##### 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 June 30, 2008
 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
    
    (IRS Employeror organization)
    
    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)
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



RAND CAPITAL CORPORATION  TABLE OF CONTENTS FOR FORM 10-Q
 PagePART I.  FINANCIAL INFORMATIONItem 1. Financial Statements and Supplementary Data (Unaudited)
    
    3Consolidated Statements of Financial Position as of June 30, 2008 and
December 31, 2007
    
    3Condensed Consolidated Statements of Operations for the Three Months
and Six Months Ended June 30, 2008 and 2007
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2008 and 2007
    
    5Condensed Consolidated Statements of Changes in Net Assets for the
Three Months and Six Months Ended June 30, 2008 and 2007
    
    6Condensed Consolidated Schedule of Portfolio Investments as of June 30,
2008
    
    7Notes to the Consolidated Financial Statements
    
    9Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    17Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    23Item 4. Controls and Procedures
    
    23PART II  OTHER INFORMATIONItem 1.Legal Proceedings
    
    24Item 1A. Risk Factors
    
    24Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
    
    26Item 3.Defaults upon Senior Securities
    
    26Item 4.Submission of Matters to a Vote of Security Holders
    
    26Item 5.Other Information
    
    26Item 6.Exhibits
    
    27Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  
  2




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##### Table of Contents



PART I.
FINANCIAL INFORMATION
 
 Item 1. Financial Statements and Supplementary Data
 RAND CAPITAL CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As of June 30, 2008 and December 31, 2007
 June 30, 2008
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSInvestments at fair value (identified cost: 6/30/08 -
$13,519,702;
 12/31/07 - $13,390,644)
    
    $
    26,462,848
    
    
    $
    26,528,490Cash and cash equivalents
    
    
    3,725,850
    
    
    
    4,396,595Interest receivable (net of allowance $122,000)
    
    
    858,641
    
    
    
    647,001Other assets
    
    
    471,835
    
    
    
    1,150,065Total assets
    
    $
    31,519,174
    
    
    $
    32,722,151LIABILITIES AND STOCKHOLDERS EQUITY (NET ASSETS)Liabilities:Debentures guaranteed by the SBA
    
    $
    8,100,000
    
    
    $
    8,100,000Deferred tax liability
    
    
    3,375,000
    
    
    
    3,955,000Income taxes payable
    
    
    44,854
    
    
    
    474,465Accounts payable and accrued expenses
    
    
    253,528
    
    
    
    321,210Deferred revenue
    
    
    37,016
    
    
    
    53,653Total liabilities
    
    
    11,810,398
    
    
    
    12,904,328Stockholders 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)
    
    
    (3,863,278
    )
    
    
    (3,940,409
    )Undistributed net realized gain on investments
    
    
    7,735,477
    
    
    
    7,796,289Net unrealized appreciation on investments
    
    
    8,334,025
    
    
    
    8,459,391Treasury stock, at cost, 44,100 shares
    
    
    (47,206
    )
    
    
    (47,206
    )Net assets (per share 6/30/08 - $3.45 , 12/31/07 - $3.47)
    
    
    19,708,776
    
    
    
    19,817,823Total liabilities and stockholders equity (net assets)
    
    $
    31,519,174
    
    
    $
    32,722,151
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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended June 30, 2008 and 2007
(Unaudited)
 Three months
    
    
    Three months
    
    
    Six months
    
    
    Six monthsended
    
    
    ended
    
    
    ended
    
    
    endedJune 30, 2008
    
    
    June 30, 2007
    
    
    June 30, 2008
    
    
    June 30, 2007Investment income:Interest from portfolio companies
    
    $
    110,017
    
    
    $
    134,479
    
    
    $
    361,781
    
    
    $
    334,196Interest from other investments
    
    
    18,520
    
    
    
    46,243
    
    
    
    53,104
    
    
    
    92,290Dividend and other investment income
    
    
    349,647
    
    
    
    179,590
    
    
    
    434,581
    
    
    
    409,010Other income
    
    
    4,084
    
    
    
    15,416
    
    
    
    11,167
    
    
    
    20,644482,268
    
    
    
    375,728
    
    
    
    860,633
    
    
    
    856,140Operating expenses:Salaries
    
    
    106,682
    
    
    
    100,587
    
    
    
    215,066
    
    
    
    207,557Employee benefits
    
    
    27,081
    
    
    
