##### 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, 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
    
    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
  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 June 30, 2006 and
December 31, 2005Condensed Consolidated Statements of Operations for the Three Months
and Six Months Ended June 30, 2006 and 2005Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2006 and 2005Condensed Consolidated Statements of Changes in Net Assets for the
Three and Six Months Ended June 30, 2006 and 2005Condensed Consolidated Schedule of Portfolio Investments as of June 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 June 30, 2006 and December 31, 2005
(Unaudited)
 June 30,
    
    
    December 31,2006
    
    
    2005ASSETSInvestments at fair value (identified cost: 6/30/06 -
$13,747,408; 12/31/05 - $13,712,890)
    
    $
    14,234,428
    
    
    $
    13,370,862Cash and cash equivalents
    
    
    1,492,122
    
    
    
    1,209,839Interest receivable (net of allowance: 6/30/06 - $122,000; 12/31/05 - $236,870)
    
    
    386,225
    
    
    
    297,619Deferred tax asset
    
    
    517,000
    
    
    
    846,000Income tax receivable
    
    
    
    
    
    
    15,582Other assets
    
    
    295,843
    
    
    
    323,703Total assets
    
    $
    16,925,618
    
    
    $
    16,063,605LIABILITIES AND STOCKHOLDERS EQUITY (NET ASSETS)Liabilities:Debentures guaranteed by the SBA
    
    $
    7,600,000
    
    
    $
    7,200,000Accounts payable and accrued expenses
    
    
    206,033
    
    
    
    167,788Deferred revenue
    
    
    67,295
    
    
    
    79,883Income taxes payable
    
    
    4,251
    
    
    
    Total liabilities
    
    
    7,877,579
    
    
    
    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)
    
    
    (5,280,544
    )
    
    
    (4,988,326
    )Undistributed net realized gain on investments
    
    
    6,533,819
    
    
    
    6,306,925Net unrealized appreciation (depreciation) on investments
    
    
    292,212
    
    
    
    (205,217
    )Treasury stock, at cost, 44,100 shares
    
    
    (47,206
    )
    
    
    (47,206
    )Net assets (per share 6/30/2006-$1.58, 12/31/2005-$1.51)
    
    
    9,048,039
    
    
    
    8,615,934Total liabilities and stockholders equity (net assets)
    
    $
    16,925,618
    
    
    $
    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 Six Months Ended June 30, 2006 and 2005
(Unaudited)
 Three months
    
    
    Three months
    
    
    Six months
    
    
    Six monthsended
    
    
    ended
    
    
    ended
    
    
    endedJune 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Investment income:Interest from portfolio companies
    
    $
    180,438
    
    
    $
    137,003
    
    
    $
    352,458
    
    
    $
    282,923Interest from other investments
    
    
    6,196
    
    
    
    645
    
    
    
    11,339
    
    
    
    1,484Dividend and other investment income
    
    
    15,103
    
    
    
    29,704
    
    
    
    28,238
    
    
    
    29,704Other income
    
    
    11,434
    
    
    
    10,707
    
    
    
    22,381
    
    
    
    21,601213,171
    
    
    
    178,059
    
    
    
    414,416
    
    
    
    335,712Operating expenses:Salaries
    
    
    95,624
    
    
    
    88,432
    
    
    
    191,908
    
    
    
    223,104Employee benefits
    
    
    21,227
    
    
    
    23,209
    
    
    
    53,153
    
    
    
    54,729Directors fees
    
    
    23,250
    
    
    
    28,250
    
    
    
    36,750
    
    
    
    36,450Professional fees
    
    
    48,467
    
    
    
    29,777
    
    
    
    75,003
    
    
    
    44,840Stockholders and office operating
    
    
    41,640
    
    
    
    33,980
    
    
    
    67,868
    
    
    
    58,373Insurance
    
    
    10,920
    
    
    
    11,550
    
    
    
    21,840
    
    
    
    23,100Corporate development
    
    
    15,770
    
    
    
    9,564
    
    
    
    28,675
    
    
    
    20,777Other operating
    
    
    1,936
    
    
    
    3,036
    
    
    
    4,558
    
    
    
    5,212258,834
    
    
    
    227,798
    
    
    
    479,755
    
    
    
    466,585Interest on SBA obligations
    
    
    112,574
    
    
    
    63,761
    
    
    
    219,498
    
    
    
    114,734Total expenses
    
    
    371,408
    
    
    
