            |                                                  | (30,852  | )        |            |            | (138,319 | )       |            |            | (69,811  | )       
|                                                     |                                                                                                   | Changes in operating assets and liabilities:                  |                                                            |                                                  |          |          |            |            |          |         |            |            |          |         
|                                                     |                                                                                                   |                                                               | (Increase) decrease in interest receivable                 |                                                  |          | (151,999 | )          |            |          | 75,158  |            |            |          | (181,976 | )         
|                                                     |                                                                                                   |                                                               | (Increase) in other assets                                 |                                                  |          | (48,207  | )          |            |          | (29,504 | )          |            |          |         |           
|                                                     |                                                                                                   |                                                               | Increase in accounts payable and other accrued liabilities |                                                  |          | 34,891   |            |            |          | 33,001  |            |            |          | 55,936   |           
|                                                     |                                                                                                   |                                                               | (Decrease) increase in deferred revenue                    |                                                  |          | (3,275   | )          |            |          | 36,405  |            |            |          | 10,087   |           
|                                                     |                                                                                                   |                                                               |                                                            |                                                  |          |          |            |            |         
|                                                     |                                                                                                   |                                                               |                                                            | Total adjustments                                |          |          | (202,942   | )          |          |         | 34,727     |            |          |          | (229,843   | )
|                                                     |                                                                                                   |                                                               |                                                            |                                                  |          |          |            |            |         
|                                                     |                                                                                                   |                                                               |                                                            | Net cash used in operating activities            |          |          | (614,062   | )          |          |         | (176,707   | )          |          |          | (574,486   | )
|                                                     |                                                                                                   |                                                               |                                                            |                                                  |          |          |            |            |         
|Cash flows from investing activities:                |                                                                                                   |                                                               |                                                            |                                                  |          |          |            |            |          |         |            |           
|                                                     | Investments originated                                                                            |                                                               |                                                            | (2,605,260                                       | )        |          |            | (4,464,000 | )        |         |            | (1,359,000 | )       
|                                                     | Proceeds from sale of portfolio investments                                                       |                                                               |                                                            | 17,647                                           |          |          |            | 86,813     |          |         |            | 104,301    |         
|                                                     | Proceeds from loan repayments                                                                     |                                                               |                                                            | 181,271                                          |          |          |            | 572,824    |          |         |            | 62,011     |         
|                                                     | Capital expenditures                                                                              |                                                               |                                                            | (4,001                                           | )        |          |            | (6,232     | )        |         |            | (1,967     | )       
|                                                     |                                                                                                   |                                                               |                                                            |                                                  |          |          |            |            |         
|                                                     |                                                                                                   |                                                               |                                                            | Net cash used in investing activities            |          |          | (2,410,343 | )          |          |         | (3,810,595 | )          |          |          | (1,194,655 | )
|                                                     |                                                                                                   |                                                               |                                                            |                                                  |          |          |            |            |         
|Cash flows from financing activities:                |                                                                                                   |                                                               |                                                            |                                                  |          |          |            |            |          |         |            |           
|                                                     | Proceeds from SBA debenture                                                                       |                                                               |                                                            | 3,700,000                                        |          |          |            | 3,500,000  |          |         |            |           |         
|                                                     | Origination costs to SBA                                                                          |                                                               |                                                            | (92,500                                          | )        |          |            | (87,500    | )        |         |            |           |         
|                                                     | Purchase of SBA commitment                                                                        |                                                               |                                                            |                                                 |          |          |            | (50,000    | )        |         |            | (50,000    | )       
|                                                     | Purchase of treasury stock                                                                        |                                                               |                                                            |                                                 |          |          |            |           |          |         |            | (21,502    | )       
|                                                     |                                                                                                   |                                                               |                                                            |                                                  |          |          |            |            |         
|                                                     |                                                                                                   |                                                               |                                                            | Net cash provided (used) by financing activities |          |          | 3,607,500  |            |          |         | 3,362,500  |            |          |          | (71,502    | )
|                                                     |                                                                                                   |                                                               |                                                            |                                                  |          |          |            |            |         
|Net increase (decrease) in cash and cash equivalents |                                                                                                   |                                                               | 583,095                                                    |                                                  |          |          | (624,802   | )          |          |         | (1,840,643 | )         
|Cash and cash equivalents:                           |                                                                                                   |                                                               |                                                            |                                                  |          |          |            |            |          |         |            |           
|                                                     | Beginning of year                                                                                 |                                                               |                                                            | 626,744                                          |          |          |            | 1,251,546  |          |         |            | 3,092,189  |         
|                                                     |                                                                                                   |                                                               |                                                            |                                                  |          |          |            |            |         
|                                                     | End of year                                                                                       |                                                               | $                                                          | 1,209,839                                        |          |          | $          | 626,744    |          |         | $          | 1,251,546  |         
|                                                     |                                                                                                   |                                                               |                                                            |                                                  |          |          |            |            |         