    23,076
    
    
    
    70,711
    
    
    
    65,389Directors fees
    
    
    44,250
    
    
    
    44,250
    
    
    
    56,000
    
    
    
    56,500Professional fees
    
    
    59,347
    
    
    
    65,584
    
    
    
    119,637
    
    
    
    97,262Stockholders and office operating
    
    
    37,200
    
    
    
    41,741
    
    
    
    61,708
    
    
    
    74,154Insurance
    
    
    8,600
    
    
    
    10,920
    
    
    
    19,100
    
    
    
    21,840Corporate development
    
    
    18,603
    
    
    
    17,675
    
    
    
    35,165
    
    
    
    32,465Other operating
    
    
    2,460
    
    
    
    3,062
    
    
    
    4,438
    
    
    
    5,541304,223
    
    
    
    306,895
    
    
    
    581,825
    
    
    
    560,708Interest on SBA obligations
    
    
    125,765
    
    
    
    125,765
    
    
    
    251,531
    
    
    
    251,531Total expenses
    
    
    429,988
    
    
    
    432,660
    
    
    
    833,356
    
    
    
    812,239Investment gain (loss) before income taxes
    
    
    52,280
    
    
    
    (56,932
    )
    
    
    27,277
    
    
    
    43,901Current income tax expense
    
    
    (385,511
    )
    
    
    (83,068
    )
    
    
    (521,624
    )
    
    
    (181,365
    )Deferred income tax benefit
    
    
    357,853
    
    
    
    291,465
    
    
    
    510,666
    
    
    
    390,133Net investment gain
    
    
    24,622
    
    
    
    151,465
    
    
    
    16,319
    
    
    
    252,669Realized and unrealized gain (loss) on investments:Net gain (loss) on sales and dispositions
    
    
    
    
    
    
    440
    
    
    
    
    
    
    
    (38,796
    )Unrealized appreciation on investments:Beginning of period
    
    
    13,008,146
    
    
    
    9,725,646
    
    
    
    13,137,846
    
    
    
    9,616,025End of period
    
    
    12,943,146
    
    
    
    9,735,146
    
    
    
    12,943,146
    
    
    
    9,735,146Change in unrealized appreciation before income
taxes
    
    
    (65,000
    )
    
    
    9,500
    
    
    
    (194,700
    )
    
    
    119,121Deferred income tax (benefit) expense
    
    
    (23,147
    )
    
    
    3,465
    
    
    
    (69,334
    )
    
    
    43,586Net (decrease) increase in unrealized appreciation
    
    
    (41,853
    )
    
    
    6,035
    
    
    
    (125,366
    )
    
    
    75,535Net realized and unrealized (loss) gain on investments
    
    
    (41,853
    )
    
    
    6,475
    
    
    
    (125,366
    )
    
    
    36,739Net (decrease) increase in net assets from operations
    
    $
    (17,231
    )
    
    $
    157,940
    
    
    $
    (109,047
    )
    
    $
    289,408Weighted 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
    
    $
    0.00
    
    
    $
    0.03
    
    
    $
    (0.02
    )
    
    $
    0.05
   4




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RAND CAPITAL CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2008 and 2007
(Unaudited)
 June 30, 2008
    
    
    June 30, 2007Cash flows from operating activities:Net (decrease) increase in net assets from
operations
    
    $
    (109,047
    )
    
    $
    289,408Adjustments to reconcile net (decrease)
increase in net assets to net cash used in
operating activities:Depreciation and amortization
    
    
    16,392
    
    
    
    16,991Original issue discount accretion
    
    
    
    
    
    
    (62,333
    )Decrease (increase) in unrealized
appreciation of
Investments
    
    
    194,700
    
    
    
    (119,121
    )Deferred tax benefit
    
    
    (580,000
    )
    
    
    (346,547
    )Net realized loss on portfolio investments
    
    
    
    
    
    
    38,796Non-cash conversion of debenture interest
    
    
    (41,783
    )
    
    
    (50,000
    )Changes in operating assets and liabilities:(Increase) in interest receivable
    
    
    (211,640
    )
    
    
    (41,016
    )Decrease (increase) in other assets
    
    
    662,800
    
    
    
    (74,280
    )Decrease in income taxes payable
    
    
    (429,611
    )
    
    
    (410,575
    )Decrease in accounts payable and accrued
expenses
    
    
    (67,682
    )
    
