##### 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
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 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
 o þ




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##### 



RAND CAPITAL CORPORATION
TABLE OF CONTENTS FOR FORM 10-Q
 PART I.  FINANCIAL INFORMATIONItem 1.
    
    FINANCIAL STATEMENTS (Unaudited)Consolidated Statements of Financial Position as of March 31, 2006 and December 31, 2005Consolidated Statements of Operations for the Three Months Ended March 31, 2006 and 2005Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005Consolidated Statements of Changes in Net Assets for the Three Months Ended March 31, 2006 and 2005Consolidated Schedule of Portfolio Investments as of March 31, 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-31.1 CertificationEX-31.2 CertificationEX-32.1 CertificationEX-32.2 Certification




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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 March 31, 2006 and December 31, 2005
 (Unaudited)
 March 31,
    
    
    December 31,2006
    
    
    2005ASSETSInvestments at fair value (identified cost: 3/31/06 -
$14,095,781; 12/31/05 - $13,712,890)
    
    $
    14,001,030
    
    
    $
    13,370,862Cash and cash equivalents
    
    
    790,782
    
    
    
    1,209,839Interest receivable (net of allowance: $236,870 at
3/31/06 and 12/31/05)
    
    
    328,963
    
    
    
    297,619Deferred tax asset
    
    
    736,000
    
    
    
    846,000Income tax receivable
    
    
    760
    
    
    
    15,582Other assets
    
    
    299,830
    
    
    
    323,703Total assets
    
    $
    16,157,365
    
    
    $
    16,063,605LIABILITIES AND STOCKHOLDERS EQUITY (NET ASSETS)Liabilities:Debentures guaranteed by the SBA
    
    $
    7,200,000
    
    
    $
    7,200,000Accounts payable and accrued expenses
    
    
    71,866
    
    
    
    167,788Deferred revenue
    
    
    75,935
    
    
    
    79,883Total liabilities
    
    
    7,347,801
    
    
    
    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)
    
    
    (5,131,015
    )
    
    
    (4,988,326
    )Undistributed net realized gain on investments
    
    
    6,494,878
    
    
    
    6,306,925Net unrealized (depreciation) on investments
    
    
    (56,851
    )
    
    
    (205,217
    )Treasury stock , at cost, 44,100 shares
    
    
    (47,206
    )
    
    
    (47,206
    )Net assets (per share 3/31/2006-$1.54, 12/31/2005-$1.51)
    
    
    8,809,564
    
    
    
    8,615,934Total liabilities and stockholders equity (net assets)
    
    $
    16,157,365
    
    
    $
    16,063,605




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##### Table of Contents



Rand Capital Corporation and Subsidiaries
 
 Condensed Consolidated Statements of Operations
 For the Three Months Ended March 31, 2006 and 2005
 (Unaudited)
 Three months
    
    Three monthsended
    
    endedMarch 31, 2006
    
    March 31, 2005Investment income:Interest from portfolio companies
    
    $
    172,020
    
    
    $
    145,920Interest from other investments
    
    
    5,143
    
    
    
    839Dividend and other investment income
    
    
    13,135
    
    
    
    Other income
    
    
    10,947
    
    
    
    10,894201,245
    
    
    
    157,653Operating expenses:Salaries
    
    
    96,284
    
    
    
    134,672Employee benefits
    
    
    31,926
    
    
    
    31,520Directors fees
    
    
    13,500
    
    
    
    8,200Professional fees
    
    
    26,536
    
    
    
    15,063Stockholders and office operating
    
    
    26,228
    
    
    
    24,393Insurance
    
    
    10,920
    
    
    
    11,550Corporate development
    
    
    12,905
    
    
    
    11,213Other operating
    
    
    2,622
    
    
    
    2,175220,921
    
    
    
    238,786Interest on SBA obligations
    
    
    106,924
    
    
    
    50,973Total expenses
    
    
    327,845
    
    
    
    289,759Investment loss before income taxes
    
    
    (126,600
    )
    
    
    (132,106
    )Current income tax expense (benefit)
    
    
    5,000
    
    
    
    (73
    )Deferred income tax expense (benefit)
    
    
    11,089
    
    
    
    (36,000
    )Net investment loss
    
    
    (142,689
    )
    
    
    (96,033
    )Realized and unrealized gain (loss) on investments:Net gain on sales and dispositions
    