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RAND CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS


December 31, 2005


|                                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                                   |  |          |          |  |        |  |    |      |  |     |           |  |  |   |           | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | -------- |  | ------ |  | -- | ---- |  | --- | --------- |  |  | - | --------- | 
|                                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                                   |  | (b)      |          |  |        |  |    |      | 
|                                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                                   |  | Date     |          |  | (c)    |  |    |      |  | (d) |          
|Company and Business                                                                                                                                                                                                             |  | Type of Investment                                                                                                                                                                                                                                                                |  | Acquired |          |  | Equity |  |    | Cost |  |     | Value     | 
|                                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                                   |  |          |          |  |        |  |    |      |  |     |           | 
|APF 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. $94,594 Senior Subordinated note at 14% due July 31,
    2007. Warrants to purchase 10.2941 shares of common
    stock.                                                                                          |  |          | 7/8/04   |  |        |  | 6  | %    |  | $   | 594,594   |  |  | $ | 594,594   | 
|Carolina 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 |  |  |   | 1,038,000 | 
|Concentrix Corporation(e)(g)Pittsford, NY. Marketing service company generating returns
    through multi-channel demand generation and renewal marketing
    services. www.concentrix.com                                       |  | $600,000 Senior Subordinated note at 14% due November 11,
    2007.                                                                                                                                                                                                               |  |          | 6/1/05   |  |        |  |   |      |  |     | 600,000   |  |  |   | 600,000   | 
|Contract StaffingBuffalo, 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   |  |  |   | 141,400   | 
|EmergingMed.com, Inc.(g)New York, NY. Cancer clinical trial matching and referral
    service. www.emergingmed.com                                                                                                               |  | Senior subordinated note at 10% due December 19, 2010.                                                                                                                                                                                                                            |  |          | 12/19/05 |  |        |  | 5  | %    |  |     | 500,000   |  |  |   | 500,000   | 
|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, 2010 with warrant to
    purchase 6.25 membership units. 25 membership units.                                                                                                                                                                    |  |          | 6/28/04  |  |        |  | 33 | %    |  |     | 750,000   |  |  |   | 750,000   | 
|G-TEC Natural Gas SystemsBuffalo, NY. Manufactures and distributes systems that allow
    natural gas to be used as an alternative fuel to gases.
    www.gas-tec.com                                                            |  | 41.322% Class A membership interest. 8% cumulative dividend.                                                                                                                                                                                                                      |  |          | 8/31/99  |  |        |  | 41 | %    |  |     | 400,000   |  |  |   | 300,000   | 
|Innov-X Systems, Inc.(e)(g)Woburn, MA. Manufactures portable x-ray fluorescence
    (XRF) analyzers used in metals/alloy analysis.
    www.innovxsys.com                                                                         |  | $350,000 Subordinated Debenture at 8.5% due September 27,
    2009. 12,344 warrants to purchase common shares. 3,500
    Series A preferred stock. $250,000 Series B Secured
    Subordinated term note at 8.5% due March 1, 2010. 12,345
    warrants to purchase common shares. |  |          | 9/27/04  |  |        |  | 10 | %    |  |     | 635,000   |  |  |   | 635,000   | 

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RAND CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS


