##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarter ended September 30, 2006
 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
(State or Other Jurisdiction of Incorporation 
or organization)
    
    16-0961359
(IRS Employer
Identification No.)2200 Rand Building, Buffalo, NY
(Address of Principal executive offices)
    
    14203
(Zip Code)
 (716) 853-0802  (Registrants Telephone No. Including Area Code)
 þ o
  o o þ
 o þ




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##### 



RAND CAPITAL CORPORATION
TABLE OF CONTENTS FOR FORM 10-Q
  
 PART I.  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements and Supplementary Data (Unaudited)Consolidated Statements of Financial Position as of September 30, 2006 and December 31, 2005Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2006 and 2005Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005Condensed Consolidated Statements of Changes in Net Assets for the Three Months and Nine Months Ended September 30, 2006 and 2005Condensed Consolidated Schedule of Portfolio Investments as of September 30, 2006Notes to the Consolidated Financial StatementsItem 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
    
    Quantitative and Qualitative Disclosures about Market RiskItem 4.
    
    Controls and ProceduresPART II  OTHER INFORMATIONItem 1.
    
    Legal ProceedingsItem 1A.
    
    Risk FactorsItem 2.
    
    Unregistered Sales of Equity Securities and Use of ProceedsItem 3.
    
    Defaults Upon Senior SecuritiesItem 4.
    
    Submission of Matters to a Vote of Security HoldersItem 5.
    
    Other InformationItem 6.
    
    ExhibitsEX-31.1EX-31.2EX-32.1EX-32.2




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##### Table of Contents



PART I.
FINANCIAL INFORMATION
 
 Item 1. Financial Statements and Supplementary Data
 Rand Capital Corporation and Subsidiaries
 
 Consolidated Statements of Financial Position
 As of September 30, 2006 and December 31, 2005
 September 30,2006
    
    
    December 31,(Unaudited)
    
    
    2005ASSETSInvestments at fair value (identified cost: 9/30/06 -$13,894,158; 12/31/05 - $13,712,890)
    
    $
    14,089,941
    
    
    $
    13,370,862Cash and cash equivalents
    
    
    2,012,306
    
    
    
    1,209,839Interest
receivable (net of allowance: 9/30/06 - $122,000; 12/31/05 - $236,870)
    
    
    486,717
    
    
    
    297,619Deferred tax asset
    
    
    511,000
    
    
    
    846,000Income tax receivable
    
    
    
    
    
    
    15,582Other assets
    
    
    284,711
    
    
    
    323,703Total assets
    
    $
    17,384,675
    
    
    $
    16,063,605LIABILITIES AND STOCKHOLDERS EQUITY (NET ASSETS)Liabilities:Debentures guaranteed by the SBA
    
    $
    8,100,000
    
    
    $
    7,200,000Accounts payable and accrued expenses
    
    
    95,837
    
    
    
    167,788Deferred revenue
    
    
    58,034
    
    
    
    79,883Income taxes payable
    
    
    1,728
    
    
    
    Total liabilities
    
    
    8,255,599
    
    
    
    7,447,671Stockholders equity (net assets):Common
stock, $.10 par  shares authorized 10,000,000; shares issued 5,763,034
    
    
    576,304
    
    
    
    576,304Capital in excess of par value
    
    
    6,973,454
    
    
    
    6,973,454Accumulated net investment (loss)
    
    
    (5,316,038
    )
    
    
    (4,988,326
    )Undistributed net realized gain on investments
    
    
    6,826,452
    
    
    
    6,306,925Net unrealized appreciation (depreciation) on investments
    
    
    116,110
    
    
    
    (205,217
    )Treasury stock, at cost, 44,100 shares
    
    
    (47,206
    )
    
    
    (47,206
    )Net assets (per share 9/30/2006-$1.60 , 12/31/2005-$1.51)
    
    
    9,129,076
    
    
    
    8,615,934Total liabilities and stockholders equity (net assets)
    
    $
    17,384,675
    
    
    $
    16,063,605




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##### Table of Contents



Rand Capital Corporation and Subsidiaries
 
 Condensed Consolidated Statements of Operations
 For the Three Months and Nine Months Ended September 30, 2006 and 2005
 (Unaudited)
 Three months
    