    
    187,953
    
    
    
    Unrealized (depreciation) on investments:Beginning of period
    
    
    (342,028
    )
    
    
    (586,047
    )End of period
    
    
    (94,751
    )
    
    
    (248,867
    )Change in unrealized appreciation
(depreciation) before income taxes
    
    
    247,277
    
    
    
    337,180Deferred income tax expense
    
    
    (98,911
    )
    
    
    (135,000
    )Net decrease in unrealized depreciation
    
    
    148,366
    
    
    
    202,180Net realized and unrealized gain on investments
    
    
    350,819
    
    
    
    202,180Net increase in net assets from operations
    
    $
    193,630
    
    
    $
    106,147Weighted average shares outstanding
    
    
    5,718,934
    
    
    
    5,718,934Basic and diluted net increase in net assets from operations
per share
    
    $
    0.03
    
    
    $
    0.02




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Rand Capital Corporation and Subsidiaries
 
 Condensed Consolidated Statements of Cash Flows
 For the Three Months Ended March 31, 2006 and 2005

(Unaudited)
 March 31,
    
    March 31,2006
    
    2005Cash flows from operating activities:Net increase in net assets from operations
    
    $
    193,630
    
    
    $
    106,147Adjustments to reconcile net increase in net assets to net
cash used in operating activities:Depreciation and amortization
    
    
    7,708
    
    
    
    4,897Decrease in unrealized depreciation of investments
    
    
    (247,277
    )
    
    
    (337,180
    )Deferred tax expense
    
    
    110,000
    
    
    
    99,000Net realized (gain) on portfolio investments
    
    
    (187,953
    )
    
    
    Non-cash conversion of debenture interest
    
    
    (2,877
    )
    
    
    Changes in operating assets and liabilities:(Increase) in interest receivable
    
    
    (31,344
    )
    
    
    (70,987
    )Decrease (increase) in other assets
    
    
    30,986
    
    
    
    (42,218
    )(Decrease) in accounts payable and accrued liabilities
    
    
    (95,922
    )
    
    
    (60,379
    )(Decrease) in deferred revenue
    
    
    (3,948
    )
    
    
    (6,144
    )Total adjustments
    
    
    (420,627
    )
    
    
    (413,011
    )Net cash used in operating activities
    
    
    (226,997
    )
    
    
    (306,864
    )Cash flows from investing activities:Investments originated
    
    
    (800,000
    )
    
    
    (485,000
    )Proceeds from sale of portfolio investments
    
    
    581,396
    
    
    
    Proceeds from loan repayments
    
    
    26,544
    
    
    
    35,038Capital expenditures
    
    
    
    
    
    
    (1,560
    )Net cash used in investing activities
    
    
    (192,060
    )
    
    
    (451,522
    )Cash flows from financing activities:Proceeds from SBA debenture
    
    
    
    
    
    
    500,000Origination costs to SBA
    
    
    
    
    
    
    (12,500
    )Net cash provided by financing activities
    
    
    
    
    
    
    487,500Net (decrease) in cash and cash equivalents
    
    
    (419,057
    )
    
    
    (270,886
    )Cash and cash equivalents:Beginning of period
    
    
    1,209,839
    
    
    
    626,744End of period
    
    $
    790,782
    
    
    $
    355,858




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Rand Capital Corporation and Subsidiaries
 
 Condensed Consolidated Statements of Changes in Net Assets
 For the Three Months Ended March 31, 2006 and 2005

(Unaudited)
 Three months
    
    Three monthsended
    
    endedMarch 31, 2006
    
    March 31, 2005Net assets at beginning of period
    
    $
    8,615,934
    
    
    $
    9,027,054Net investment (loss)
    
    
    (142,689
    )
    
    
    (96,033
    )Net realized gain on investments
    
    
    187,953
    
    
    
    Net decrease in unrealized depreciation of investments
    
    
    148,366
    
    
    
    202,180Net increase in net assets from operations
    
    
    193,630
    
    
    
    106,147Net assets at end of period
    
    $
    8,809,564
    
    
    $
    9,133,201




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##### Table of Contents



Rand Capital Corporation and Subsidiaries
 
 Consolidated Schedule of Portfolio Investments
 March 31, 2006
 (Unaudited)
 (b)
    