    291,559
    
    
    
    699,253
    
    
    
    581,319Investment loss before income taxes
    
    
    (158,237
    )
    
    
    (113,500
    )
    
    
    (284,837
    )
    
    
    (245,607
    )Current income tax expense
    
    
    5,000
    
    
    
    5,000
    
    
    
    10,000
    
    
    
    4,927Deferred income tax benefit
    
    
    (13,708
    )
    
    
    (48,157
    )
    
    
    (2,619
    )
    
    
    (84,157
    )Net investment loss
    
    
    (149,529
    )
    
    
    (70,343
    )
    
    
    (292,218
    )
    
    
    (166,377
    )Realized and unrealized gain (loss) on investments:Net gain on sales and dispositions
    
    
    38,941
    
    
    
    
    
    
    
    226,894
    
    
    
    Unrealized appreciation (depreciation) on
investments:Beginning of period
    
    
    (94,751
    )
    
    
    (248,867
    )
    
    
    (342,028
    )
    
    
    (586,048
    )End of period
    
    
    487,020
    
    
    
    (420,974
    )
    
    
    487,020
    
    
    
    (420,974
    )Change in unrealized appreciation
(depreciation)before income taxes
    
    
    581,771
    
    
    
    (172,107
    )
    
    
    829,048
    
    
    
    165,074Deferred income tax expense (benefit)
    
    
    232,708
    
    
    
    (68,843
    )
    
    
    331,619
    
    
    
    66,157Net change in unrealized appreciation (depreciation)
    
    
    349,063
    
    
    
    (103,264
    )
    
    
    497,429
    
    
    
    98,917Net realized and unrealized gain (loss) on investments
    
    
    388,004
    
    
    
    (103,264
    )
    
    
    724,323
    
    
    
    98,917Net increase (decrease) in net assets from operations
    
    $
    238,475
    
    
    $
    (173,607
    )
    
    $
    432,105
    
    
    $
    (67,460
    )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
    
    $
    0.04
    
    
    $
    (0.03
    )
    
    $
    0.08
    
    
    $
    (0.01
    )




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Rand Capital Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2006 and 2005
(Unaudited)
 June 30, 2006
    
    
    June 30, 2005Cash flows from operating activities:Net increase (decrease) in net assets from operations
    
    $
    432,105
    
    
    $
    (67,460
    )Adjustments to reconcile net increase in net assets to
net cash used in operating activities:Depreciation and amortization
    
    
    15,599
    
    
    
    10,730Increase in unrealized appreciation of investments
    
    
    (829,048
    )
    
    
    (165,074
    )Deferred tax expense (benefit)
    
    
    329,000
    
    
    
    (18,000
    )Net realized gain on portfolio investments
    
    
    (226,894
    )
    
    
    Non-cash conversion of debenture interest
    
    
    (12,877
    )
    
    
    (19,097
    )Changes in operating assets and liabilities:(Increase) in interest receivable
    
    
    (88,606
    )
    
    
    (88,712
    )Decrease) (increase) in other assets
    
    
    47,348
    
    
    
    (40,110
    )Increase (decrease) in accounts payable and
accrued liabilities
    
    
    42,496
    
    
    
    (11,617
    )(Decrease) increase in deferred revenue
    
    
    (12,588
    )
    
    
    12,040Total adjustments
    
    
    (735,570
    )
    
    
    (319,840
    )Net cash used in operating activities
    
    
    (303,465
    )
    
    
    (387,300
    )Cash flows from investing activities:Investments originated
    
    
    (820,000
    )
    
    
    (1,451,060
    )Proceeds from sale of portfolio investments
    
    
    950,885
    
    
    
    Proceeds from loan repayments
    
    
    74,368
    
    
    
    68,725Capital expenditures
    
    
    (12,256
    )
    
    
    (1,560
    )Net cash provided by (used in) investing activities
    
    
    192,998
    
    
    
    (1,383,895
    )Cash flows from financing activities:Proceeds from SBA debenture
    
    
    400,000
    
    
    
    1,500,000Origination costs to SBA
    
    
    (7,250
    )
    
    
    (37,500
    )Net cash provided by financing activities
    
    
    392,750
    
    
    
    1,462,500Net increase (decrease) in cash and cash equivalents
    
    
    282,283
    
    
    
    (308,695
    )Cash and cash equivalents:Beginning of period
    
    
    1,209,839
    
    
    