    
    Three months
    
    
    Nine months
    
    
    Nine monthsended
    
    
    ended
    
    
    ended
    
    
    endedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Investment income:Interest from portfolio companies
    
    $
    187,325
    
    
    $
    156,005
    
    
    $
    539,783
    
    
    $
    438,928Interest from other investments
    
    
    13,517
    
    
    
    803
    
    
    
    24,856
    
    
    
    2,287Dividend and other investment income
    
    
    163,756
    
    
    
    1,660
    
    
    
    191,994
    
    
    
    31,364Other income
    
    
    41,529
    
    
    
    12,535
    
    
    
    63,910
    
    
    
    34,136406,127
    
    
    
    171,003
    
    
    
    820,543
    
    
    
    506,715Operating expenses:Salaries
    
    
    95,162
    
    
    
    88,618
    
    
    
    287,070
    
    
    
    311,722Employee benefits
    
    
    20,704
    
    
    
    18,578
    
    
    
    73,857
    
    
    
    73,307Directors fees
    
    
    9,750
    
    
    
    9,750
    
    
    
    46,500
    
    
    
    46,200Professional fees
    
    
    21,028
    
    
    
    18,910
    
    
    
    96,031
    
    
    
    63,750Stockholders and office operating
    
    
    19,389
    
    
    
    28,121
    
    
    
    87,257
    
    
    
    86,494Insurance
    
    
    10,920
    
    
    
    11,550
    
    
    
    32,760
    
    
    
    34,650Corporate development
    
    
    12,188
    
    
    
    24,810
    
    
    
    40,863
    
    
    
    45,587Other operating
    
    
    3,783
    
    
    
    2,876
    
    
    
    8,341
    
    
    
    8,088192,924
    
    
    
    203,213
    
    
    
    672,679
    
    
    
    669,798Interest on SBA obligations
    
    
    127,137
    
    
    
    73,689
    
    
    
    346,635
    
    
    
    188,423Total expenses
    
    
    320,061
    
    
    
    276,902
    
    
    
    1,019,314
    
    
    
    858,221Investment gain (loss) before income taxes
    
    
    86,066
    
    
    
    (105,899
    )
    
    
    (198,771
    )
    
    
    (351,506
    )Current income tax (benefit) expense
    
    
    (1,842
    )
    
    
    5,000
    
    
    
    8,158
    
    
    
    9,927Deferred income tax expense (benefit)
    
    
    123,402
    
    
    
    (212,289
    )
    
    
    120,783
    
    
    
    (296,446
    )Net investment (loss) gain
    
    
    (35,494
    )
    
    
    101,390
    
    
    
    (327,712
    )
    
    
    (64,987
    )Realized and unrealized gain (loss) on investments:Net gain (loss) on sales and dispositions
    
    
    292,633
    
    
    
    (382,353
    )
    
    
    519,527
    
    
    
    (382,353
    )Unrealized appreciation (depreciation) on
investments:Beginning of period
    
    
    487,020
    
    
    
    (420,974
    )
    
    
    (342,028
    )
    
    
    (586,048
    )End of period
    
    
    193,516
    
    
    
    (22,433
    )
    
    
    193,516
    
    
    
    (22,433
    )Change in unrealized appreciation
(depreciation) before income taxes
    
    
    (293,504
    )
    
    
    398,541
    
    
    
    535,544
    
    
    
    563,615Deferred income tax (benefit) expense
    
    
    (117,402
    )
    
    
    159,289
    
    
    
    214,217
    
    
    
    225,446Net change in unrealized appreciation (depreciation)
    
    
    (176,102
    )
    
    
    239,252
    
    
    
    321,327
    
    
    
    338,169Net realized and unrealized gain (loss) on investments
    
    
    116,531
    
    
    
    (143,101
    )
    
    
    840,854
    
    
    
    (44,184
    )Net increase (decrease) in net assets from operations
    
    $
    81,037
    
    
    $
    (41,711
    )
    