December 31, 2005  (Continued)


|                                                                                                                                                                                                               |  |                                                                                                                                                                                       |  |          |          |  |        |  |    |      |  |     |           |  |  |  |           | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | -------- |  | ------ |  | -- | ---- |  | --- | --------- |  |  |  | --------- | 
|                                                                                                                                                                                                               |  |                                                                                                                                                                                       |  | (b)      |          |  |        |  |    |      | 
|                                                                                                                                                                                                               |  |                                                                                                                                                                                       |  | Date     |          |  | (c)    |  |    |      |  | (d) |          
|Company and Business                                                                                                                                                                                           |  | Type of Investment                                                                                                                                                                    |  | Acquired |          |  | Equity |  |    | Cost |  |     | Value     | 
|                                                                                                                                                                                                               |  |                                                                                                                                                                                       |  |          |          |  |        |  |    |      |  |     |           | 
|Kionix, Inc.Ithaca, NY. Develops innovative MEMS based technology
    applications. www.kionix.com                                                                                                             |  | 30,241 shares Series B preferred stock. (g)
    2,862,091 shares Series A preferred stock.
    714,285 shares Series B preferred stock.                                               |  |          | 5/17/02  |  |        |  | 2  | %    |  |     | 1,262,340 |  |  |  | 977,863   | 
|Minrad International, Inc. (AMEX: BUF)(h)(j)Buffalo, NY. Developer of acute care devices and
    anesthetics. www.minrad.com                                                                                   |  | 677,981 common shares.                                                                                                                                                                |  |          | 8/4/97   |  |        |  | 3  | %    |  |     | 919,422   |  |  |  | 1,119,000 | 
|New Monarch Machine Tool, Inc.(e)(g)(i)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
    December 31, 2005.                                            |  |          | 9/24/03  |  |        |  | 12 | %    |  |     | 525,000   |  |  |  | 525,000   | 
|Photonic Products Group, Inc (OTC:PHPG.OB)(a)(j)(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. 18,000 shares common stock.                                                                                        |  |          | 10/31/00 |  |        |  | <1 | %    |  |     | 145,000   |  |  |  | 123,220   | 
|RAMSCO(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   |  |  |  | 916,947   | 
|Rocket Broadband Networks, Inc.(g)Rochester, NY. Communications service provider of satellite
    TV, broadband internet and VoIP digital phone targeting multiple
    dwelling units. www.rocketbroadband.com |  | 285,829 Preferred shares.                                                                                                                                                             |  |          | 12/20/05 |  |        |  | 6  | %    |  |     | 204,082   |  |  |  | 204,082   | 
|Somerset Gas Transmission Company, LLCBuffalo, NY. Natural gas transportation company.
    www.somersetgas.com                                                                                                 |  | 26.5337 Units.                                                                                                                                                                        |  |          | 7/10/02  |  |        |  | 3  | %    |  |     | 719,097   |  |  |  | 786,748   | 
|Synacor, Inc.(e)(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 |  |        |  | 5  | %    |  |     | 820,000   |  |  |  | 828,674   | 

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RAND CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS


December 31, 2005  (Continued)


|                                                                                                                                                                       |  |                                                                                                                                                                                                         |  |          |          |  |        |  |    |      |  |     |            |  |  |   |            | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | -------- |  | ------ |  | -- | ---- |  | --- | ---------- |  |  | - | ---------- | 
|                                                                                                                                                                       |  |                                                                                                                                                                                                         |  | (b)      |          |  |        |  |    |      | 
|                                                                                                                                                                       |  |                                                                                                                                                                                                         |  | Date     |          |  | (c)    |  |    |      |  | (d) |           
|Company and Business                                                                                                                                                   |  | Type of Investment                                                                                                                                                                                      |  | Acquired |          |  | Equity |  |    | Cost |  |     | Value      | 
|                                                                                                                                                                       |  |                                                                                                                                                                                                         |  |          |          |  |        |  |    |      |  |     |            | 
|Topps 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  | %    |  |     | 595,000    |  |  |   | 927,000    | 
|Ultra-Scan CorporationAmherst, NY. Biometrics application developer of ultrasonic
    fingerprint technology. www.ultra-scan.com                                       |  | 536,596 common shares, 107,104 Series A-1 preferred
    shares.
    (g) 95,284 Series A-1 preferred shares.                                                                                             |  |          | 12/11/92 |  |        |  | 3  | %    |  |     | 938,164    |  |  |   | 1,203,000  | 
|UStec, Inc.Victor, NY. Markets digital wiring systems for new home
    construction. www.ustecnet.com                                                                  |  | $100,000 note at 5% due February 1, 2006 (e). 50,000 common
    shares. Warrants for 139,395 common shares.
    (g) $350,000 Senior Subordinated Convertible Debentures at 6%
    due February 2, 2008. |  |          | 6/26/98  |  |        |  | <1 | %    |  |     | 450,500    |  |  |   | 475,000    | 
|Vanguard Modular Building SystemsPhiladelphia, 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    |  |  |   | 135,000    | 
|WineIsIt.com, Corp.(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    |  |  |   | 551,918    | 
|Other Investments                                                                                                                                                      |  | Other                                                                                                                                                                                                   |  |          | Various  |  |        |  |    |      |  |     | 524,426    |  |  |   | 38,416     | 
|                                                                                                                                                                       |  |                                                                                                                                                                                                         |  |          |          |  |        |  |    |      |  |     |            | 
|                                                                                                                                                                       |  | Total portfolio investments                                                                                                                                                                             |  |          |          |  |        |  | (f | )    |  | $   | 13,712,890 |  |  | $ | 13,370,862 | 
|                                                                                                                                                                       |  |                                                                                                                                                                                                         |  |          |          |  |        |  |    |      |  |     |            | 