    
    (194,151
    )Decrease in deferred revenue
    
    
    (16,637
    )
    
    
    (19,643
    )Total adjustments
    
    
    (473,461
    )
    
    
    (1,261,879
    )Net cash used in operating activities
    
    
    (582,508
    )
    
    
    (972,471
    )Cash flows from investing activities:Investments originated
    
    
    (674,990
    )
    
    
    (10
    )Proceeds from sale of portfolio investments
    
    
    
    
    
    
    440Proceeds from loan repayments
    
    
    587,715
    
    
    
    1,032,318Capital expenditures
    
    
    (962
    )
    
    
    (1,350
    )Net cash (use in) provided by
investing activities
    
    
    (88,237
    )
    
    
    1,031,398Net (decrease) increase in cash and cash
equivalents
    
    
    (670,745
    )
    
    
    58,927Cash and cash equivalents:Beginning of period
    
    
    4,396,595
    
    
    
    4,299,852End of period
    
    $
    3,725,850
    
    
    
    4,358,779
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RAND CAPITAL CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
For the Three and Six Months Ended June 30, 2008 and 2007
(Unaudited)
 Three months
    
    
    Three months
    
    
    Six months
    
    
    Six monthsended
    
    
    ended
    
    
    ended
    
    
    endedJune 30, 2008
    
    
    June 30, 2007
    
    
    June 30, 2008
    
    
    June 30, 2007Net assets at beginning of period
    
    $
    19,726,007
    
    
    $
    17,230,126
    
    
    $
    19,817,823
    
    
    $
    16,782,405Cumulative effect adjustment for
uncertain tax positions  FIN 48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    316,253Net investment gain
    
    
    24,622
    
    
    
    151,465
    
    
    
    16,319
    
    
    
    252,669Net realized gain (loss) on investments
    
    
    
    
    
    
    440
    
    
    
    
    
    
    
    (38,796
    )Net change in unrealized appreciation
on investments
    
    
    (41,853
    )
    
    
    6,035
    
    
    
    (125,366
    )
    
    
    75,535Net (decrease) increase in net assets from
operations
    
    
    (17,231
    )
    
    
    157,940
    
    
    
    (109,047
    )
    
    
    289,408Net assets at end of period
    
    $
    19,708,776
    
    
    $
    17,388,066
    
    
    $
    19,708,776
    
    
    $
    17,388,066
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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
June 30, 2008
(Unaudited)
 (b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    PerDate
    
    (c)
    
    
    
    
    
    
    (d)
    
    
    ShareCompany and Business
    
    Type of Investment
    
    Acquired
    
    Equity
    
    
    Cost
    
    
    Value
    
    
    of RandAdam (Formerly Adampluseve, Inc.) (g)
New York, NY. Luxury sports wear company for men
and women.
www.shopadam.com
    
    Warrants to
purchase 1,715
Series A
convertible
preferred shares.
    
    7/14/06
    
    
    3
    %
    
    $
    68,000
    
    
    $
    133,341
    
    
    
    .02APF Group, Inc. (e)(g)
Yonkers, 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
    
    $566,504 consolidated senior
subordinated note
at 12.74% due
December 30, 2010.
Warrants to
purchase 10.2941
shares of common
stock.
    
    7/8/04
    
    
    6
    %
    
    
    566,504
    
    
    
    566,504
    
    
    
    .10Associates Interactive, LLC (e)(g)
Buffalo, NY. Provider of training content and
certifications used to train retail sales
associates.
www.associatesinteractive.com
    
    $247,813 promissory
note at 8% due
December 19, 2012.
Investor units
totaling 21.88% of
company.
    
    10/15/07
    
    
    22
    %
    
    
    250,000
    
    
    
    250,000
    
    
    
    .05Carolina 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 7.5%.
Redeemable January
31, 2010.
5% common
membership
interest.
    
    1/30/04
    
    
    5
    %
    
    
    1,000,000
    
    
    
    1,227,000
    
    
    
    .21Contract Staffing (e)(h)
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 shares
of common stock.
    
    11/8/99
    
    
    10
    %
    
    
    94,003
    
    
    
    94,003
    
    
    
    .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.
Warrants for 5.5% of
common stock.
    