    (c)
    
    
    
    
    
    (d)PerShareDate
    
    
    
    
    
    
    
    
    
    
    
    
    
    ofCompany and Business
    
    Type of Investment
    
    Acquired
    
    Equity
    
    Cost
    
    Value
    
    RandAPF Group, Inc. (e)(g)
Mount Vernon, NY.
Manufacturer of museum
quality picture frames and
framed mirrors for museums,
art galleries, retail frame
shops, upscale designers and
prominent collectors.
www.apfgroup.com
    
    $500,000 Senior Subordinated note at
12.5% due July 1, 2009. $94,594
Senior Subordinated note at 14% due
July 31, 2007. Warrants to purchase
10.2941 shares of common stock.
    
    7/8/04
    
    
    6
    %
    
    $
    594,594
    
    
    $
    594,594
    
    
    
    .10Carolina Skiff LLC (e)(g)
Waycross, GA. Manufacturer
of fresh water, ocean
fishing and pleasure boats.
www.carolinaskiff.com
    
    $985,000 Class A preferred membership
interest at 11%. Redeemable January
31, 2010. 5% common membership
interest.
    
    1/30/04
    
    
    5
    %
    
    
    1,000,000
    
    
    
    1,038,000
    
    
    
    .18Concentrix Corporation (e)(g)
Pittsford, NY. Marketing
service company generating
returns through
multi-channel demand
generation and renewal
marketing services.
www.concentrix.com
    
    $600,000 Senior Subordinated note at
14% due November 11, 2007.
    
    6/1/05
    
    
    0
    %
    
    
    600,000
    
    
    
    600,000
    
    
    
    .10Contract Staffing
Buffalo, NY. PEO providing
human resource
administration for small
businesses.
www.contract-staffing.com
    
    Preferred Stock Repurchase Agreement
through March 31, 2010 at 5%.
    
    11/8/99
    
    
    10
    %
    
    
    141,400
    
    
    
    141,400
    
    
    
    .02EmergingMed.com, Inc. (g)
New York, NY. Cancer
clinical trial matching and
referral service.
www.emergingmed.com
    
    $500,000 Senior subordinated note at
10% due December 19, 2010.
    
    12/19/05
    
    
    5
    %
    
    
    500,000
    
    
    
    500,000
    
    
    
    .09Gemcor II, LLC (e)(g)
West Seneca, NY. Designs
and sells automatic riveting
machines used in the
assembly of aircraft
components.
www.gemcor.com
    
    $250,000 note at 8% due June 28, 2010
with warrant to purchase 6.25
membership units. 25 membership
units.
    
    6/28/04
    
    
    33
    %
    
    
    750,000
    
    
    
    750,000
    
    
    
    .13G-TEC Natural Gas Systems
Buffalo, NY. Manufactures
and distributes systems that
allow natural gas to be used
as an alternative fuel to
gases.
www.gas-tec.com
    
    41.322% Class A membership interest.
8% cumulative dividend.
    
    8/31/99
    
    
    41
    %
    
    
    400,000
    
    
    
    300,000
    
    
    
    .05Innov-X Systems, Inc. (e)(g)
Woburn, MA. Manufactures
portable x-ray fluorescence
(XRF) analyzers used in
metals/alloy analysis.
www.innovxsys.com
    
    $350,000 Subordinated Debenture at
8.5% due September 27, 2009. 12,344
warrants to purchase common shares.
3,500 Series A preferred stock.
$250,000 Series B Secured Subordinated
term note at 8.5% due March 1, 2010.
12,345 warrants to purchase common
shares.
    
    9/27/04
    
    
    10
    %
    
    
    635,000
    
    
    
    635,000
    
    
    
    .11Kionix, Inc.
Ithaca, NY. Develops
innovative MEMS based
technology applications.
www.kionix.com
    
    30,241 shares Series B preferred stock.
(g)2,862,091 shares Series A
preferred stock. 714,285 shares
Series B preferred stock.
    