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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS


December 31, 2005  (Continued)


Notes to Consolidated Schedule of Portfolio Investments




|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Unrestricted securities 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, 2005 restricted securities represented 99% 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, 2005,
    the aggregate cost of investment securities approximated
    $13.7 million. Net unrealized depreciation aggregated
    approximately $342,000, of which $935,000 related to appreciated
    investment securities and $1,277,000 related to depreciated
    investment securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(g) |  | Rand Capital SBIC, L.P. investment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(h) |  | This is a publicly owned security. The Corporations shares
    are restricted in the open market under Rule 144.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(i) |  | Reduction in cost and value reflects current principal repayment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(j) |  | Publicly owned company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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RAND CAPITAL CORPORATION AND SUBSIDIARIES


SCHEDULES OF SELECTED PER SHARE DATA AND RATIOS


For the Five Years Ended December 31, 2005, 2004, 2003,
2002 and 2001




|                                                   |                                                             |                         |           |       |      |   |           |       |    |   |           |       |    |      |           |       |    |   |            |        |   
|-------------------------------------------------- | ----------------------------------------------------------- | ----------------------- | --------- | ----- | ---- | - | --------- | ----- | -- | - | --------- | ----- | -- | ---- | --------- | ----- | -- | - | ---------- | ------ | --
|                                                   |                                                             | Year Ended December 31, |          
|                                                   |                                                             |                         |          
|                                                   |                                                             | 2005                    |           |       | 2004 |   |           | 2003  |    |   | 2002      |       |    | 2001 |          
|                                                   |                                                             |                         |           |       |      |   |           |       |    |   |           |       |    |      |          
|Income from investment operations(1):              |                                                             |                         |           |       |      |   |           |       |    |   |           |       |    |      |           |       |    |   |            |       
|                                                   | Investment income                                           |                         | $         | 0.13  |      |   | $         | 0.13  |    |   | $         | 0.08  |    |      | $         | 0.05  |    |   | $          | 0.02   |   
|                                                   | Expenses                                                    |                         |           | 0.22  |      |   |           | 0.16  |    |   |           | 0.16  |    |      |           | 0.15  |    |   |            | 0.14   |   
|                                                   |                                                             |                         |           |       |      |   |           |       |    |   |           |       |    |      |          
|                                                   | Investment (loss) before income taxes                       |                         |           | (0.09 | )    |   |           | (0.03 | )  |   |           | (0.08 | )  |      |           | (0.10 | )  |   |            | (0.12  | ) 
|                                                   | Income tax expense (benefit)                                |                         |           | (0.06 | )    |   |           | (0.01 | )  |   |           | (0.03 | )  |      |           | 0.03  |    |   |            | 0.15   |   
|                                                   |                                                             |                         |           |       |      |   |           |       |    |   |           |       |    |      |          
|                                                   | Net investment (loss)                                       |                         |           | (0.03 | )    |   |           | (0.02 | )  |   |           | (0.05 | )  |      |           | (0.13 | )  |   |            | (0.27  | ) 
|                                                   | Net realized and unrealized gain (loss) on investments      |                         |           | (0.04 | )    |   |           | (0.02 | )  |   |           | 0.00  |    |      |           | 0.05  |    |   |            | 0.55   |   
|                                                   | Net proceeds from private stock offering                    |                         |           | 0.00  |      |   |           | 0.00  |    |   |           | 0.00  |    |      |           | 0.00  |    |   |            | 0.01   |   
|                                                   |                                                             |                         |           |       |      |   |           |       |    |   |           |       |    |      |          
|                                                   | (Decrease) increase in net asset value                      |                         |           | (0.07 | )    |   |           | (0.04 | )  |   |           | (0.05 | )  |      |           | (0.08 | )  |   |            | 0.29   |   