    $
    513,142
    
    
    $
    (109,171
    )Weighted average shares outstanding
    
    
    5,718,934
    
    
    
    5,718,934
    
    
    
    5,718,934
    
    
    
    5,718,934Basic and diluted net increase (decrease) in net assets from
operations per share
    
    $
    0.01
    
    
    $
    (0.01
    )
    
    $
    0.09
    
    
    $
    (0.02
    )




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##### Table of Contents



Rand Capital Corporation and Subsidiaries
 
 Condensed Consolidated Statements of Cash Flows
 For the Nine Months Ended September 30, 2006 and 2005
 (Unaudited)
 September 30,
    
    
    September 30,2006
    
    
    2005Cash flows from operating activities:Net increase (decrease) in net assets from operations
    
    $
    513,142
    
    
    $
    (109,171
    )Adjustments to reconcile net increase (decrease) in net
assets to net cash used in operating activities:Depreciation and amortization
    
    
    20,603
    
    
    
    17,138Increase in unrealized appreciation of investments
    
    
    (535,544
    )
    
    
    (563,615
    )Deferred tax expense (benefit)
    
    
    335,000
    
    
    
    (71,000
    )Net realized (gain) loss on portfolio investments
    
    
    (519,527
    )
    
    
    382,353Non-cash conversion of debenture interest
    
    
    (12,877
    )
    
    
    (29,097
    )Changes in operating assets and liabilities:(Increase) in interest receivable
    
    
    (189,098
    )
    
    
    (94,187
    )Decrease (increase) in other assets
    
    
    61,985
    
    
    
    (9,110
    )(Decrease) increase in deferred revenue
    
    
    (21,849
    )
    
    
    5,505Decrease in accounts payable and accrued liabilities
    
    
    (69,124
    )
    
    
    (62,002
    )Total adjustments
    
    
    (930,430
    )
    
    
    (424,015
    )Net cash used in operating activities
    
    
    (417,288
    )
    
    
    (533,186
    )Cash flows from investing activities:Investments originated
    
    
    (1,820,622
    )
    
    
    (1,901,178
    )Proceeds from sale of portfolio investments
    
    
    1,397,831
    
    
    
    17,647Proceeds from loan repayments
    
    
    773,927
    
    
    
    131,537Capital expenditures
    
    
    (12,256
    )
    
    
    (3,116
    )Net cash provided by (used in) investing activities
    
    
    338,880
    
    
    
    (1,755,110
    )Cash flows from financing activities:Proceeds from SBA debenture
    
    
    900,000
    
    
    
    2,200,000Origination costs to SBA
    
    
    (19,125
    )
    
    
    (55,000
    )Net cash provided by financing activities
    
    
    880,875
    
    
    
    2,145,000Net increase (decrease) in cash and cash equivalents
    
    
    802,467
    
    
    
    (143,296
    )Cash and cash equivalents:Beginning of period
    
    
    1,209,839
    
    
    
    626,744End of period
    
    $
    2,012,306
    
    
    $
    483,448




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##### Table of Contents



Rand Capital Corporation and Subsidiaries
 
 Condensed Consolidated Statements of Changes in Net Assets
 For the Three Months and Nine Months Ended September 30, 2006 and 2005
 (Unaudited)
 Three months
    
    
    Three months
    
    
    Nine months
    
    
    Nine monthsended
    
    
    ended
    
    
    ended
    
    
    endedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net assets at beginning of period
    
    $
    9,048,039
    
    
    $
    8,959,594
    
    
    $
    8,615,934
    
    
    $
    9,027,054Net investment (loss) gain
    
    
    (35,494
    )
    
    
    101,390
    
    
    
    (327,712
    )
    
    
    (64,987
    )Net realized gain (loss) on investments
    
    
    292,633
    
    
    
    (382,353
    )
    
    
    519,527
    
    
    
    (382,353
    )Net change in unrealized appreciation
(depreciation) on investments
    
    
    (176,102
    )
    
    
    239,252
    
    
    
    321,327
    
    
    