    5/17/02
    
    
    2
    %
    
    
    1,262,340
    
    
    
    977,863
    
    
    
    .17




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Rand Capital Corporation and Subsidiaries
Consolidated Schedule of Portfolio Investments
March 31, 2006 (Continued)
(Unaudited)
 (b)
    
    (c)
    
    
    
    
    
    (d)PerShareDate
    
    
    
    
    
    
    
    
    
    
    
    
    
    ofCompany and Business
    
    Type of Investment
    
    Acquired
    
    Equity
    
    Cost
    
    Value
    
    RandMinrad International, Inc.
(AMEX: BUF) ( h) (j)
Buffalo, NY. Developer of acute care
devices and anesthetics.
www.minrad.com
    
    387,981 common shares.
    
    8/4/97
    
    
    1
    %
    
    
    525,978
    
    
    
    969,953
    
    
    
    .17New Monarch Machine Tool, Inc. (e)(g)(i)
Cortland, NY.
Manufactures and services
vertical/horizontal machining centers.
www.monarchmt.com
    
    $527,876.85 note at 12% due
January 13, 2009. $300,000
note at 12% due January 13,
2009. Warrants for 22.84
shares of common stock.
    
    9/24/03
    
    
    15
    %
    
    
    803,001
    
    
    
    803,001
    
    
    
    .14Niagara Dispensing Technologies, Inc.
Tonawanda, NY. Beverage dispense
technology development and products
manufacturer, specializing in beer
dispensing systems.
www.exactpour.com
    
    $500,000 Senior Subordinated
note at 8% due March 7, 2011.
Adjustable warrant for 4% of
common stock.
    
    3/8/06
    
    
    4
    %
    
    
    500,000
    
    
    
    500,000
    
    
    
    .09Photonic Products Group, Inc
(OTC:PHPG.OB) (a) (j)
(Formerly INRAD, Inc.) Northvale, NJ.
Develops and manufactures products for
laser photonics industry.
www.inrad.com
    
    100 shares convertible Series B
preferred stock, 10% dividend.
18,000 shares common stock.
    
    10/31/00
    
    <1%
    
    
    145,000
    
    
    
    126,100
    
    
    
    .02RAMSCO (e)(g)
Albany, NY. Distributor of water,
sanitary, storm sewer and specialty
construction materials to the
contractor, highway and municipal
markets.
www.ramsco.com
    
    $916,947.23 notes at 13% due
November 18, 2007. Warrants to
purchase 12.5% of common
shares.
    
    11/19/02
    
    
    13
    %
    
    
    916,947
    
    
    
    916,947
    
    
    
    .16Rocket Broadband
Networks, Inc. (g)
Rochester, NY. Communications service
provider of satellite TV, broadband
internet and VoIP digital phone
targeting multiple dwelling units.
www.rocketbroadband.com
    
    285,829 Preferred shares.
    
    12/20/05
    
    
    6
    %
    
    
    204,082
    
    
    
    204,082
    
    
    
    .04Somerset Gas Transmission
Company, LLC
Buffalo, NY. Natural gas transportation
company.
www.somersetgas.com
    
    26.5337 Units.
    
    7/10/02
    
    
    2
    %
    
    
    719,097
    
    
    
    786,748
    
    
    
    .14Synacor, Inc. (e)(g)
Buffalo, NY. Develops provisioning
platforms for aggregation and delivery
of content for broadband access
providers.
www.synacor.com
    
    $350,000 convertible note at 10%
due November 18, 2007. 200,000
shares of Series B preferred
stock. 59,828 Series A
preferred shares. Warrants for
299,146 common shares.
    
    11/18/02
    
    
    5
    %
    
    
    820,000
    
    
    
    828,674
    
    
    
    .14Topps Meat Company LLC (e)(g)
Elizabeth, NJ. Producer and supplier of
premium branded frozen hamburgers and
portion controlled meat products.
www.toppsmeat.com
    
    Preferred A and Class A common
membership interest.
    
    4/3/03
    
    
    3
    %
    
    
    595,000
    
    
    
    927,000
    
    
    
    .16Ultra  Scan Corporation
Amherst, NY. Biometrics application
developer of ultrasonic fingerprint
technology.
www.ultra-scan.com
    
    536,596 common shares, 107,104
Series A-1 preferred shares.
(g) 95,284 Series A-1
preferred shares.
    