|Net asset value, beginning of year                 |                                                             |                         | 1.58      |       |      |   | 1.62      |       |    |   | 1.67      |       |    |      | 1.75      |       |    |   | 1.46       |       
|                                                   |                                                             |                         |           |       |      |   |           |       |    |   |           |       |    |      |          
|Net asset value, end of year                       |                                                             | $                       | 1.51      |       |      | $ | 1.58      |       |    | $ | 1.62      |       |    | $    | 1.67      |       |    | $ | 1.75       |       
|                                                   |                                                             |                         |           |       |      |   |           |       |    |   |           |       |    |      |          
|Per share market value, end of year                |                                                             | $                       | 1.34      |       |      | $ | 1.56      |       |    | $ | 1.45      |       |    | $    | 1.03      |       |    | $ | 1.27       |       
|                                                   |                                                             |                         |           |       |      |   |           |       |    |   |           |       |    |      |          
|Total return based on market value                 |                                                             |                         | (14.1     | )%    |      |   | 7.6       | %     |    |   | 40.8      | %     |    |      | (18.9     | )%    |    |   | (42.0      | )%    
|Total return based on net asset value              |                                                             |                         | (4.6      | )%    |      |   | (2.5      | )%    |    |   | (3.0      | )%    |    |      | (4.6      | )%    |    |   | 19.9       | %     
|Supplemental data:                                 |                                                             |                         |           |       |      |   |           |       |    |   |           |       |    |      |           |       |    |   |            |       
|                                                   | Ratio of expenses before income taxes to average net assets |                         |           | 14.35 | %    |   |           | 9.86  | %  |   |           | 10.01 | %  |      |           | 8.73  | %  |   |            | 8.95   | % 
|                                                   | Ratio of expenses including taxes to average net assets     |                         |           | 10.34 | %    |   |           | 9.53  | %  |   |           | 8.45  | %  |      |           | 10.16 | %  |   |            | 18.55  | % 
|                                                   | Ratio of net investment loss to average net assets          |                         |           | (1.99 | )%   |   |           | (1.23 | )% |   |           | (3.67 | )% |      |           | (7.51 | )% |   |            | (16.82 | )%
|                                                   | Portfolio turnover                                          |                         |           | 21.6  | %    |   |           | 50.4  | %  |   |           | 24.3  | %  |      |           | 65.4  | %  |   |            | 6.3    | % 
|Net assets end of year                             |                                                             | $                       | 8,615,934 |       |      | $ | 9,027,054 |       |    | $ | 9,238,488 |       |    | $    | 9,604,634 |       |    | $ | 10,058,284 |       
|Weighted average shares outstanding at end of year |                                                             |                         | 5,718,934 |       |      |   | 5,718,934 |       |    |   | 5,722,776 |       |    |      | 5,759,260 |       |    |   | 5,762,294  |       






|    |                                                                                             
|--- | --------------------------------------------------------------------------------------------
|(1) | Per share data are based on weighted average shares outstanding
    and results are rounded.

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RAND CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Note 1.  Summary of Significant Accounting
Policies


Nature of Business








Principles of Consolidation


Investments






Cash and Cash Equivalents


Revenue Recognition  Interest
Income


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RAND CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Deferred Debenture Costs


Deferred Revenue


Net Assets Per Share


Supplemental Cash Flow Information


Concentration of Credit and Market
Risk




Accounting Estimates


Note 2.  Promissory Notes Receivable




Note 3.  Income Taxes




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RAND CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                 |  |      |         |  |      |   |         |  
|-------------------------------- |  | ---- | ------- |  | ---- | - | ------- | -
|                                 |  | 2005 |         |  | 2004 |  
|                                 |  |      |         |  |      |  
|Operations                       |  | $    | 54,000  |  |      | $ | (42,000 | )
|Investments                      |  |      | 137,000 |  |      |   | 234,000 |  
|Net operating loss carryforwards |  |      | 655,000 |  |      |   | 374,000 |  
|                                 |  |      |         |  |      |  
|Deferred tax assets, net         |  | $    | 846,000 |  |      | $ | 566,000 |  
|                                 |  |      |         |  |      |  