    626,744End of period
    
    $
    1,492,122
    
    
    $
    318,049




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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 Six Months Ended June 30, 2006 and 2005
(Unaudited)
 Three months
    
    
    Three months
    
    
    Six months
    
    
    Six monthsended
    
    
    ended
    
    
    ended
    
    
    endedJune 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Net assets at beginning of period
    
    $
    8,809,564
    
    
    $
    9,133,201
    
    
    $
    8,615,934
    
    
    $
    9,027,054Net investment loss
    
    
    (149,529
    )
    
    
    (70,343
    )
    
    
    (292,218
    )
    
    
    (166,377
    )Net realized gain on investments
    
    
    38,941
    
    
    
    
    
    
    
    226,894
    
    
    
    Net change in unrealized
appreciation (depreciation) of
investments
    
    
    349,063
    
    
    
    (103,264
    )
    
    
    497,429
    
    
    
    98,917Net increase (decrease) in net
assets from operations
    
    
    238,475
    
    
    
    (173,607
    )
    
    
    432,105
    
    
    
    (67,460
    )Net assets at end of period
    
    $
    9,048,039
    
    
    $
    8,959,594
    
    
    $
    9,048,039
    
    
    $
    8,959,594




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##### Table of Contents



Rand Capital Corporation and Subsidiaries
Consolidated Schedule of Portfolio Investments
June 30, 2006
(Unaudited)
 Per(b)
    
    
    
    
    
    
    
    ShareDate
    
    (c)
    
    
    
    (d)
    
    ofCompany and Business
    
    Type of Investment
    
    Acquired
    
    Equity
    
    Cost
    
    Value
    
    RandAPF Group, Inc. (e)(g)
    
    $500,000 Senior Subordinated
    
    7/8/04
    
    6%
    
    $594,594
    
    $594,594
    
    .10Mount Vernon, NY. Manufacturer of
    
    note at 12.5% due July 1,museum quality picture frames and framed
    
    2009. $94,594 Seniormirrors for museums, art galleries,
    
    Subordinated note at 14% dueretail frame shops, upscale designers
    
    July 31, 2007. Warrants toand prominent collectors.
    
    purchase 10.2941 shares ofwww.apfgroup.com
    
    common stock.Carolina Skiff LLC (e)(g)
    
    $985,000 Class A preferred
    
    1/30/04
    
    5%
    
    1,000,000
    
    1,038,000
    
    .18Waycross, GA. Manufacturer of fresh
    
    membership interest at 11%.water, ocean fishing and pleasure boats.
    
    Redeemable Januarywww.carolinaskiff.com
    
    31, 2010. 5% commonmembership interest.Concentrix Corporation (e)(g)
    
    $600,000 Senior Subordinated
    
    6/1/05
    
    0%
    
    600,000
    
    600,000
    
    .10Pittsford, NY. Marketing service
    
    note at 14% due November 11,company generating returns through
    
    2007.multi-channel demand generation and
renewal
marketing services.
www.concentrix.comContract Staffing
    
    Preferred Stock Repurchase
    
    11/8/99
    
    10%
    
    141,400
    
    141,400
    
    .02Buffalo, NY. PEO providing human
    
    Agreement through March 31,resource administration for small
    
    2010 at 5%.businesses.
www.contract-staffing.comEmergingMed.com, Inc. (g)
    
    $500,000 Senior subordinated
    
    12/19/0
    
    5%
    
    500,000
    
    500,000
    
    .09New York, NY. Cancer clinical trial
    
    note at 10% due December 19,matching and referral service.
    
    2010.www.emergingmed.comGemcor II, LLC (e)(g)(i)
    
    $250,000 note at 8% due June
    
    6/28/04
    
    33%
    
    741,097
    
    741,097
    
    .13West Seneca, NY. Designs and sells
    
    28, 2010 with warrant toautomatic riveting machines used in the
    
    purchase 6.25 membershipassembly of aircraft components.
    
    units.  25 membership units.www.gemcor.comG-TEC Natural Gas Systems
    
    41.322% Class A membership
    
    8/31/99
    
    41%
    
    400,000
    
    300,000
    
    .05Buffalo, NY. Manufactures and
    
    interest.  8% cumulativedistributes systems that allow natural
    
    dividend.gas to be used as an alternative fuel to
gases.
www.gas-tec.comInnov-X Systems, Inc. (e)(g)
    
    $350,000 Subordinated
    
    9/27/04
    
    10%
    
    635,000
    
    635,000
    
    .11Woburn, MA. Manufactures portable x-ray
    
    Debenture at 8.5% duefluorescence (XRF) analyzers used in
    
    September 27, 2009.  12,344metals/alloy analysis.
    
    warrants to purchase commonwww.innovxsys.com
    
    shares.  3,500 Series Apreferred stock.  $250,000Series B Secured Subordinatedterm note at 8.5% due March 1,2010.  12,345 warrants topurchase common shares.Kionix, Inc.
    