    12/19/05
    
    
    5
    %
    
    
    500,000
    
    
    
    500,000
    
    
    
    .09Gemcor II, LLC (e)(g)(h)
West Seneca, NY.
Designs and sells
automatic riveting
machines used in the
assembly of aircraft
components.
www.gemcor.com
    
    $250,000 subordinated
note at 8% due June
28, 2010 with warrant to
purchase 6.25 membership
units. 25 membership
units.
    
    6/28/04
    
    
    31
    %
    
    
    634,946
    
    
    
    4,134,946
    
    
    
    .72Golden Goal LLC (g)
Fort Ann, NY. Youth
soccer and lacrosse
tournament park.
www.goldengoalpark.com
    
    191,811 Class C units
at 4%.
    
    12/10/07
    
    
    6
    %
    
    
    637,414
    
    
    
    637,414
    
    
    
    .11G-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
    
    28.925% Class A
membership interest.
8% cumulative dividend.
    
    8/31/99
    
    
    29
    %
    
    
    400,000
    
    
    
    198,000
    
    
    
    .04Innov-X Systems, Inc. (g)
Woburn, MA.
Manufactures portable
x-ray fluorescence (XRF)
analyzers used in
metals/alloy analysis.
www.innovxsys.com
    
    2,642 Series A
convertible preferred
stock. Warrants for
21,596 common shares.
8% cumulative dividend.
    
    9/27/04
    
    
    9
    %
    
    
    1,000,000
    
    
    
    8,761,700
    
    
    
    1.53Kionix, Inc.
Ithaca, NY. Develops
innovative MEMS based
technology applications.
www.kionix.com
    
    30,241 shares Series B

696,296 preferred stock.
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
    %
    
    
    1,506,043
    
    
    
    1,221,567
    
    
    
    .21
  7




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RAND CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
June 30, 2008 (Continued)
(Unaudited)
 (b)Date
    
    (c)
    
    
    
    
    
    
    (d)
    
    
    Per ShareCompany and Business
    
    Type of Investment
    
    Acquired
    
    Equity
    
    
    Cost
    
    
    Value
    
    
    of RandMezmeriz, Inc. (g)
Ithaca, NY. Developer of micro mirror
technology that replaces silicon with
carbon fibers in micro-electronic
mechanical systems (MEMS), which enables
a new generation of high definition
displays.
www.mezmeriz.com
    
    $100,000 convertible note at 9%
due January 9, 2010.
    
    1/9/08
    
    
    
    
    100,000
    
    
    
    100,000
    
    
    
    .02Niagara Dispensing Technologies, Inc. (e)
Amherst, NY. Beverage dispensing
technology development and products
manufacturer, specializing in rapid pour
beer dispensing systems for high volume
stadium and concession operations.
www.exactpour.com
    
    202,081 Series B preferred stock.
(g)463,691 Series A preferred
stock. 518,752 Series B
preferred stock.
    
    3/8/06
    
    
    14
    %
    
    
    1,281,783
    
    
    
    1,170,783
    
    
    
    .20Photonic Products Group, Inc
(OTC:PHPG.OB) (a)(i)
Northvale, NJ. Develops and
manufactures products for laser
photonics industry.
www.inrad.com
    
    66,000 shares common stock.
    
    10/31/00
    
    <1%
    
    
    165,000
    
    
    
    207,000
    
    
    
    .04RAMSCO (e)(g)
Albany, NY. Distributor of water,
sanitary, storm sewer and specialty
construction materials to the
contractor, highway and municipal
construction markets.
www.ramsco.com
    
    $300,000 promissory notes at 8%
due October 20, 2010. Warrants
for 5.99% of common stock.
    
    11/19/02
    
    
    6
    %
    
    
    300,000
    
    
    
    300,000
    
    
    
    .05Rocket Broadband Networks, Inc. (g)
Amherst, NY. Communications service
provider of satellite TV, broadband
internet and VoIP digital phone
targeting multiple dwelling units.
www.rocketbroadband.com
    
    285,829 Series A preferred
shares. 
247,998 Series A-1
preferred shares. 
996,441
Series B preferred shares
    
    12/20/05
    
    
    11
    %
    
    
    680,000
    
    
    
    680,000
    
    
    
    .12Somerset Gas Transmission Company, LLC
(e)
Columbus, OH. Natural gas
transportation company.
www.somersetgas.com
    
    26.5337 units.
    
