Summary of RAND CAPITAL CORP

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes included elsewhere in this report.
FORWARD LOOKING STATEMENTS
Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this document that do not relate to present or historical conditions are "forward-looking statements" within the meaning of that term in Section 27A of the Securities Act of 1933, and in Section 21F of the Securities Exchange Act of 1934. Additional oral or written forward-looking statements may be made by the Corporation from time to time and those statements may be included in documents that are filed with the Securities and Exchange Commission. Such forward-looking statements involve risks and uncertainties that could cause results or outcomes to differ materially from those expressed in the forward-looking statements.
Forward-looking statements may include, without limitation, statements relating to the Corporation's plans, strategies, objectives, expectations and intentions and are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as "believes," "forecasts," "intends," "possible," "expects," "estimates," "anticipates," or "plans" and similar expressions are intended to identify forward-looking statements. Among the important factors on which such statements are based are assumptions concerning the state of the national economy and the local markets in which the Corporation's portfolio companies operate, the state of the securities markets in which the securities of the Corporation's portfolio companies trade or could be traded, liquidity within the national financial markets, and inflation. Forward-looking statements are also subject to the risks and uncertainties described in Part II, Item 1A of this report, the text of which is incorporated herein by reference.
There may be other factors that we have not identified that affect the likelihood that the forward-looking statements may prove to be accurate. Further, any forward-looking statement speaks only as of the date it is made and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time that may cause our business not to develop as we expect, and we cannot predict all of them. Overview
The following discussion includes Rand Capital Corporation ("Rand"), Rand Capital SBIC, L.P., ("Rand SBIC"), and Rand Capital Management, LLC ("Rand Management"), (collectively the "Corporation"), its financial position and results of operations.
Rand is incorporated under the laws of New York and is regulated under the 1940 Act as a business development company ("BDC"). In addition a wholly-owned subsidiary, Rand SBIC, is regulated as a Small Business Investment Company ("SBIC") by the Small Business Administration ("SBA"). The Corporation anticipates that most, if not all, of its investments in the next year will be originated through the SBIC subsidiary.
Rand is restructuring Rand SBIC as a wholly-owned corporate subsidiary, a process that it expects to be completed by the close of business on December 31, 2008. See Note 1 to "Notes to Consolidated Financial Statements for the Six Months Ended June 30, 2008 and 2007," which are incorporated herein by reference.
Critical Accounting Policies
The Corporation prepares its consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP), which require the use of estimates and assumptions that affect the reported amounts of assets and liabilities. A summary of our critical accounting policies can be found in the December 31, 2007 Form 10-K in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations".

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Financial Condition
Overview:

                           6/30/08          12/31/07         Decrease       % Decrease

     Total assets        $ 31,519,174     $ 32,722,151     $ (1,202,977 )          (3.7 %)
     Total liabilities     11,810,398       12,904,328       (1,093,930 )          (8.5 %)

     Net assets          $ 19,708,776     $ 19,817,823     $   (109,047 )          (0.6 %)

The Corporation's financial condition is dependent on the success of its portfolio holdings. It has invested a substantial portion of its assets in small to medium sized private companies. The following summarizes the Corporation's investment portfolio at the period-ends indicated.

                                                                  Increase       % Increase
                                 6/30/08          12/31/07       (Decrease)      (Decrease)
Investments, at cost           $ 13,519,702     $ 13,390,644     $   129,058             1.0 %
Unrealized appreciation, net     12,943,146       13,137,846        (194,700 )          (1.5 %)

Investments at fair value      $ 26,462,848     $ 26,528,490     $   (65,642 )          (0.2 %)

The change in investments, at cost, is comprised of the following:

                                                                      Amount
   New Investments:
   Niagara Dispensing Technologies, Inc. (Niagara Dispensing)       $  374,990
   Associates Interactive                                              200,000
   Mezmeriz, Inc.                                                      100,000

   Total of investments made during the six months ended
   June 30, 2008                                                    $  674,990