    338,169Net increase (decrease) in net assets from
operations
    
    
    81,037
    
    
    
    (41,711
    )
    
    
    513,142
    
    
    
    (109,171
    )Net assets at end of period
    
    $
    9,129,076
    
    
    $
    8,917,883
    
    
    $
    9,129,076
    
    
    $
    8,917,883




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##### Table of Contents



Rand Capital Corporation and Subsidiaries
 
 Condensed Consolidated Schedule of Portfolio Investments
 September 30, 2006
 (Unaudited)
 Per(b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    ShareDate
    
    (c)
    
    
    
    
    
    (d)
    
    ofCompany and Business
    
    Type of Investment
    
    Acquired
    
    Equity
    
    Cost
    
    Value
    
    RandAdampluseve, LLC (g)
New York, NY. Luxury
sports wear company for men
and women.
www.adampluseve.com
    
    $561,000 Senior
Subordinated note
at 10% due July 14,
2011. Warrants to
purchase
approximately 2.5%
of Company.
    
    7/14/06
    
    
    3
    %
    
    $
    561,000
    
    
    $
    563,267
    
    
    
    .10APF Group, Inc. (e)(g)(i)
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
    %
    
    $
    586,488
    
    
    $
    586,488
    
    
    
    .10Carolina 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
    
    
    
    1,227,000
    
    
    
    .21Contract Staffing
Buffalo, NY. PEO providing
human resource
administration for small
businesses.
www.contract-staffing.com
    
    Preferred Stock
Repurchase
Agreement through
March 31, 2010 at
5%.
    
    11/8/99
    
    
    10
    %
    
    
    141,400
    
    
    
    141,400
    
    
    
    .02EmergingMed.com, Inc. (g)
New York, NY. Cancer
clinical trial matching and
referral service.
www.emergingmed.com
    
    $500,000 Senior
subordinated note
at 10% due December
19, 2010.
    
    12/19/05
    
    
    5
    %
    
    
    500,000
    
    
    
    500,000
    
    
    
    .09Gemcor II, LLC (e)(g)(i)
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
    %
    
    
    736,601
    
    
    
    736,601
    
    
    
    .13G-TEC Natural Gas Systems
Buffalo, NY. Manufactures
and distributes systems
that allow natural gas to
be used as an alternative
fuel to gases.
www.gas-tec.com
    
    41.322% Class A
membership
interest. 8%
cumulative
dividend.
    
    8/31/99
    
    
    41
    %
    
    
    400,000
    
    
    
    300,000
    
    
    
    .05Innov-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
    
    
    
    .11




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##### Table of Contents



Rand Capital Corporation and Subsidiaries
Condensed Consolidated Schedule of Portfolio Investments
September 30, 2006 (Continued)
(Unaudited)
 Per(b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    ShareDate
    
    (c)
    
    
    
    
    
    (d)
    
    ofCompany and Business
    
    Type of Investment
    
    Acquired
    
    Equity
    
    Cost
    
    Value
    
    RandKionix, Inc.
Ithaca, NY. Develops innovative MEMS
based technology applications.
www.kionix.com
    
    30,241 shares Series B
preferred stock. 696,296
shares Series C preferred
stock.
(g) 2,862,091 shares Series A
preferred stock. 714,285
shares Series B preferred
stock.
    
    5/17/02
    
    
    2
    %
    
    
    1,506,044
    
    
    
    1,221,567
    
    
    
    .21Minrad International, Inc.
(AMEX: BUF) (h)(j)
Buffalo, NY. Developer of acute care
devices and anesthetics.
www.minrad.com
    
    229,640 common shares.
    
    8/4/97
    
    
    1
    %
    
    
    311,118
    
    
    
    907,078
    
    
    
    .16New Monarch Machine Tool, Inc. (e)(g)(i)
Cortland, NY. Manufactures and services
vertical/horizontal machining centers.
www.monarchmt.com
    
    $527,876.85 note at 12% due
January 13, 2009. $300,000
note at 12% due January 13,
2009. Warrants for 22.84
shares of common stock.
    