    30,241 shares Series B
    
    5/17/02
    
    2%
    
    1,262,340
    
    977,863
    
    .17Ithaca, NY. Develops innovative MEMS
    
    preferred stock.based technology applications.
    
    (g) 2,862,091 shares Series Awww.kionix.com
    
    preferred stock.  714,285shares Series B preferredstock.




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##### Table of Contents



Rand Capital Corporation and Subsidiaries
Consolidated Schedule of Portfolio Investments
June 30, 2006 (Continued)
(Unaudited)
 Per(b)
    
    
    
    
    
    
    
    ShareDate
    
    (c)
    
    
    
    (d)
    
    ofCompany and Business
    
    Type of Investment
    
    Acquired
    
    Equity
    
    Cost
    
    Value
    
    RandMinrad International, Inc.
    
    343,440 common shares.
    
    8/4/97
    
    1%
    
    465,431
    
    1,363,457
    
    .24(AMEX:
BUF) ( h)(j)
Buffalo, NY. Developer of acute care
devices and anesthetics.
www.minrad.comNew Monarch Machine Tool, Inc. (e)(g)(i)
    
    $527,876.85 note at 12% due
    
    9/24/03
    
    15%
    
    765,328
    
    765,328
    
    .13Cortland, NY. Manufactures and services
    
    January 13, 2009.  $300,000 notevertical/horizontal machining centers.
    
    at 12% due January 13, 2009.www.monarchmt.com
    
    Warrants for 22.84 shares ofcommon stock.Niagara Dispensing Technologies, Inc. (g)
    
    $500,000 Senior Subordinated
    
    3/8/06
    
    4%
    
    500,000
    
    500,000
    
    .09Tonawanda, NY. Beverage dispense
    
    note at 8% due March 7, 2011.technology development and products
    
    Adjustable warrant for 4% ofmanufacturer, specializing in beer
    
    common stock.dispensing systems.
www.exactpour.comPhotonic Products Group, Inc
    
    100 shares convertible Series B
    
    10/31/00
    
    <1%
    
    155,000
    
    128,820
    
    .02(OTC:PHPG.OB)(a) (j)
    
    preferred stock, 10% dividend.(Formerly INRAD, Inc.) Northvale, NJ.
    
    22,000 shares common stock.Develops and manufactures products for
laser photonics industry.
www.inrad.comRAMSCO (e)(g)
    
    $916,947.23 notes at 13% due
    
    11/19/02
    
    13%
    
    916,947
    
    916,947
    
    .16Albany, NY. Distributor of water, sanitary,
    
    November 18, 2007.  Warrants tostorm sewer and specialty construction
    
    purchase 12.5% of commonmaterials to the contractor, highway and
    
    shares.municipal markets.
www.ramsco.comRocket Broadband Networks, Inc. (g)
    
    285,829 Preferred shares.
    
    12/20/05
    
    6%
    
    204,082
    
    204,082
    
    .04Rochester, NY. Communications service
provider of satellite TV, broadband
internet and VoIP digital phone targeting
multiple dwelling units.
www.rocketbroadband.comSomerset Gas Transmission Company, LLC
    
    26.5337 Units.
    
    7/10/02
    
    2%
    
    719,097
    
    786,748
    
    .14Buffalo, NY. Natural gas transportation
company.
www.somersetgas.comSynacor, Inc. (e)(g)
    
    $350,000 convertible note at 10%
    
    11/18/02
    
    5%
    
    820,000
    
    828,674
    
    .14Buffalo, NY. Develops provisioning
    
    due November 18, 2007.  200,000platforms for aggregation and delivery of
    
    shares of Series B preferredcontent for broadband access providers.
    
    stock. 59,828 Series A preferredwww.synacor.com
    
    shares. Warrants for 299,146common shares.Topps Meat Company LLC (e)(g)
    
    Preferred A and Class A common
    
    4/3/03
    
    3%
    
    595,000
    
    927,000
    
    .16Elizabeth, NJ. Producer and supplier of
    
    membership interest.premium branded frozen hamburgers and
portion controlled meat products.
www.toppsmeat.comUltra  Scan Corporation
    
    536,596 common shares, 107,104
    
    12/11/92
    
    3%
    
    938,164
    
    1,203,000
    
    .21Amherst, NY. Biometrics application
    
    Series A-1 preferred shares.developer of ultrasonic fingerprint
    
    (g)  95,284 Series A-1 preferredtechnology.
    
    shares.www.ultra-scan.comUStec, Inc.
    