|          |         |      |          |          |      |  |          |          |   |  |          |          |  
|--------- | ------- | ---- | -------- | -------- | ---- |  | -------- | -------- | - |  | -------- | -------- | -
|          |         | 2005 |          |          | 2004 |  |          | 2003     |  
|          |         |      |          |          |      |  |          |          |  
|Current:  |         |      |          |          |      |  |          |          |   |  |          |         
|          | Federal |      | $        |         |      |  | $        |         |   |  | $        |         |  
|          | State   |      |          | 23,514   |      |  |          | 24,316   |   |  |          | 27,498   |  
|          |         |      |          |          |      |  |          |          |  
|          |         |      | 23,514   |          |      |  | 24,316   |          |   |  | 27,498   |         
|          |         |      |          |          |      |  |          |          |  
|Deferred: |         |      |          |          |      |  |          |          |   |  |          |         
|          | Federal |      |          | (112,000 | )    |  |          | (85,000  | ) |  |          | (260,000 | )
|          | State   |      |          | (168,000 | )    |  |          | (51,000  | ) |  |          | (58,000  | )
|          |         |      |          |          |      |  |          |          |  
|          |         |      | (280,000 | )        |      |  | (136,000 | )        |   |  | (318,000 | )       
|          |         |      |          |          |      |  |          |          |  
|          | Total   |      | $        | (256,486 | )    |  | $        | (111,684 | ) |  | $        | (290,502 | )
|          |         |      |          |          |      |  |          |          |  



|                                                                                       |       |      |          |          |      |   |          |          |   |   |          |          |  
|-------------------------------------------------------------------------------------- | ----- | ---- | -------- | -------- | ---- | - | -------- | -------- | - | - | -------- | -------- | -
|                                                                                       |       | 2005 |          |          | 2004 |   |          | 2003     |  
|                                                                                       |       |      |          |          |      |   |          |          |  
|Net investment (loss) and realized gain (loss) before income tax
    expense (benefit) |       | $    | (667,606 | )        |      | $ | (323,118 | )        |   | $ | (635,145 | )       
|                                                                                       |       |      |          |          |      |   |          |          |  
|Expected tax (benefit) at statutory rate                                               |       | $    | (226,986 | )        |      | $ | (109,860 | )        |   | $ | (215,950 | )       
|State  net of federal effect                                                          |       |      | (40,057  | )        |      |   | (19,387  | )        |   |   | (38,110  | )       
|Other                                                                                  |       |      | (4,443   | )        |      |   | 17,563   |          |   |   | (36,442  | )       
|                                                                                       |       |      |          |          |      |   |          |          |  
|                                                                                       | Total |      | $        | (271,486 | )    |   | $        | (111,684 | ) |   | $        | (290,502 | )
|                                                                                       |       |      |          |          |      |   |          |          |  



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RAND CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Note 4.  SBA Debenture Obligations




Note 5.  Stockholders Equity (Net
Assets)








|                                                      |  |             |            |   |                |     |           |                |  |   |          |  
|----------------------------------------------------- |  | ----------- | ---------- | - | -------------- | --- | --------- | -------------- |  | - | -------- | -
|                                                      |  |             |            |   |                | Net |          
|                                                      |  | Accumulated |            |   | Undistributed  |     |           | Unrealized     | 
|                                                      |  | Net         |            |   | Net Realized   |     |           | Appreciation   | 
|                                                      |  | Investment  |            |   | Gain (Loss) on |     |           | (Depreciation) | 
|                                                      |  | Loss        |            |   | Investments    |     |           | on Investments | 
|                                                      |  |             |            |   |                |     |           |                | 
|Balance, December 31, 2003                            |  | $           | (4,700,763 | ) |                | $   | 6,662,551 |                |  | $ | (225,852 | )
|Net (decrease) increase in net assets from operations |  |             | (112,383   | ) |                |     | 26,727    |                |  |   | (125,777 | )
|                                                      |  |             |            |   |                |     |           |                | 
|Balance, December 31, 2004                            |  | $           | (4,813,146 | ) |                | $   | 6,689,278 |                |  | $ | (351,629 | )
|                                                      |  |             |            |   |                |     |           |                | 
|Net (decrease) increase in net assets from operations |  |             | (175,180   | ) |                |     | (382,353  | )              |  |   | 146,412  |  
|                                                      |  |             |            |   |                |     |           |                | 
|Balance, December 31, 2005                            |  | $           | (4,988,326 | ) |                | $   | 6,306,925 |                |  | $ | (205,217 | )
|                                                      |  |             |            |   |                |     |           |                | 