    9/24/03
    
    
    15
    %
    
    
    726,481
    
    
    
    726,481
    
    
    
    .13Niagara Dispensing Technologies, Inc. (g)
Tonawanda, NY. Beverage dispense
technology development and products
manufacturer, specializing in beer
dispensing systems. 
www.exactpour.com
    
    $500,000 Senior Subordinated
note at 8% due March 7, 2011.
Adjustable warrant for 4% of
common stock.
    
    3/8/06
    
    
    4
    %
    
    
    500,000
    
    
    
    500,000
    
    
    
    .09Photonic 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.
22,000 shares common stock.
    
    10/31/00
    
    <1%
    
    
    155,000
    
    
    
    125,300
    
    
    
    .02RAMSCO (e)(g)(i)
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
    %
    
    
    870,087
    
    
    
    870,087
    
    
    
    .15Rocket 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.
247,998 Series A-1 Preferred
shares.
    
    12/20/05
    
    
    6
    %
    
    
    400,000
    
    
    
    400,000
    
    
    
    .07Somerset Gas Transmission Company, LLC
Buffalo, NY. Natural gas transportation
company.
www.somersetgas.com
    
    26.5337 Units.
    
    7/10/02
    
    
    2
    %
    
    
    719,097
    
    
    
    786,748
    
    
    
    .14Synacor, 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
    
    
    
    .14Topps 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
    
    
    
    .16Ultra  Scan Corporation
Amherst, NY. Biometrics application
developer of ultrasonic fingerprint
technology.
www.ultra-scan.com
    
    536,596 common shares, 107,104
Series A-1 preferred shares.
(g) 95,284 Series A-1
preferred shares.
    
    12/11/92
    
    
    3
    %
    
    
    938,164
    
    
    
    1,203,000
    
    
    
    .21




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##### Table of Contents



Rand Capital Corporation and Subsidiaries
Condensed Consolidated Schedule of Portfolio Investments
September 30, 2006 (Continued)
(Unaudited)
 Per(b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    ShareDate
    
    (c)
    
    
    
    
    
    (d)
    
    ofCompany and Business
    
    Type of Investment
    
    Acquired
    
    Equity
    
    Cost
    
    Value
    
    RandUStec, Inc.
Victor, NY. Markets
digital wiring systems
for new home
construction.
www.ustecnet.com
    
    $100,000 note at 5% due
February 1, 2007 (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
    
    
    
    .08WineIsIt.com, Corp. (e)
Amherst, NY. Marketing
company specializing in
customer loyalty
programs supporting the
wine and spirit
industry.
www.wineisit.com
    
    $20,000 note at 12% due
April 26, 2007.
(g) $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
    %
    
    
    821,918
    
    
    
    395,000
    
    
    
    .07Other Investments
    
    Other
    
    Various
    
    
    
    
    
    
    520,260
    
    
    
    34,250
    
    
    
    .02Total portfolio investments
    
    
    
    
    
    
    
    $
    13,894,158
    
    
    $
    14,089,941
    
    
    $
    2.46




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##### Table of Contents



Rand Capital Corporation and Subsidiaries
Condensed Consolidated Schedule of Portfolio Investments
September 30, 2006 (Continued)
(Unaudited)
 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 September 30, 2006 restricted
securities represented approximately 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 September 30, 2006, the aggregate cost of investment
securities approximated $13.9 million. Net unrealized appreciation aggregated approximately
$196,000 of which $1,523,000 related to appreciated investment securities and $1,327,000
related to depreciated investment securities.(g)
    
    Rand Capital SBIC, L.P. investment(h)
    
    This is a publicly owned company. The Corporations shares are restricted securities but may
be sold 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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##### Table of Contents



Rand Capital Corporation and Subsidiaries
 
 Notes to the Consolidated Financial Statements
 For the Nine Months Ended September 30, 2006 and 2005
(Unaudited)
 Note 1. ORGANIZATION
  Formation of SBIC Subsidiary




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##### Table of Contents




    
    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 and;
    
    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.
   Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation 
  N-30-B2/ARS
    