    7/10/02
    
    
    2
    %
    
    
    719,097
    
    
    
    786,748
    
    
    
    .14Synacor Inc. (g)
Buffalo, NY. Develops provisioning
platforms for aggregation and delivery
of content for broadband access
providers.
www.synacor.com
    
    78,186 Series A preferred
shares. 200,000 shares of
Series B preferred stock.
80,126 Series C preferred
shares. 299,146 common shares.
    
    11/18/02
    
    
    4
    %
    
    
    1,349,479
    
    
    
    4,168,001
    
    
    
    .73Ultra  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
    
    
    4
    %
    
    
    938,164
    
    
    
    1,203,000
    
    
    
    .21WineIsIt.com, Corp.
Williamsville, NY. Marketing company
specializing in customer loyalty
programs supporting the wine and spirit
industry. 
www.wineisit.com
    
    (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.
(e)$20,000 note at 18% due
April 1, 2009.
    
    12/18/02
    
    
    2
    %
    
    
    821,918
    
    
    
    100,000
    
    
    
    .02Other Investments
    
    Various
    
    
    
    
    
    
    
    
    507,351
    
    
    
    22,841
    
    
    
    .00Total portfolio investments
    
    
    
    
    
    
    
    $
    13,519,702
    
    
    $
    26,462,848
    
    
    $
    4.63
  8




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
June 30, 2008 (Continued)
(Unaudited)
 Notes to Consolidated Schedule of Portfolio Investments
           9




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##### Table of Contents



Rand Capital Corporation and Subsidiaries
 
 Notes to the Consolidated Financial Statements
For the Six Months Ended June 30, 2008 and 2007
(Unaudited)
 Note 1. ORGANIZATION
   Formation of SBIC Subsidiary
       10




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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;
 
    
    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.
     
  11




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##### Table of Contents



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, 2007Form 10-Q
    
    Quarterly Report on Form 10-Q for the quarters ended March 31, 2008,
September 30, 2007 and June 30, 2007Form N-23C-1
    
    Reports by closed-end investment companies of purchases of their own securities
  Principles of Consolidation
  12




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##### Table of Contents



Cash and Cash Equivalents
 Revenue Recognition  Interest and Dividend Income
  Other Assets
 Original Issue Discount
 Deferred Debenture Costs
 Net Assets per Share
 Supplemental Cash Flow Information
 Accounting Estimates
 Stockholders Equity (Net Assets) 
  13




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##### Table of Contents



Profit Sharing and Stock Option Plan -
  Income Taxes  
     14




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##### Table of Contents



Concentration of Credit Risk 
 Subsequent Events 
 Note 3. INVESTMENTS
    Assets Measured at Fair Value on a Recurring Basis
 Fair Value Measurements at Reported Date UsingQuoted Prices in
    
    
    Significant
    
    
    Other SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    InputsDescription
    
    June 30, 2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Venture Capital
Investments
    
    $
    26,462,848
    
    
    $
    207,000
    
    
    $
    0
    
    
    $
    26,255,848
  15




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##### Table of Contents



Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
 Fair Value Measurements Using SignificantUnobservable Inputs (Level 3)Venture Capital InvestmentsBeginning Balance, December 31, 2007, of Level 3 Assets
    

    
    

    
   $
    26,265,790Realized Gains or Losses included in net change in net assets from operations
    
    
    Unrealized gains or losses included in net change in net assets from operationsBioWorks
    
    $
    (28,000
    )Niagara Dispensing Technologies, Inc.
    
    $
    (111,000
    )
    
    $
    (139,000
    )Purchases of SecuritiesMezmeriz, Inc.
    
    $
    100,000Niagara Dispensing Technologies, Inc.
    
    $
    374,990Associates Interactive, LLC
    
    $
    200,000Niagara Dispensing Technoligies, Inc interest conversion
    
    $
    41,783
    
    
    $
    716,773Repayments of SecuritiesNew Monarch Machine Tool, Inc.
    
    $
    (520,147
    )Gemcor II, LLC
    
    $
    (30,506
    )Contract Staffing
    
    $
    (37,062
    )
    
    $
    $(587,715
    )Transfers in or out of Level 3
    
    
    
    
    
    
    Ending Balance, June 30, 2008, of Level 3 Assets
    
    
    
    
    
    $
    26,255,848The amount of total gains or losses for the period included in earnings
(or changes in net assets) attributable to the change in unrealized gains
or losses relating to assets still held at the reporting date.
    