Note 6.  Stock Option Plans




Note 7.  Employee Benefit Plans




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RAND CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Note 8.  Commitments and Contingencies






Note 9.  Subsequent Events




Note 10.  Quarterly Operations and Earnings
Data  Unaudited


|                                                                                      |  |         |          |   |         |   |          |         |  |   |          |   |  |   |         |  
|------------------------------------------------------------------------------------- |  | ------- | -------- | - | ------- | - | -------- | ------- |  | - | -------- | - |  | - | ------- | -
|                                                                                      |  | 4th     |          |   | 3rd     |   |          | 2nd     |  |   | 1st      |  
|                                                                                      |  | Quarter |          |   | Quarter |   |          | Quarter |  |   | Quarter  |  
|                                                                                      |  |         |          |   |         |   |          |         |  |   |          |  
|2005                                                                                  |  |         |          |   |         |   |          |         |  |   |          |   |  |   |         |  
|Investment income                                                                     |  | $       | 229,858  |   |         | $ | 171,004  |         |  | $ | 178,059  |   |  | $ | 157,653 |  
|Net increase (decrease) in net assets from operations                                 |  |         | (301,949 | ) |         |   | (41,711  | )       |  |   | (173,607 | ) |  |   | 106,147 |  
|Basic and diluted net increase (decrease) in net assets from
    operations per share |  |         | (0.05    | ) |         |   | (0.01    | )       |  |   | (0.03    | ) |  |   | 0.02    |  
|2004                                                                                  |  |         |          |   |         |   |          |         |  |   |          |   |  |   |         |  
|Investment income                                                                     |  | $       | 185,205  |   |         | $ | 197,684  |         |  | $ | 188,621  |   |  | $ | 186,194 |  
|Net 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   | )

Note 11.  Allowance for Doubtful Accounts




|                             |  |      |          |   |      |   |          |      |  |   |          |  
|---------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                             |  | 2005 |          |   | 2004 |   |          | 2003 | 
|                             |  |      |          |   |      |   |          |      | 
|Balance at beginning of year |  | $    | (122,000 | ) |      | $ | (122,914 | )    |  | $ | (13,167  | )
|Provision for losses         |  |      | (114,870 | ) |      |   | (122,000 | )    |  |   | (122,914 | )
|Recoveries                   |  |      |         |   |      |   | 122,914  |      |  |   | 13,167   |  
|                             |  |      |          |   |      |   |          |      | 
|Balance at end of year       |  | $    | (236,870 | ) |      | $ | (122,000 | )    |  | $ | (122,914 | )
|                             |  |      |          |   |      |   |          |      | 

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RAND CAPITAL CORPORATION AND SUBSIDIARIES


SCHEDULE OF CONSOLIDATED CHANGES IN INVESTMENTS AT


COST AND REALIZED LOSS


For the Year Ended December 31, 2005


|                                                    |                                               |            |           |          |          |   |          |          |  
|--------------------------------------------------- | --------------------------------------------- | ---------- | --------- | -------- | -------- | - | -------- | -------- | -
|                                                    |                                               | Cost       |           |          |         
|                                                    |                                               | Increase   |           |          | Realized |  
|                                                    |                                               | (Decrease) |           |          | Loss     |  
|                                                    |                                               |            |           |          |          |  
|New and Additions to Previous Investments           |                                               |            |           |          |          |   |          |         
|                                                    | APF Group, Inc.                               |            | $         | 94,594   |          |   |          |          |  
|                                                    | Concentrix Corporation                        |            |           | 600,000  |          |   |          |          |  
|                                                    | EmergingMed.com, Inc.                         |            |           | 500,000  |          |   |          |          |  
|                                                    | G-TEC Natural Gas Systems                     |            |           | 125,000  |          |   |          |          |  
|                                                    | Innov-X Systems, Inc.                         |            |           | 285,000  |          |   |          |          |  
|                                                    | Kionix, Inc.                                  |            |           | 262,340  |          |   |          |          |  
|                                                    | Photonics Product Group                       |            |           | 10,000   |          |   |          |          |  
|                                                    | Rocket Broadband Networks, Inc.               |            |           | 204,082  |          |   |          |          |  
|                                                    | Somerset Gas Transmission Company, Inc.       |            |           | 19,097   |          |   |          |          |  
|                                                    | Topps Meat Company LLC                        |            |           | 336,000  |          |   |          |          |  
|                                                    | Ultra-Scan Corporation                        |            |           | 200,000  |          |   |          |          |  
|                                                    |                                               |            |           |          |          |  
|                                                    |                                               |            | 2,636,113 |          |          |   |          |         
|                                                    |                                               |            |           |          |          |  
|Investments Sold/ Liquidation                       |                                               |            |           |          |          |   |          |         
|                                                    | DLisi Food Systems, Inc.                     |            |           | (400,000 | )        |   | $        | (382,353 | )
|                                                    |                                               |            |           |          |          |  
|                                                    |                                               |            | (400,000  | )        |          |   | (382,353 | )       
|Other Changes                                       |                                               |            |           |          |          |   |          |         
|                                                    | Debenture repayments, distributions and other |            |           | (145,076 | )        |   |          |         |  
|                                                    |                                               |            |           |          |          |  
|Net Change in Investments at Cost and Realized Loss |                                               | $          | 2,091,037 |          |          | $ | (382,353 | )       
|                                                    |                                               |            |           |          |          |  