    Quarterly & Annual Reports to ShareholdersN-54A
    
    Election to Adopt Business Development Company statusDEF-14A
    
    Definitive Proxy Statement submitted to shareholdersForm 10-K
    
    Annual Report on Form 10-K for the year ended December 31, 2005Form 10-Q
    
    Quarterly Report on Form 10-Q for the quarters ended June 30, 2006, March
31, 2006, and September 30, 2005Form N-23C-1
    
    Reports by closed-end investment companies of purchases of their own securities




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##### Table of Contents



Principles of Consolidation
 Investments
  Cash and Cash Equivalents
 Revenue Recognition  Interest Income
  Original
Issue Discount
 Deferred Debenture Costs




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##### Table of Contents



Net Assets per Share
 Supplemental Cash Flow Information
 Accounting Estimates
 Stockholders Equity (Net Assets) 
  Stock
Option Plan 
 Subsequent Events 




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##### Table of Contents



Item 2. 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 and Other Considerations, below.
 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
   Critical Accounting Policies




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##### Table of Contents



Financial Condition
  9/30/06
    
    12/31/05
    
    Increase
    
    % IncreaseTotal assets
    
    $
    17,384,675
    
    
    $
    16,063,605
    
    
    $
    1,321,070
    
    
    
    8.2
    %Total liabilities
    
    
    8,255,599
    
    
    
    7,447,671
    
    
    
    807,928
    
    
    
    10.8
    %Net assets
    
    $
    9,129,076
    
    
    $
    8,615,934
    
    
    $
    513,142
    
    
    
    6.0
    %
  9/30/06
    
    12/31/05
    
    Increase
    
    % IncreaseInvestments, at cost
    
    $
    13,894,158
    
    
    $
    13,712,890
    
    
    $
    181,268
    
    
    
    1.3
    %Unrealized appreciation
(depreciation), net
    
    
    195,783
    
    
    
    (342,028
    )
    
    
    537,811
    
    
    
    157.2
    %Investments at fair value
    
    $
    14,089,941
    
    
    $
    13,370,862
    
    
    $
    719,079
    
    
    
    5.4
    %
  New Investments
    
    AmountAdampluseve, LLC (Adam+Eve)
    
    $
    561,000Niagara Dispensing Technologies, Inc.
(Niagara Dispensing)
    
    
    500,000New Monarch Machine Tool, Inc. (Monarch)
    
    
    300,000Kionix, Inc (Kionix)
    
    
    243,704Rocket Broadband Networks, Inc (Rocket Broadband)
    
    
    195,918WineIsIt.com, Corp. (Wineisit)
    
    
    20,000Total of investments made during the nine months
ended September 30, 2006
    
    $
    1,820,622Interest conversions:Photonic Products Group, Inc. (Photonics)
    
    
    10,000Monarch
    
    
    2,877Total of new investments and interest conversions
during the nine months ended September 30, 2006
    
    $
    1,833,499Sales/Investment RepaymentsMinrad International, Inc. (Minrad)
    
    
    (608,304
    )Concentrix
    
    
    (600,000
    )Vanguard Modular Building Systems (Vanguard)
    
    
    (270,000
    )Monarch
    
    
    (101,395
    )Ramsco
    
    
    (46,860
    )Gemcor II, LLC (Gemcor)
    
    
    (13,399
    )APF Group, Inc. (APF)
    
    
    (8,106
    )Takeform
    
    
    (4,167
    )Total of sales or investment repayments
during the nine months ended September 30, 2006
    
    
    (1,652,231
    )Total change in investment balance, at cost
during the nine months ended September 30, 2006
    
    $
    181,268




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##### Table of Contents



Results of Operations
 Investment Income
  Comparison of the nine months ended September 30, 2006 to the nine months ended September 30,
2005
 September 30, 2006
    
    September 30, 2005
    
    Increase
    
    % IncreaseInterest from portfolio companies
    
    $
    539,783
    
    
    $
    438,928
    
    
    $
    100,855
    
    
    
    23.0
    %Interest from other investments
    
    
    24,856
    
    
    
    2,287
    
    
    
    22,569
    
    
    