    $100,000 note at 5% due February
    
    6/26/98
    
    <1%
    
    450,500
    
    475,000
    
    .08Victor, NY. Markets digital wiring systems
    
    1, 2007 (e).  50,000 commonfor new home construction.
    
    shares.  Warrants for 139,395www.ustecnet.com
    
    common shares.(g)  $350,000 SeniorSubordinated ConvertibleDebentures at 6% due February 2,2008.




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##### Table of Contents



Rand Capital Corporation and Subsidiaries
Consolidated Schedule of Portfolio Investments
June 30, 2006 (Continued)
(Unaudited)
 Per(b)
    
    
    
    
    
    
    
    ShareDate
    
    (c)
    
    
    
    (d)
    
    ofCompany and Business
    
    Type of Investment
    
    Acquired
    
    Equity
    
    Cost
    
    Value
    
    RandWineIsIt.com, Corp. (e)
    
    $20,000 note at 12% due April
    
    12/18/02
    
    2%
    
    821,918
    
    571,918
    
    .10Amherst, NY. Marketing company
    
    26, 2007. (g)  $500,000 Seniorspecializing in customer loyalty programs
    
    Subordinated note at 10% duesupporting the wine and spirit industry.
    
    December 17, 2009.  $250,000www.wineisit.com
    
    note at 10% due April 16, 2005.Warrants to purchase 100,000shares Class B common stock.Other Investments
    
    Other
    
    Various
    
    
    
    521,510
    
    35,500
    
    .02Total portfolio investments
    
    
    
    
    
    $13,747,408
    
    $14.234.428
    
    $2.48




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##### Table of Contents



Rand Capital Corporation and Subsidiaries
Consolidated Schedule of Portfolio Investments
June 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 June 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 June 30, 2006, the aggregate cost of investment securities
approximated $13.7 million. Net unrealized appreciation aggregated approximately $487,000 of
which $1,634,000 related to appreciated investment securities and $1,147,000 related to
depreciated investment securities.
  (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 Six Months Ended June 30, 2006 and 2005
(Unaudited)
 Note 1. ORGANIZATION
  Formation of SBIC Subsidiary




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
    
    A BDC (Rand) to operate a BDC/small business investment company (Rand SBIC) as its
wholly owned subsidiary in limited partnership form;
    
    Rand, Rand Management and Rand SBIC to engage in certain transactions that the
Corporation would otherwise be permitted to engage in as a BDC if its component parts
were organized as a single corporation;
    
    Rand, as a BDC, and Rand SBIC, as its BDC/SBIC subsidiary, to meet asset coverage
requirements for senior securities on a consolidated basis 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 March 31, 2006,
September 30, 2005 and June 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
  Deferred Debenture Costs
 Net Assets per Share
 Supplemental Cash Flow Information
 Accounting Estimates




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##### Table of Contents



Stockholders
Equity (Net Assets) -
  Stock Option Plan -
 Subsequent
Event -




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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
  6/30/06
    
    12/31/05
    
    Increase
    
    % IncreaseTotal assets
    
    $
    16,925,618
    
    
    $
    16,063,605
    
    
    $
    862,013
    
    
    
    5.4
    %Total liabilities
    
    
    7,877,579
    
    
    
    7,447,671
    
    
    
    429,908
    
    
    
    5.8
    %Net assets
    
    $
    9,048,039
    
    
    $
    8,615,934
    
    
    $
    432,105
    
    
    
    5.0
    %
  6/30/06
    
    12/31/05
    
    Increase
    
    % IncreaseInvestments, at cost
    
    $
    13,747,408
    
    
    $
    13,712,890
    
    
    $
    34,518
    
    
    
    0.3
    %Unrealized appreciation
(depreciation), net
    
    
    487,020
    
    
    