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






















35



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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Evaluation of Disclosure Controls and Procedures. 13a-15(e) 15d-15(e) 10-K.


Changes in Internal Control Over Financial Reporting.





Item 9B.     Other
Information







PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant










|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation








|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management



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Item 13.     Certain
Relationships and Related Transactions









|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accounting Fees and Services






PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules





| |                                      
| | -------------------------------------
| | (1) CONSOLIDATED FINANCIAL STATEMENTS



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | Statements of Financial Position as of December 31, 2005
    and 2004                                                          
|
| | Statements of Operations for the three years in the period ended
    December 31, 2005                                         
|
| | Statements of Cash Flows for the three years in the period ended
    December 31, 2005                                         
|
| | Statements of Changes in Net Assets for the three years in the
    period ended December 31, 2005                              
|
| | Schedule of Portfolio Investments as of December 31, 2005                                                                      
|
| | Schedules of Selected Per Share Data and Ratios for the five
    years in the period ended December 31, 2005                   
|
| | Notes to the Consolidated Financial Statements                                                                                 
|
| | Supplemental Schedule of Consolidated Changes in Investments at
    Cost and Realized Loss for the year ended December 31, 2005
|
| | Report of Independent Registered Public Accounting Firm                                                                        



| |                                  
| | ---------------------------------
| | (2) FINANCIAL STATEMENT SCHEDULES



| |                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The required financial statement Schedule II 
    Valuation and Qualifying Accounts has been omitted because the
    information required is included in the note 11 to the
    consolidated financial statements.

12b-32


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

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##### Table of Contents



| |        |  |  |                                                                                                                                                                                                           
| | ------ |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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 or 15(d) of
Securities Exchange Act of 1934, the registrant has duly caused
this Report on
Form 10-K to be
signed on its behalf by the undersigned thereunto duly
authorized.




| |                         
| | ------------------------
| | RAND CAPITAL CORPORATION



| |     |                  
| | --- | -----------------
| | By: | /s/ Allen F. Grum

| |                                                                       
| | ----------------------------------------------------------------------
| | _______________________________________ 
     Allen 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 24, 2006
|                                                  
|(ii) Principal Accounting & Financial
    Officer:
|/s/ Daniel P. PenberthyDaniel P. Penberthy         |  | Treasurer |  | March 24, 2006
|                                                  
|(iii) Directors:                                  
|/s/ Allen F. GrumAllen F. Grum                     |  | Director  |  | March 24, 2006
|/s/ Erland E.
    KailbourneErland E. Kailbourne   |  | Director  |  | March 24, 2006
|/s/ Ross B. KenzieRoss B. Kenzie                   |  | Director  |  | March 24, 2006
|/s/ Willis S. McleeseWillis S. McLeese             |  | Director  |  | March 24, 2006
|/s/ Reginald B. Newman
    IIReginald B. Newman II |  | Director  |  | March 24, 2006
|/s/ Jayne K. RandJayne K. Rand                     |  | Director  |  | March 24, 2006
|/s/ Robert M. ZakRobert M. Zak                     |  | Director  |  | March 24, 2006

39