##### 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, 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: 811-01825
 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
 PART I.  FINANCIAL INFORMATIONItem 1. Financial Statements and Supplementary Data (Unaudited)
    
    
    1Condensed Consolidated Statements of Financial Position as of September
30, 2008 and December 31, 2007
    
    
    1Condensed Consolidated Statements of Operations for the Three Months
and Nine Months Ended September 30, 2008 and 2007
    
    
    2Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2008 and 2007
    
    
    3Condensed Consolidated Statements of Changes in Net Assets for the
Three Months and Nine Months Ended September 30, 2008 and 2007
    
    
    4Condensed Consolidated Schedule of Portfolio Investments as of
September 30, 2008
    
    
    5Notes to the Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 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
    
    
    25Item 3.Defaults upon Senior Securities
    
    
    25Item 4.Submission of Matters to a Vote of Security Holders
    
    
    25Item 5.Other Information
    
    
    25Item 6.Exhibits
    
    
    26Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 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
 
 CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
 As of September 30, 2008 and December 31, 2007
 September 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSInvestments at fair value (identified cost: 9/30/08 
$13,453,917; 12/31/07  $13,390,644)
    
    $
    25,599,063
    
    
    $
    26,528,490Cash and cash equivalents
    
    
    3,585,620
    
    
    
    4,396,595Interest receivable (net of allowance $122,000)
    
    
    924,392
    
    
    
    647,001Other assets
    
    
    425,316
    
    
    
    1,150,065Total assets
    
    $
    30,534,391
    
    
    $
    32,722,151LIABILITIES AND STOCKHOLDERS EQUITY (NET ASSETS)Liabilities:Debentures guaranteed by the SBA
    
    $
    8,100,000
    
    
    $
    8,100,000Deferred tax liability
    
    
    2,892,000
    
    
    
    3,955,000Income taxes payable
    
    
    9,479
    
    
    
    474,465Accounts payable and accrued expenses
    
    
    132,822
    
    
    
    321,210Deferred revenue
    
    
    28,697
    
    
    
    53,653Total liabilities
    
    
    11,162,998
    
    
    
    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)
    
    
    (3,778,951
    )
    
    
    (3,940,409
    )Undistributed net realized gain on investments
    
    
    7,735,477
    
    
    
    7,796,289Net unrealized appreciation on investments
    
    
    7,912,315
    
    
    
    8,459,391Treasury stock, at cost, 44,100 shares
    
    
    (47,206
    )
    
    
    (47,206
    )Net assets (per share 9/30/08  $3.39 , 12/31/07  $3.47)
    
    
    19,371,393
    
    
    
    19,817,823Total liabilities and stockholders equity (net assets)
    
    $
    30,534,391
    
    
    $
    32,722,151
   1




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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, 2008 and 2007
(Unaudited)
 Three months
    
    
    Three months
    
    
    Nine months
    
    
    Nine monthsended
    
    
    ended
    
    
    ended
    
    
    endedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Investment income:Interest from portfolio companies
    
    $
    128,182
    
    
    $
    140,766
    
    
    $
    489,963
    
    
    $
    474,962Interest from other investments
    
    
    19,900
    
    
    
    41,563
    
    
    
    73,004
    
    
    
    133,853Dividend and other investment income
    
    
    272,877
    
    
    
    177,281
    
    
    
    707,458
    
    
    
    586,291Other income
    
    
    3,084
    
    
    
    5,993
    
    
    
    14,251
    
    
    
    26,637424,043
    
    
    
    365,603
    
    
    
    1,284,676
    
    
    
    1,221,743Operating expenses:Salaries
    
    
    106,312
    
    
    
    100,465
    
    
    
    321,378
    
    
    
    308,022Employee benefits
    
    
    23,221
    
    
    
    21,338
    
    
    
    93,932
    
    
    
    86,727Directors fees
    
    
    9,750
    
    
    
    10,750
    
    
    
    65,750
    
    
    
    67,250Professional fees
    
    
    19,080
    
    
    
    52,383
    
    
    
    138,717
    
    
    
    149,645Stockholders and office operating
    
    
    29,340
    
    
    
    23,902
    
    
    
    91,048
    
    
    
    98,056Insurance
    
    
    12,400
    
    
    
    10,920
    
    
    
    31,500
    
    
    
    32,760Corporate development
    
    
    12,548
    
    
    