    (342,028
    )
    
    
    829,048
    
    
    
    242.4
    %Investments at fair value
    
    $
    14,234,428
    
    
    $
    13,370,862
    
    
    $
    863,566
    
    
    
    6.5
    %
  New Investments
    
    AmountNiagara Dispensing Technologies, Inc. (Niagara Dispensing)
    
    $
    500,000New Monarch Machine Tool, Inc. (Monarch)
    
    
    300,000WineIsIt.com, Corp. (Wineisit)
    
    
    20,000Total of investments made during the six months
ended June 30, 2006
    
    $
    820,000Interest conversions:Photonic Products Group, Inc. (Photonics)
    
    
    10,000Monarch
    
    
    2,877Total of new investments and interest conversions
during the six months ended June 30, 2006
    
    $
    832,877Sales/Investment RepaymentsMinrad International, Inc. (Minrad)
    
    
    (453,991
    )Vanguard Modular Building Systems (Vanguard)
    
    
    (270,000
    )Monarch
    
    
    (62,548
    )Gemcor II, LLC (Gemcor)
    
    
    (8,903
    )Takeform
    
    
    (2,917
    )Total of sales or investment repayments
during the six months ended June 30, 2006
    
    
    (798,359
    )Total change in investment balance, at cost
during the six months ended June 30, 2006
    
    $
    34,518




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##### Table of Contents



Results of Operations
 Investment Income
  Comparison of the six months ended June 30, 2006 to the six months ended June 30, 2005
 June 30,
    
    
    June 30,
    
    
    Increase
    
    
    %Increase2006
    
    
    2005
    
    
    (Decrease)
    
    
    (Decrease)Interest from portfolio companies
    
    $
    352,458
    
    
    $
    282,923
    
    
    $
    69,535
    
    
    
    24.6
    %Interest from other investments
    
    
    11,339
    
    
    
    1,484
    
    
    
    9,855
    
    
    
    664.1
    %Dividend and other investment income
    
    
    28,238
    
    
    
    29,704
    
    
    
    (1,466
    )
    
    
    (4.9
    %)Other income
    
    
    22,381
    
    
    
    21,601
    
    
    
    780
    
    
    
    3.6
    %Total investment income
    
    $
    414,416
    
    
    $
    335,712
    
    
    $
    78,704
    
    
    
    23.4
    %
 Interest from portfolio companies
  Interest
    
    Investment
    
    Year that InterestCompany
    
    Rate
    
    Cost
    
    Accrual CeasedG-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
 June 30, 2006
    
    June 30, 2005
    
    Increase
    
    % IncreaseTotal Expenses
    
    $
    699,253
    
    
    $
    581,319
    
    
    $
    117,934
    
    
    
    20
    %
   Net Realized Gains and Losses on Investments




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##### Table of Contents



Net Change in Unrealized Appreciation (Depreciation) of Investments
  June 30, 2006Minrad valuation to market
    
    $
    834,310Vanguard Sale
    
    
    135,000Photonics valuation to market
    
    
    (4,400
    )Minrad Stock Sales
    
    
    (135,862
    )Total Change in net Unrealized Appreciation
during the six months ended June 30, 2006
    
    $
    829,048
     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




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##### Table of Contents



The Corporation is Subject to Risks Created by the Valuation of its Portfolio Investments
  Investing in The Corporations Shares May be Inappropriate for the Investors Risk Tolerance
  The Corporation is Subject to Risks Created by its Regulated Environment
  The Corporation is Subject to Risks Created by Borrowing Funds from the SBA
  The Economic Environment May Change
  The Corporation is Dependent Upon Key Management Personnel for Future Success




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##### Table of Contents



The Corporation Operates in a Competitive Market for Investment Opportunities
  Fluctuations of Quarterly Results
  
 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
 th
  VOTES FOR
    
    VOTES WITHHELDAllen F. Grum
    
    
    4,791,300
    
    
    
    26,216Erland E. Kailbourne
    
    
    4,792,300
    
    
    
    25,216Ross B. Kenzie
    
    
    4,791,175
    
    
    
    26,341Willis S. McLeese
    
    
    4,628,851
    
    
    
    188,665Reginald B. Newman II
    
    
    4,792,300
    
    
    
    25,216Jayne K. Rand
    
    
    4,647,143
    
    
    
    170,373Robert M. Zak
    
    
    4,791,300
    
    
    
    26,216
 
 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. 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