    986.8
    %Dividend and other investment income
    
    
    191,994
    
    
    
    31,364
    
    
    
    160,630
    
    
    
    512.1
    %Other income
    
    
    63,910
    
    
    
    34,136
    
    
    
    29,774
    
    
    
    87.2
    %Total investment income
    
    $
    820,543
    
    
    $
    506,715
    
    
    $
    313,828
    
    
    
    61.9
    %
 Interest from portfolio companies
  Year that InterestCompany
    
    Interest Rate
    
    Investment Cost
    
    Accrual CeasedContract Staffing
    
    
    5
    %
    
    
    141,400
    
    
    
    2006G-Tec
    
    
    8
    %
    
    
    400,000
    
    
    
    2004WineIsIt.com
    
    
    10
    %
    
    
    821,918
    
    
    
    2005
 Interest from other investments
 Dividend and other investment income




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##### Table of Contents



Other income
  Operating Expenses
 September 30, 2006
    
    September 30, 2005
    
    Increase
    
    % IncreaseTotal Expenses
    
    $
    1,019,314
    
    
    $
    858,221
    
    
    $
    161,093
    
    
    
    19
    %




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##### Table of Contents



Net Realized Gains and Losses on Investments
  Net Change in Unrealized Appreciation (Depreciation) of Investments
  September 30,2006Minrad valuation to market
    
    $
    829,717Increase Carolina Skiff valuation
    
    
    189,000Vanguard Sale
    
    
    135,000Photonics valuation to market
    
    
    (7,920
    )Decrease Wineisit valuation
    
    
    (176,918
    )Minrad Stock Sales
    
    
    (433,335
    )Total Change in net Unrealized Appreciation
during the nine months ended September 30, 2006
    
    $
    535,544




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##### Table of Contents



Net Increase in Net Assets from Operations
  Liquidity and Capital Resources




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##### Table of Contents



Risk Factors and Other Considerations
 The Corporations Portfolio Investments are Illiquid
  Investing in Private Companies involves a High Degree of Risk
   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




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##### Table of Contents



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
  The Corporation Operates in a Competitive Market for Investment Opportunities
  Fluctuations of Quarterly Results




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk




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##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Control Over Financial Reporting.




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##### Table of Contents



PART II.
OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information




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##### Table of Contents



Item 6. Exhibits
 (a)
    
    Exhibits
  (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 to 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 Limited Partnership of Rand Capital SBIC, L.P. 
incorporated by reference to Exhibit 10.4 to the Corporations Form 10-K
filed for the year ended December 31, 2001.(10.5)
    
    Limited Liability Corporation Agreement of Rand Capital Management, LLC
 incorporated by reference to Exhibit 10.5 to the Corporations Form
10-K Report filed for the year ended December 31, 2001.(10.6)
    
    Certificate of Formation of Rand Capital Management, LLC incorporated
by reference to Exhibit 10.6 to the Corporations Form 10-K Report filed
for the year ended December 31, 2001.(10.7)
    
    N/A(10.8)
    
    Profit Sharing Plan  incorporated by reference to Exhibit 10.8 to the
Corporations Form 10-K Report filed for the year ended December 31,
2002.*(21)
    
    Subsidiaries of the Corporation  incorporated by
reference to Exhibit 21 to the Corporations Form 10-K Report filed for
the year ended December 31, 2001.(31.1)
    
    Certification of the Chief 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 Chief 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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##### Table of Contents



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-Q to be signed on its behalf by the undersigned
thereunto duly authorized.
  RAND CAPITAL CORPORATIONBy:
    
    /s/ Allen F. Grum

Allen F. Grum, PresidentBy:
    
    /s/ Daniel P. Penberthy

Daniel P. Penberthy, TreasurerRAND CAPITAL SBIC, L.P.By:
    
    RAND CAPITAL MANAGEMENT LLC
General PartnerBy:
    
    RAND CAPITAL CORPORATION
MemberBy:
    
    /s/ Allen F. Grum

Allen F. Grum, PresidentBy:
    
    /s/ Daniel P. Penberthy

Daniel P. Penberthy, Treasurer