    17,886
    
    
    
    47,713
    
    
    
    50,351Other operating
    
    
    1,826
    
    
    
    2,343
    
    
    
    6,264
    
    
    
    7,884214,477
    
    
    
    239,987
    
    
    
    796,302
    
    
    
    800,695Interest on SBA obligations
    
    
    144,766
    
    
    
    125,766
    
    
    
    396,297
    
    
    
    377,297Total expenses
    
    
    359,243
    
    
    
    365,753
    
    
    
    1,192,599
    
    
    
    1,177,992Investment gain (loss) before income taxes
    
    
    64,800
    
    
    
    (150
    )
    
    
    92,077
    
    
    
    43,751Current income tax expense
    
    
    (87,183
    )
    
    
    (36,082
    )
    
    
    (608,807
    )
    
    
    (217,447
    )Deferred income tax benefit (expense)
    
    
    106,710
    
    
    
    (377,982
    )
    
    
    617,376
    
    
    
    12,151Net investment gain (loss)
    
    
    84,327
    
    
    
    (414,214
    )
    
    
    100,646
    
    
    
    (161,545
    )Realized and unrealized (loss) gain on investments:Net gain on sales and dispositions
    
    
    
    
    
    
    555,000
    
    
    
    
    
    
    
    516,204Unrealized appreciation on investments:Beginning of period
    
    
    12,943,146
    
    
    
    9,735,146
    
    
    
    13,137,846
    
    
    
    9,616,025End of period
    
    
    12,145,146
    
    
    
    8,822,146
    
    
    
    12,145,146
    
    
    
    8,822,146Change in unrealized appreciation before
income taxes
    
    
    (798,000
    )
    
    
    (913,000
    )
    
    
    (992,700
    )
    
    
    (793,879
    )Deferred income tax (benefit)
    
    
    (376,290
    )
    
    
    (421,115
    )
    
    
    (445,624
    )
    
    
    (377,529
    )Net decrease in unrealized appreciation
    
    
    (421,710
    )
    
    
    (491,885
    )
    
    
    (547,076
    )
    
    
    (416,350
    )Net realized and unrealized (loss) gain on investments
    
    
    (421,710
    )
    
    
    63,115
    
    
    
    (547,076
    )
    
    
    99,854Net decrease in net assets from operations
    
    $
    (337,383
    )
    
    $
    (351,099
    )
    
    $
    (446,430
    )
    
    $
    (61,691
    )Weighted average shares outstanding
    
    
    5,718,934
    
    
    
    5,718,934
    
    
    
    5,718,934
    
    
    
    5,718,934Basic and diluted net decrease in net assets from
operations per share
    
    $
    (0.06
    )
    
    $
    (0.06
    )
    
    $
    (0.08
    )
    
    $
    (0.01
    )
   2




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RAND CAPITAL CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Nine Months Ended September 30, 2008 and 2007
(Unaudited)
 September 30,
    
    
    September 30,2008
    
    
    2007Cash flows from operating activities:Net decrease in net assets from operations
    
    $
    (446,430
    )
    
    $
    (61,691
    )Adjustments to reconcile net decrease in net
assets to net cash used in operating
activities:Depreciation and amortization
    
    
    43,587
    
    
    
    25,487Original issue discount accretion
    
    
    
    
    
    
    (62,333
    )Decrease in unrealized appreciation of
investments
    
    
    992,700
    
    
    
    793,879Deferred tax benefit
    
    
    (1,063,000
    )
    
    
    (389,547
    )Net realized loss on portfolio investments
    
    
    
    
    
    
    (516,204
    )Non-cash conversion of debenture interest
    
    
    (70,717
    )
    
    
    (50,000
    )Changes in operating assets and liabilities:Increase in interest receivable
    
    
    (277,391
    )
    
    
    (85,013
    )Increase in prepaid income taxes
    
    
    
    
    
    
    (207,130
    )Decrease (increase) in other assets
    
    
    683,029
    
    
    
    (59,244
    )Decrease in income taxes payable
    
    
    (464,986
    )
    
    
    (410,575
    )Decrease in accounts payable and accrued
expenses
    
    
    (188,387
    )
    
    
    (230,833
    )Decrease in deferred revenue
    
    
    (24,956
    )
    
    
    (24,635
    )Total adjustments
    
    
    (370,123
    )
    