   Changes to Investments:
   Niagara Dispensing interest conversion                           $   41,783

   Investment Repayments:
   New Monarch Machine Tool, Inc. (Monarch)                         $ (520,147 )
   Gemcor II, LLC (Gemcor)                                             (30,506 )
   Contract Staffing                                                   (37,062 )

   Total changes to investments and investment repayments during
   the six months ended June 30, 2008                               $ (545,932 )


   Total change in investment balance, at cost, during the six
   months ended June 30, 2008                                       $  129,058

Net asset value (NAV) per share was $3.45/share at June 30, 2008 versus $3.47/share at December 31, 2007.
The Corporation's total investments at fair value, whose fair value have been estimated by the Board of Directors, approximated 134% of net assets at June 30, 2008 and December 31, 2007.
Cash and cash equivalents approximated 19% of net assets at June 30, 2008 compared to 22% at December 31, 2007.

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Results of Operations
Investment Income
The Corporation's investment objective is to achieve long-term capital appreciation on its equity investments while maintaining a current cash flow from its debenture and pass through equity instruments. Therefore, the Corporation invests in a mixture of debenture and equity instruments, which will provide a current return on a portion of the investment portfolio. The equity features contained in our investment portfolio are structured to realize capital appreciation over the long-term and may not generate current income in the form of dividends or interest. In addition, the Corporation earns interest income from investing its idle funds in money market instruments. The sources and amounts of interest and dividend income will fluctuate from period to period based on, among other things, the Corporation's balances and composition in its portfolio investments versus its cash balances. The investment income is impacted by the Corporation's ability to fund investments that fit its strategic profile and the level of liquidity events within its investment portfolio which can not be predicted with any certainty.
Comparison of the six months ended June 30, 2008 to the six months ended

June 30, 2007

                                                                                    Increase         % Increase
                                         June 30, 2008        June 30, 2007        (Decrease)        (Decrease)
Interest from portfolio companies       $       361,781      $       334,196      $     27,585               8.3 %
Interest from other investments                  53,104               92,290           (39,186 )           (42.5 %)
Dividend and other investment income            434,581              409,010            25,571               6.3 %
Other income                                     11,167               20,644            (9,477 )           (45.9 %)

Total investment income                 $       860,633      $       856,140      $      4,493               0.5 %

Interest from portfolio companies - The portfolio interest income increase is due to two non recurring items in portfolio interest revenue for the six months ended June 30, 2008. Interest of $43,067 was recognized on the escrow from Innov-X Systems, Inc. (Innov-X). The Innov-X escrow of $711,249 and the accrued interest were received in the second quarter of 2008. In addition, the Corporation recognized $122,411 in cumulative dividends from Innov-X. These dividends resulted from the re-negotiation of the preferred stock terms and provided for an 8% cumulative deferred return. This dividend will continue to accrue prospectively and will be accrued monthly and recognized in portfolio interest income.
Without the two aforementioned non recurring portfolio interest items this line item would have decreased ($137,893) or (41%) from the six months ended June 30, 2007. The decrease is a result of two portfolio companies (RAMSCO and Monarch) repaying their debt instruments during the last twelve months coupled with the fact that 60% of the new investments made by the Corporation have been equity instruments.
For the six months ended June 30, 2007 the Corporation recognized Original Issue Discount (OID) income on its Adampluseve, Inc (Adampluseve) investment. Adampluseve paid off its debenture instrument early and therefore the remaining $62,333 in unamortized OID was accreted into income during the six months ended June 30, 2007. OID is created when the Corporation invests in a debenture instrument that has a warrant attached to the instrument. This requires an allocation of a portion of the investment cost to the warrant and reduces the debt instrument by an equal amount in the form of a note discount or OID. The note is then reported net of the discount and the discount is accreted into income over the life of the debenture instrument.