    
    
    
    
    $
    (139,000
    )Gains and losses (realized and unrealized) included in Net Increase (decrease)
in net assets from operations for the period above are reported as follows:Net Gain (Loss) on Sales and Dispositions
    
    
    
    
    
    $
    0Change in unrealized gains or losses relating to assets still held at reporting date
    
    
    
    
    
    $
    (139,000
    )
  16




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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 companies 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 in Part II, Item 1A of this report, the text of 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
    Critical Accounting Policies
   17




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##### Table of Contents



Financial Condition
  6/30/08
    
    
    12/31/07
    
    
    Decrease
    
    
    % DecreaseTotal assets
    
    $
    31,519,174
    
    
    $
    32,722,151
    
    
    $
    (1,202,977
    )
    
    
    (3.7
    %)Total liabilities
    
    
    11,810,398
    
    
    
    12,904,328
    
    
    
    (1,093,930
    )
    
    
    (8.5
    %)Net assets
    
    $
    19,708,776
    
    
    $
    19,817,823
    
    
    $
    (109,047
    )
    
    
    (0.6
    %)
  Increase
    
    
    % Increase6/30/08
    
    
    12/31/07
    
    
    (Decrease)
    
    
    (Decrease)Investments, at cost
    
    $
    13,519,702
    
    
    $
    13,390,644
    
    
    $
    129,058
    
    
    
    1.0
    %Unrealized appreciation, net
    
    
    12,943,146
    
    
    
    13,137,846
    
    
    
    (194,700
    )
    
    
    (1.5
    %)Investments at fair value
    
    $
    26,462,848
    
    
    $
    26,528,490
    
    
    $
    (65,642
    )
    

    
    (0.2
    %)
  AmountNew Investments:Niagara Dispensing Technologies, Inc. (Niagara Dispensing)
    
    $
    374,990Associates Interactive
    
    
    200,000Mezmeriz, Inc.
    
    
    100,000Total of investments made during the six months
ended June 30, 2008
    
    $
    674,990Changes to Investments:Niagara Dispensing interest conversion
    
    $
    41,783Investment Repayments:New Monarch Machine Tool, Inc. (Monarch)
    
    $
    (520,147
    )Gemcor II, LLC (Gemcor)
    
    
    (30,506
    )Contract Staffing
    
    
    (37,062
    )Total changes to investments and investment repayments
during the six months ended June 30, 2008
    
    $
    (545,932
    )Total change in investment balance, at cost,
during the six months ended June 30, 2008
    
    $
    129,058
     18




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##### Table of Contents



Results of Operations
 Investment Income
  Comparison of the six months ended June 30, 2008 to the six months ended June 30, 2007
 Increase
    
    
    % IncreaseJune 30, 2008
    
    
    June 30, 2007
    
    
    (Decrease)
    
    
    (Decrease)Interest from portfolio companies
    
    $
    361,781
    
    
    $
    334,196
    
    
    $
    27,585
    
    
    
    8.3
    %Interest from other investments
    
    
    53,104
    
    
    
    92,290
    
    
    
    (39,186
    )
    
    
    (42.5
    %)Dividend and other investment income
    
    
    434,581
    
    
    
    409,010
    
    
    
    25,571
    
    
    
    6.3
    %Other income
    
    
    11,167
    
    
    
    20,644
    
    
    
    (9,477
    )
    
    
    (45.9
    %)Total investment income
    
    $
    860,633
    
    
    $
    856,140
    
    
    $
    4,493
    
    
    
    0.5
    %
 Interest
from portfolio companies
    19




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##### Table of Contents



Interest
    
    
    Investment
    
    
    Year that InterestCompany
    
    Rate
    
    
    Cost
    
    
    Accrual CeasedG-Tec
    
    
    8
    %
    
    
    400,000
    
    
    
    2004UStec
    
    
    5
    %
    
    
    100,000
    
    
    
    2006WineIsIt.com
    
    
    10
    %
    
    
    801,918
    
    
    
    2005
 Interest from other investments
 Dividend and other investment income
  Other income
   Operating Expenses
 Comparison of the six months ended June 30, 2008 to the six months ended June 30, 2007
 June 30, 2008
    
    
    June 30, 2007
    
    
    Increase
    
    
    % IncreaseTotal Expenses
    
    $
    833,356
    
    
    $
    812,239
    
    
    $
    21,117
    
    
    