    
    (1,216,148
    )Net cash used in operating activities
    
    
    (816,552
    )
    
    
    (1,277,839
    )Cash flows from investing activities:Investments originated
    
    
    (689,990
    )
    
    
    (1,030,010
    )Proceeds from sale of portfolio investments
    
    
    
    
    
    
    255,440Proceeds from loan repayments
    
    
    697,433
    
    
    
    1,885,414Capital expenditures
    
    
    (1,866
    )
    
    
    (1,350
    )Net cash provided by investing activities
    
    
    5,577
    
    
    
    1,109,494Net decrease in cash and cash equivalents
    
    
    (810,975
    )
    
    
    (168,345
    )Cash and cash equivalents:Beginning of period
    
    
    4,396,595
    
    
    
    4,299,852End of period
    
    $
    3,585,620
    
    
    $
    4,131,507
   3




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
 For the Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
 Three months
    
    
    Three months
    
    
    Nine months
    
    
    Nine monthsended
    
    
    ended
    
    
    ended
    
    
    endedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net assets at beginning of period
    
    $
    19,708,776
    
    
    $
    17,388,066
    
    
    $
    19,817,823
    
    
    $
    16,782,405Cumulative effect adjustment for
uncertain tax positions  FIN 48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    316,253Net investment gain (loss)
    
    
    84,327
    
    
    
    (414,214
    )
    
    
    100,646
    
    
    
    (161,545
    )Net realized gain on investments
    
    
    
    
    
    
    555,000
    
    
    
    
    
    
    
    516,204Net change in unrealized appreciation
On investments
    
    
    (421,710
    )
    
    
    (491,885
    )
    
    
    (547,076
    )
    
    
    (416,350
    )Net decrease in net assets from operations
    
    
    (337,383
    )
    
    
    (351,099
    )
    
    
    (446,430
    )
    
    
    (61,691
    )Net assets at end of period
    
    $
    19,371,393
    
    
    $
    17,036,967
    
    
    $
    19,371,393
    
    
    $
    17,036,967
   4




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
 September 30, 2008
(Unaudited)
 (b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    PerDate
    
    (c)
    
    
    
    
    
    
    (d)
    
    
    ShareCompany and Business
    
    Type of Investment
    
    Acquired
    
    Equity
    
    
    Cost
    
    
    Value
    
    
    of RandAdampluseve, Inc. (dba Adam) (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
    
    
    2
    %
    
    $
    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 8% due June 30,
2011. Warrants to
purchase 10.2941
shares of common
stock.
    
    7/8/04
    
    
    6
    %
    
    
    595,436
    
    
    
    595,436
    
    
    
    .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
    
    
    
    .04Carolina 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
    
    
    
    .21EmergingMed.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
    %
    
    
    619,232
    
    
    
    4,119,232
    
    
    
    .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 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
    %
    
    
    1,506,043
    
    
    
    1,221,567
    
    
    
    .21
  5




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
September 30, 2008 (Continued)
(Unaudited)
 (b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    PerDate
    
    (c)
    
    
    
    
    
    
    (d)
    
    
    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
    
    
    
    104,000
    
    
    
    .02RAMSCO (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 9% 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
$15,000 Bridge Note at 11.25% due March
10, 2009.
    
    12/20/05
    
    
    11
    %
    
    
    695,000
    
    
    
    0
    
    
    
    .00Somerset 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
    
    
    
    
    
    
    
    $
    13,453,917
    
    
    $
    25,599,063
    
    
    $
    4.48
  6




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
September 30, 2008 (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, 2008 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 upon exercise of 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 Corporation holds an 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. 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, 2008, the aggregate cost of investment securities
approximated $13.5 million. Net unrealized appreciation aggregated approximately $12.1 million, of
which $14.7 million related to appreciated investment securities and $2.6 million related to
depreciated investment securities.(g)
    
    Rand Capital SBIC, L.P. investment.(h)
    
    Reduction in cost and value from previously reported balances reflects current principal
repayment.(i)
    
    Publicly owned company.  7




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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, 2008 and 2007
(Unaudited)
 Note 1. ORGANIZATION
   Formation of SBIC Subsidiary
       8




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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.
      9




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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 June 30, 2008, March
31, 2008 and September 30, 2007Form N-23C-1
    
    Reports by closed-end investment companies of purchases of their own securities
   10