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After reviewing the portfolio companies' performance and the circumstances surrounding the investments, the Corporation has ceased accruing interest income on the following investment instruments:

                           Interest       Investment       Year that Interest
           Company           Rate            Cost            Accrual Ceased
           G-Tec                   8 %        400,000                     2004
           UStec                   5 %        100,000                     2006

WineIsIt.com 10 % 801,918 2005

Interest from other investments - The decrease in interest income is primarily due to lower cash balances, coupled with lower interest rates earned by the Corporation on its cash balances. The cash balance at June 30, 2008 and 2007 was $3,725,850 and $4,358,779, respectively.
Dividend and other investment income - Dividend income is comprised of distributions from Limited Liability Companies (LLC's) in which the Corporation has invested. The Corporation's investment agreements with certain LLC's require the entities to distribute funds to the Corporation for payment of income taxes on its allocable share of the entities' profits. These dividends will fluctuate based upon the profitability of the entities and the timing of the distributions.
Dividend income for the six months ended June 30, 2008 consisted of distributions from Gemcor II, LLC (Gemcor) for $420,954 and Carolina Skiff LLC (Carolina Skiff) for $13,627. Dividend income for the six months ended June 30, 2007 consisted of distributions from Gemcor for $348,140, Carolina Skiff for $23,534, Somerset Gas Transmission Company, LLC (Somerset) for $21,710, Topps Meat Company LLC (Topps) for $14,944 and Vanguard Modular Building Systems (Vanguard) for $682.
Other income - Other income consists of the revenue associated with the amortization of financing fees charged to the portfolio companies upon successful closing of Rand SBIC financing. The SBA regulations limit the amount of fees that can be charged to a portfolio company and the Corporation typically charges 1% to 3% to the portfolio companies. These fees are amortized ratably over the life of the instrument associated with the fees. Upon the prepayment of a loan or debt security, any unamortized closing fees are recorded as income. The unamortized fees are carried on the balance sheet under Deferred Revenue. In addition, other income includes fees charged by the Corporation to its portfolio companies for attendance at the portfolio company board meetings. The income associated with the amortization of financing fees was $4,183 and $19,644 for the six months ended June 30, 2008 and 2007, respectively. The decrease is due to the fact that the Corporation has not charged any of its new portfolio companies financing fees in the last two years. The annualized financing fee income based on the existing portfolio will be approximately $8,300 in 2008.
The income associated with board attendance fees was $7,000 and $1,000 for the six months ended June 30, 2008 and 2007, respectively. Operating Expenses
Comparison of the six months ended June 30, 2008 to the six months ended

June 30, 2007

                       June 30, 2008       June 30, 2007      Increase       % Increase

     Total Expenses   $       833,356     $       812,239     $  21,117              2.6 %

Operating expenses predominately consist of interest expense on SBA obligations, employee compensation and benefits, directors' fees, shareholder related costs, office expenses, professional fees, and expenses related to identifying and reviewing investment opportunities.

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The increase in operating expenses during the six months ended June 30, 2008 can be attributed to the 23% or $22,375 increase in professional fees. Professional fees consist of legal, accounting and tax expenses. The increase in legal fees is due to the anticipated restructuring of the corporate structure to comply with certain SBA regulations that were discussed in Note 1 "Organization". The Corporation expects legal fees to continue to increase until the reorganization is finalized during 2008.
Net Realized Gains and Losses on Investments There were no realized gains or losses during the six months ended June 30, 2008.
During the six months ended June 30, 2007, the Corporation recognized a net realized loss of ($38,796), with ($39,236) recognized on UStec when it satisfied its $350,000 debenture instrument obligation by a payment in the amount of $310,764 and a minor gain of $440 on a public security. Net Change in Unrealized Appreciation of Investments The Corporation recorded a net decrease in unrealized appreciation on investments before income taxes of ($194,700) during the six months ended June 30, 2008, as compared to an increase of $119,121 for the six months ended June 30, 2007. The decrease of ($194,700) in unrealized appreciation on investments is due to the following valuation changes made by the Corporation:

                                                                   June 30, 2008

 Niagara Dispensing                                               $      (111,000 )
 Photonic Products Group, Inc (Photonic)                                  (55,700 )
 Bioworks                                                                 (28,000 )

 Total change in net unrealized appreciation during the six
 months ended June 30, 2008                                       $      (194,700 )

The Corporation converted its debt instruments in Niagara Dispensing to equity during the second quarter of 2008. Therefore it revalued its investment in Niagara Dispensing based on the valuation of equity shares at conversion. The Corporation's investment in Bioworks was valued at zero for the six months ended June 30, 2008 based on an analysis of the liquidation preferences of senior securities in the portfolio company.
Photonic is a publicly traded stock (NASDAQ symbol: PHPG.OB) and is marked to market at the end of each quarter.
Synacor Inc. filed an S-1 registration statement on August 2, 2007 with the SEC and also filed an amended S-1 in April 2008. An S-1 is a registration document that a company files with the SEC regarding the proposed sale of its securities to the public. No valuation change has occurred with respect to the Synacor S-1 filings.
The increase in unrealized appreciation on investments of $119,121 for the six months ended June 30, 2007 is due to the following valuation changes made by the Corporation:

                                                                   June 30, 2007
 Adampluseve warrants                                             $        65,341
 Reclass UStec to realized loss                                            39,000
 Photonic                                                                  14,780

 Total increase in net unrealized appreciation during the six
 months ended June 30, 2007                                       $       119,121

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The Corporation recognized appreciation on its remaining equity investment in Adampluseve. The portfolio company participated in a round of financing in January 2007 that caused them to pay off the Corporation's debenture instrument prior to the maturity date. The Corporation still holds warrants in Adampluseve and they were adjusted based on the pricing of this recent round of financing. During the six months ended June 30, 2007, the Corporation recognized a realized loss on its investment in UStec and of ($39,236) and reclassified its unrealized loss to realized. UStec satisfied its $350,000 debenture instrument obligation by a payment in the amount of $310,764 which gave rise to the realized loss. Photonic is a publicly traded stock (Nasdaq symbol: PHPG.OB) and is marked to market at the end of each quarter.
All of these value adjustments are consistent with the Corporation's established valuation policy.
Net (Decrease) Increase in Net Assets from Operations The Corporation accounts for its operations under GAAP for investment companies. The principal measure of its financial performance is "net (decrease) increase in net assets from operations" on its consolidated statements of operations. For the six months ended June 30, 2008, the net decrease in net assets from operations was ($109,047) as compared to a net increase in net assets from operations of $289,408 for the same six month period in 2007. The decrease for the period ending June 30, 2008 can be attributed to the decrease in unrealized appreciation, net of tax, of ($125,366) in the current period. Liquidity and Capital Resources
The Corporation's investment objective is to achieve long-term capital appreciation on its equity investments while maintaining a current cash flow from its debenture and pass through equity instruments. The equity features of our investment portfolio are structured to realize capital appreciation over the long-term and may not necessarily generate current income in the form of dividends or interest.
As of June 30, 2008 the Corporation's total liquidity, consisting of cash and cash equivalents, totaled $3,725,850.
As of June 30, 2008 the Corporation had paid $100,000 to the SBA to reserve its approved $10,000,000 leverage. This leverage commitment expires on September 30, 2008. The Corporation has drawn down $8,100,000 of this leverage as of June 30, 2008. These SBA borrowings will have balloon maturities beginning in 2014. Management expects that it will not be necessary to draw down the remaining $1,900,000 of approved SBA leverage before its expiration in September 2008, and that the large cash balance will be adequate to fund new investments and operating activities.
Management believes that the cash and cash equivalents at June 30, 2008, coupled with the anticipated interest and dividend payments on its portfolio investments, will provide the Corporation with the liquidity necessary to fund operations and new investments over the next twelve months. The Corporation expects its cash flow related to its investing activities will continue to fluctuate based on its success in originating investments and its ability to realize gains on liquidation of investments.

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