    12/11/92
    
    
    3
    %
    
    
    938,164
    
    
    
    1,203,000
    
    
    
    .21




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Rand Capital Corporation and Subsidiaries
Consolidated Schedule of Portfolio Investments
March 31, 2006 (Continued)
(Unaudited)
 (b)
    
    
    (c)
    
    
    
    
    
    
    (d)PerShareDate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ofCompany and Business
    
    Type of Investment
    
    Acquired
    
    
    Equity
    
    
    Cost
    
    
    Value
    
    
    RandVanguard Modular Building Systems
Philadelphia, PA. Leases and
sells high-end modular space solutions. www.vanguardmodular.com
    
    2,673 preferred units with warrants, 14% accrued distribution rate.
    
    
    12/16/99
    
    
    
    <1
    %
    
    
    270,000
    
    
    
    135,000
    
    
    
    .02WineIsIt.com, Corp.(g)
    
    $500,000 Senior Subordinated note at
    
    
    12/18/02
    
    
    
    2
    %
    
    
    801,918
    
    
    
    551,918
    
    
    
    .10Amherst, NY. Marketing company specializing
    
    10% due December 17, 2009.in customer loyalty programs supporting the
    
    $250,000 note at 10% due April 16,wine and spirit industry.
    
    2005. Warrants to purchase 100,000www.wineisit.com
    
    shares of Class B common stock.Other Investments
    
    Other
    
    Various
    
    
    
    
    
    $
    522,760
    
    
    $
    36,750
    
    
    
    .01Total portfolio investments
    
    
    
    
    
    
    
    
    
    $
    14,095,781
    
    
    $
    14,001,030
    
    
    $
    2.43




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##### Table of Contents



Rand Capital Corporation and Subsidiaries
Consolidated Schedule of Portfolio Investments
March 31, 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 March 31, 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 March 31, 2006, the aggregate cost of investment securities
approximated $14.0 million. Net unrealized depreciation aggregated approximately $95,000 of
which $1,179,000 related to appreciated investment securities and $1,274,000 related to
depreciated investment securities.(g)
    
    Rand Capital SBIC, L.P. investment(h)
    
    This is a publicly owned security. The Corporations shares are restricted 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
 
 Notes to the Consolidated Financial Statements
 For the Three Months Ended March 31, 2006 and 2005
 (Unaudited)
 Note 1. ORGANIZATION
  Formation of SBIC Subsidiary




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##### Table of Contents




    
    A BDC (Rand) to operate a BDC/small business investment company (Rand SBIC) as its
wholly owned subsidiary in limited partnership form;
    
    Rand, Rand Management and Rand SBIC to engage in certain transactions that the
Corporation would otherwise be permitted to engage in as a BDC if its component parts
were organized as a single corporation;
    
    Rand, as a BDC, and Rand SBIC, as its BDC/SBIC subsidiary, to meet asset coverage
requirements for senior securities on a consolidated basis and;
    
    Rand SBIC, as a BDC/SBIC subsidiary of Rand, as a BDC, to file Exchange Act reports
on a consolidated basis as part of Rands reports.
   Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation 
  N-30-B2/ARS
    
    Quarterly & Annual Reports to ShareholdersN-54A
    
    Election to Adopt Business Development Company statusDEF-14A
    
    Definitive Proxy Statement submitted to shareholdersForm 10-K
    
    Annual Report on Form 10-K for the year ended December 31, 2005Form 10-Q
    
    Quarterly Report on Form 10-Q for the quarters ended September 30, 2005,
June 30, 2005 and March 31, 2005




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Form N-23C-1 Reports by closed-end investment companies of purchases of their own securities
  Principles of Consolidation
 Investments
  Cash and Cash Equivalents
 Revenue Recognition  Interest Income
  Deferred Debenture Costs
 Net Assets per Share
 Accounting Estimates
 Stockholders Equity (Net Assets) 




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Stock
Option Plan 




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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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Financial Condition
  Increase
    
    % Increase3/31/06
    
    12/31/05
    
    (Decrease)
    
    (Decrease)Total assets
    
    $
    16,157,365
    
    
    $
    16,063,605
    
    
    $
    93,760
    
    
    
    0.60
    %Total liabilities
    
    
    7,347,801
    
    
    
    7,447,671
    
    
    
    (99,870
    )
    
    
    (1.3
    %)Net assets
    
    $
    8,809,564
    
    
    $
    8,615,934
    
    
    $
    193,630
    
    
    
    2.2
    %
  Increase
    
    % Increase3/31/06
    
    12/31/05
    
    (Decrease)
    