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##### Table of Contents



Principles of Consolidation 
 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 
  11




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##### Table of Contents



Stockholders Equity (Net Assets) 
  Profit Sharing and Stock Option Plan 
  Income Taxes  
    Concentration of Credit Risk 
  12




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##### Table of Contents



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
    
    
    UnobservableSeptember 30,
    
    
    Identical Assets
    
    
    Inputs
    
    
    InputsDescription
    
    2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Venture Capital
Investments
    
    $
    25,599,063
    
    
    $
    104,000
    
    
    $
    0
    
    
    $
    25,495,063
  13




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##### Table of Contents



Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
 Fair ValueMeasurementsUsing SignificantUnobservableInputs (Level 3)Venture CapitalInvestmentsBeginning 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 operationsRocket Broadband Networks, Inc.
    
    $
    (695,000
    )Niagara Dispensing Technologies, Inc.
    
    $
    (110,000
    )BioWorks
    
    $
    (28,000
    )
    
    $
    (834,000
    )Purchases of SecuritiesMezmeriz, Inc.
    
    $
    100,000Niagara Dispensing Technologies, Inc.
    
    $
    374,990Associates Interactive, LLC
    
    $
    200,000Niagara Dispensing Technologies, Inc interest conversion
    
    $
    41,783APF Group, Inc.
    
    $
    28,934Rocket Broadband Networks, Inc.
    
    $
    15,000
    
    
    $
    760,707Repayments of SecuritiesNew Monarch Machine Tool, Inc.
    
    $
    (520,147
    )Contract Staffing
    
    $
    (131,065
    )Gemcor II, LLC
    
    $
    (46,222
    )
    
    $
    (697,434
    )Transfers in or out of Level 3
    
    
    
    
    
    
    Ending Balance, September 30, 2008, of Level 3 Assets
    
    
    
    
    
    $
    25,495,063The 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.
    
    
    
    
    
    $
    (834,000
    )Gains and losses (realized and unrealized) included in net 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
    
    
    
    
    
    $
    (834,000
    )
  14




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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.
 Our Structure
    Business Developments
   15




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##### Table of Contents




    
    The ability of the Corporations portfolio companies to obtain necessary credit
financing for their operations may be impacted
    
    Increased difficulty for portfolio companies to obtain equity financing to continue to
fund their operations
    
    The slow down in capital goods and industry spending may impact the goods and services
that the portfolio companies sell
    
    The ability for the Corporation to exit its investments may become more difficult
as access to public markets and the merger and acquisition industry become impaired
    
    The Corporations diversified portfolio of investments may experience unexpected growth
despite these market uncertainties based on their own capitalization, industry niche, and
current market acceptance for their products/services.
    
    The Corporations SBA leverage commitment expired September 30, 2008, and the SBAs
interest in renewing Rands $1.9 million in undrawn leverage may be adversely affected by
the status of the financial markets
   Critical Accounting Policies
   16




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##### Table of Contents



Overview and Financial Condition
 9/30/08
    
    
    12/31/07
    
    
    Decrease
    
    
    % DecreaseTotal assets
    
    $
    30,534,391
    
    
    $
    32,722,151
    
    
    $
    (2,187,760
    )
    
    
    (6.7
    %)Total liabilities
    
    
    11,162,998
    
    
    
    12,904,328
    
    
    
    (1,741,330
    )
    
    
    (13.5
    %)Net assets
    
    $
    19,371,393
    
    
    $
    19,817,823
    
    
    $
    (446,430
    )
    
    
    (2.3
    %)
  Increase
    
    
    % Increase9/30/08
    
    
    12/31/07
    
    
    (Decrease)
    
    
    (Decrease)Investments, at cost
    
    $
    13,453,917
    
    
    $
    13,390,644
    
    
    $
    63,273
    
    
    
    .05
    %Unrealized appreciation, net
    
    
    12,145,146
    
    
    
    13,137,846
    
    
    
    (992,700
    )
    
    
    (7.6
    %)Investments at fair value
    
    $
    25,599,063
    
    
    $
    26,528,490
    
    
    $
    (929,427
    )
    
    
    (3.5
    %)
  AmountNew Investments:Niagara Dispensing Technologies, Inc. (Niagara Dispensing)
    
    $
    374,990Associates Interactive
    
    
    200,000Mezmeriz, Inc.
    