    2.6
    %
   20




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##### Table of Contents



Net Realized Gains and Losses on Investments
   Net Change in Unrealized Appreciation of Investments
  June 30, 2008Niagara Dispensing
    
    $
    (111,000
    )Photonic Products Group, Inc (Photonic)
    
    
    (55,700
    )Bioworks
    
    
    (28,000
    )Total change in net unrealized appreciation
during the six months ended June 30, 2008
    
    $
    (194,700
    )
      June 30, 2007Adampluseve warrants
    
    $
    65,341Reclass UStec to realized loss
    
    
    39,000Photonic
    
    
    14,780Total increase in net unrealized appreciation
during the six months ended June 30, 2007
    
    $
    119,121
  21




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##### Table of Contents



Net (Decrease) Increase in Net Assets from Operations
  Liquidity and Capital Resources
      22




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Control Over Financial Reporting.
  23




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##### Table of Contents



PART II.
OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 The Corporation is Subject to Risks Created by the Valuation of its Portfolio Investments
  The Corporations Portfolio Investments are Illiquid
  Investing in Private Companies involves a High Degree of Risk
   Investing in the Corporations Shares May be Inappropriate for the Investors Risk Tolerance
   24




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##### Table of Contents



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 Corporation is Dependent Upon Key Management Personnel for Future Success
  The Corporation Operates in a Competitive Market for Investment Opportunities
  Fluctuations of Quarterly Results
   25




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##### Table of Contents



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
 th
  VOTES FOR
    
    
    VOTES WITHHELDAllen F. Grum
    
    
    4,864,120
    
    
    
    24,314Erland E. Kailbourne
    
    
    4,878,955
    
    
    
    9,479Ross B. Kenzie
    
    
    4,887,009
    
    
    
    1,425Willis S. McLeese
    
    
    4,858,120
    
    
    
    30,314Reginald B. Newman II
    
    
    4,878,955
    
    
    
    9,479Jayne K. Rand
    
    
    4,863.955
    
    
    
    24,479Robert M. Zak
    
    
    4,878,955
    
    
    
    9,479
 
 Item 5. Other Information
   26




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##### Table of Contents



Item 6. Exhibits
 (a)
    
    ExhibitsThe following exhibits are filed with this report or are incorporated herein by
reference to a prior filing, in accordance with Rule 12b-32 under the
Securities Exchange Act of 1934.
 (3)(i)
    
    Certificate of Incorporation of the Corporation, incorporated by
reference to Exhibit (a) (1) of Form N-2 filed with the Securities
Exchange Commission on April 22, 1997.(3)(ii)
    
    By-laws of the Corporation incorporated by reference to Exhibit (b) of
Form N-2 filed with the Securities Exchange Commission on April 22, 1997.(4)
    
    Specimen certificate of common stock certificate,
incorporated by reference to Exhibit (b) of Form N-2 filed with the
Securities Exchange Commission on April 22, 1997.(10.1)
    
    Employee Stock Option Plan  incorporated by reference 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 Formation of Rand Capital SBIC, L.P.  incorporated by
reference to Exhibit 10.4 to the Corporations Form10-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  furnished herewith(32.2)
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 Rand Capital SBIC, L.P.  furnished herewith
 *
    
    Management contract or compensatory plan.
  27




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##### Table of Contents



Signatures
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
  RAND CAPITAL CORPORATIONBy:
    /s/ Allen F. GrumAllen F. Grum, PresidentBy:
    /s/ Daniel P. PenberthyDaniel P. Penberthy, TreasurerRAND CAPITAL SBIC, L.P.By:
    RAND CAPITAL MANAGEMENT LLCGeneral PartnerBy:
    RAND CAPITAL CORPORATIONMemberBy:
    /s/ Allen F. GrumAllen F. Grum, PresidentBy:
    /s/ Daniel P. PenberthyDaniel P. Penberthy, Treasurer  28




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##### Table of Contents



Exhibit Index
 ExhibitNumber
    
    Description31.1
    
    
    Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a)/15d-14(a) under
the Securities Exchange Act of 1934, as amended31.2
    
    
    Certification of Chief Financial Officer Pursuant to Rules 13a-14(a)/15d-14(a) under the
Securities Exchange Act of 1934, as amended32.1
    
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Rand Capital
Corporation32.2
    
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Rand Capital
SBIC, L.P.
  29