    (Decrease)Investments, at cost
    
    $
    14,095,781
    
    
    $
    13,712,890
    
    
    $
    382,891
    
    
    
    2.8
    %Unrealized depreciation, net
    
    
    (94,751
    )
    
    
    (342,028
    )
    
    
    (247,277
    )
    
    
    (72.3
    %)Investments at fair value
    
    $
    14,001,030
    
    
    $
    13,370,862
    
    
    $
    630,168
    
    
    
    4.7
    %
  New Investments
    
    AmountNiagara Dispensing Technologies, Inc. (Niagara Dispensing)
    
    $
    500,000New Monarch Machine Tool, Inc. (Monarch)
    
    
    300,000Total of investments made during the three months
ended March 31, 2006
    
    $
    800,000Interest conversion:Monarch
    
    
    2,887Total of new investments and interest conversions
during the three months ended March 31, 2006
    
    $
    802,887




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Results of Operations
 Investment Income
  Comparison of the three months ended March 31, 2006 to the three months ended March 31, 2005
 March 31,
    
    March 31,
    
    Increase
    
    %Increase2006
    
    2005
    
    (Decrease)
    
    (Decrease)Interest from portfolio companies
    
    $
    172,020
    
    
    $
    145,920
    
    
    $
    26,100
    
    
    
    17.9
    %Interest from other investments
    
    
    5,143
    
    
    
    839
    
    
    
    4,304
    
    
    
    513
    %Dividend and other investment income
    
    
    13,135
    
    
    
    
    
    
    
    13,135
    
    
    
    Other income
    
    
    10,947
    
    
    
    10,894
    
    
    
    53
    
    
    
    .5
    %Total investment income
    
    $
    201,245
    
    
    $
    157,653
    
    
    $
    43,592
    
    
    
    27.7
    %
 Interest from portfolio companies
  Interest
    
    Investment
    
    Year that InterestCompany
    
    Rate
    
    Cost
    
    Accrual CeasedG-Tec
    
    
    8
    %
    
    
    400,000
    
    
    
    2004Vanguard
    
    
    14
    %
    
    
    270,000
    
    
    
    2003WineIsIt.com
    
    
    10
    %
    
    
    801,918
    
    
    
    2005
 Interest from other investments
 Dividend and other investment income
 Other income




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Operating Expenses
 March 31, 2006
    
    March 31, 2005
    
    Increase
    
    % IncreaseTotal Expenses
    
    $
    327,845
    
    
    $
    289,759
    
    
    $
    38,086
    
    
    
    13
    %
   Net Realized Gains and Losses on Investments
  Net Change in Unrealized Appreciation (Depreciation) of Investments




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Minrad valuation to market
    
    $
    329,453Photonics valuation to market
    
    
    2,880Reclass Minrad unrealized gain to realized gain
on shares sold
    
    
    (85,056
    )Total Change in Unrealized Depreciation
    
    $
    247,277
    Net Increase in Net Assets from Operations
  Liquidity and Capital Resources




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Risk Factors and Other Considerations
 The Corporations Portfolio Investments are Illiquid
  Investing in Private Companies involves a High Degree of Risk
   The Corporation is Subject to Risks Created by the Valuation of its Portfolio Investments
  Investing in The Corporations Shares May be Inappropriate for the Investors Risk Tolerance
  The Corporation is Subject to Risks Created by its Regulated Environment




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The Corporation is Subject to Risks Created by Borrowing Funds from the SBA
  The Economic Environment May Change
  The Corporation is Dependent Upon Key Management Personnel for Future Success
  The Corporation Operates in a Competitive Market for Investment Opportunities
  Fluctuations of Quarterly Results




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Item 3. Quantitative and Qualitative Disclosures about Market Risk




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




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




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##### Table of Contents



Item 6. Exhibits
 (a)
    
    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 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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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.
   By:
    /s/ Allen F. GrumAllen F. Grum, President By:
    /s/ Daniel P. PenberthyDaniel P. Penberthy, Treasurer RAND CAPITAL SBIC, L.P.By:
    RAND CAPITAL MANAGEMENT LLCGeneral Partner By:
    RAND CAPITAL CORPORATIONMember By:
    /s/ Allen F. GrumAllen F. Grum, President By:
    /s/ Daniel P. PenberthyDaniel P. Penberthy, Treasurer