    
    100,000Rocket Broadband Networks, Inc. (Rocket Broadband)
    
    
    15,000Total of investments made during the nine months
ended September 30, 2008
    
    $
    689,990Changes to Investments:Niagara Dispensing interest conversion
    
    $
    41,783APF Group, Inc. payment in kind conversion
    
    $
    28,934Total of changes to investments made during the nine months
ended September 30, 2008
    
    $
    70,717Investment Repayments:New Monarch Machine Tool, Inc. (Monarch)
    
    $
    (520,147
    )Contract Staffing
    
    
    (131,065
    )Gemcor II, LLC (Gemcor)
    
    
    (46,222
    )Total changes to investments and investment repayments
during the nine months ended September 30, 2008
    
    $
    (697,434
    )Total change in investment balance, at cost,
during the nine months ended September 30, 2008
    
    $
    63,273
     17




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##### Table of Contents



Results of Operations
 Investment Income
  Comparison of the nine months ended September 30, 2008 to the nine months ended September 30, 2007
 September 30,
    
    
    September 30,
    
    
    Increase
    
    
    % Increase2008
    
    
    2007
    
    
    (Decrease)
    
    
    (Decrease)Interest from portfolio companies
    
    $
    489,963
    
    
    $
    474,962
    
    
    $
    15,001
    
    
    
    3.2
    %Interest from other investments
    
    
    73,004
    
    
    
    133,853
    
    
    
    (60,849
    )
    
    
    (45.5
    %)Dividend and other investment income
    
    
    707,458
    
    
    
    586,291
    
    
    
    121,167
    
    
    
    20.7
    %Other income
    
    
    14,251
    
    
    
    26,637
    
    
    
    (12,386
    )
    
    
    (46.5
    %)Total investment income
    
    $
    1,284,676
    
    
    $
    1,221,743
    
    
    $
    62,933
    
    
    
    5.2
    %
 Interest from portfolio companies
     18




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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
    19




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##### Table of Contents



Operating Expenses
 Comparison of the nine months ended September 30, 2008 to the nine months ended September 30, 2007
 September 30, 2008
    
    
    September 30, 2007
    
    
    Increase
    
    
    % IncreaseTotal Expenses
    
    $
    1,192,599
    
    
    $
    1,177,992
    
    
    $
    14,607
    
    
    
    1.2
    %
   Net Realized Gains and Losses on Investments
   Net Change in Unrealized Appreciation of Investments
  September 30,2008Rocket Broadband
    
    $
    (695,000
    )Photonic Products Group, Inc (Photonic)
    
    
    (158,700
    )Niagara Dispensing
    
    
    (111,000
    )Bioworks
    
    
    (28,000
    )Total change in net unrealized appreciation
during the nine months ended September 30, 2008
    
    $
    (992,700
    )
   20




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##### Table of Contents



September 30,2007Topps Meat Company LLC (Topps) valuation change
    
    $
    (927,000
    )Adampluseve warrants
    
    
    65,341Reclass USTec to realized loss
    
    
    39,000Photonic valuation to market
    
    
    28,780Total change in net unrealized appreciation
during the nine months ended September 30, 2007
    
    $
    (793,879
    )
    Net Decrease in Net Assets from Operations
    21




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##### Table of Contents



Liquidity and Capital Resources
     
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
     22




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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 needs to obtain exemptive relief for the SEC from certain provisions of the
Investment Company Act and the Securities Exchange Act, and our ability to obtain the
necessary relief is limited by the Corporations need to comply with the requirements of the
Small Business Administration.
  
    
    Rand to operate a BDC/SBIC as its wholly owned subsidiary in limited partnership
form;
    
    Rand, Rand SBIC and Rand Management to engage in certain transactions that they
would otherwise be permitted to engage in as a BDC if their component parts were
organized as a single corporation;
    
    Rand and Rand SBIC to meet asset coverage requirements for senior securities of
regulated BDCs on a consolidated basis;
    
    Rand SBIC, as a wholly owned subsidiary of Rand, to file reports under the
Securities Exchange Act on a consolidated basis as part of Rands reports.
   24




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##### Table of Contents



The Corporation may be negatively affected by adverse changes in the general economic conditions of
the domestic and global markets
  
 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
   25




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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.  26




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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. Grum

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

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

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

Daniel P. Penberthy, Treasurer
  27




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description(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
  28