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. Our Structure
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 Nine Months Ended September 30, 2008 and 2007," which are incorporated herein by reference.
Business Developments
The financial markets have experienced extreme volatility since late 2007 due to uncertainty and disruption in large segments of the credit markets. During the third quarter of 2008, the financial markets deteriorated even further causing significant distress on the functioning of the markets and unprecedented strain on the availability of liquidity in the short-term debt market. This may continue to have far reaching negative consequences across many industries.

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These and other economic factors may impact the operations and future financial performance of the Corporation in the following ways:
• The ability of the Corporation's portfolio companies to obtain necessary credit financing for their operations may be impacted

• Increased difficulty for portfolio companies to obtain equity financing to continue to fund their operations

• The slow down in capital goods and industry spending may impact the goods and services that the portfolio companies sell

• The ability for the Corporation to exit its investments may become more difficult as access to public markets and the merger and acquisition industry become impaired

• The Corporation's diversified portfolio of investments may experience unexpected growth despite these market uncertainties based on their own capitalization, industry niche, and current market acceptance for their products/services.

• The Corporation's SBA leverage commitment expired September 30, 2008, and the SBA's interest in renewing Rand's $1.9 million in undrawn leverage may be adversely affected by the status of the financial markets

During the third quarter of 2008 the Corporation's portfolio may have been affected by these financial market uncertainties as evidenced by Rocket Broadband seeking additional financing, the reduction in value of Photonic's securities based on the closing stock prices, and the withdrawal of Synacor's S-1 Initial Public Offering filing.
While the effect of these market uncertainties on the Corporation's portfolio cannot be determined, many of the Corporation's portfolio companies have begun to develop action plans necessary to help align their resources (staffing, operating expenses and remaining capital) with their business needs to create more competitive companies and increase their chances of future success. 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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Overview and Financial Condition

                           9/30/08          12/31/07         Decrease        % Decrease

     Total assets        $ 30,534,391     $ 32,722,151     $ (2,187,760 )           (6.7 %)
     Total liabilities     11,162,998       12,904,328       (1,741,330 )          (13.5 %)

     Net assets          $ 19,371,393     $ 19,817,823     $   (446,430 )           (2.3 %)

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
                                 9/30/08          12/31/07       (Decrease)      (Decrease)
Investments, at cost           $ 13,453,917     $ 13,390,644     $    63,273             .05 %
Unrealized appreciation, net     12,145,146       13,137,846        (992,700 )          (7.6 %)

Investments at fair value      $ 25,599,063     $ 26,528,490     $  (929,427 )          (3.5 %)

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
   Rocket Broadband Networks, Inc. (Rocket Broadband)                   15,000

   Total of investments made during the nine months ended
   September 30, 2008                                               $  689,990

   Changes to Investments:
   Niagara Dispensing interest conversion                           $   41,783
   APF Group, Inc. payment in kind conversion                       $   28,934

   Total of changes to investments made during the nine months
   ended September 30, 2008                                         $   70,717

   Investment Repayments:
   New Monarch Machine Tool, Inc. (Monarch)                         $ (520,147 )
   Contract Staffing                                                  (131,065 )
   Gemcor II, LLC (Gemcor)                                             (46,222 )

   Total changes to investments and investment repayments during
   the nine months ended September 30, 2008                         $ (697,434 )


   Total change in investment balance, at cost, during the nine
   months ended September 30, 2008                                  $   63,273

Net asset value (NAV) per share was $3.39/share at September 30, 2008 versus $3.47/share at December 31, 2007.
The Corporation's total investments, whose fair value have been estimated by the Board of Directors, approximated 132% and 134% of net assets at September 30, 2008 and December 31, 2007.
Cash and cash equivalents approximated 19% of net assets at September 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 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 the Corporation's 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 nine months ended September 30, 2008 to the nine months ended

September 30, 2007

                                         September 30,        September 30,         Increase         % Increase
                                             2008                 2007             (Decrease)        (Decrease)
Interest from portfolio companies       $       489,963      $       474,962      $     15,001               3.2 %
Interest from other investments                  73,004              133,853           (60,849 )           (45.5 %)
Dividend and other investment income            707,458              586,291           121,167              20.7 %
Other income                                     14,251               26,637           (12,386 )           (46.5 %)

Total investment income                 $     1,284,676      $     1,221,743      $     62,933               5.2 %

Interest from portfolio companies - The portfolio interest income increase is due to a non recurring item in portfolio interest revenue for the nine months ended September 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 earned interest of $43,067 were received in the second quarter of 2008. The Corporation began to recognize dividends on the Series A Convertible Preferred Stock of Innov-X during the nine months ended September 30, 2008. These dividends resulted from the re-negotiation of the preferred stock terms and provided for an 8% cumulative deferred return while the investment is outstanding. The amount recognized during the nine months ended September 30, 2008 was $142,411. This dividend is classified as portfolio interest income and this revenue classification is consistent with other interest bearing instruments in the portfolio.
Without the two aforementioned items interest from portfolio companies for the nine months ended September 30, 2008 would have decreased ($170,477) or (35.9%) from the nine months ended September 30, 2007. The decrease is a result of two portfolio companies (Monarch and RAMSCO) repaying their debt instruments during the last twelve months and one portfolio company (Niagara Dispensing) converting its debenture instrument into equity during 2008.
For the nine months ended September 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 nine months ended September 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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Based on a review of the portfolio companies' performance and the circumstances surrounding the investments, the Corporation 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 September 30, 2008 and 2007 was $3,585,620 and $4,131,507, 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 nine months ended September 30, 2008 consisted of distributions from Gemcor for $687,620 and Carolina Skiff LLC (Carolina Skiff) for $19,838.
Dividend income for the nine months ended September 30, 2007 consisted of distributions from Gemcor for $494,807, Carolina Skiff for $39,069, Somerset Gas Transmission Company, LLC (Somerset) for $36,789, Topps Meat Company LLC (Topps) for $14,944 and Vanguard Modular Building Systems (Vanguard) for $682. In the fourth quarter of 2007 Gemcor made a distribution in the amount of $877,600 due to a change in management estimates. This large fourth quarter 2007 distribution more than doubled the Dividend and Other investment income line item in the fourth quarter of 2007. The portfolio company does not expect any such unusual distributions in the current fiscal year.
Other income - Other income consists of the revenue associated with the amortization of financing fees charged to the portfolio companies upon successful closing of a 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 $6,250 and $24,636 for the nine months ended September 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 $8,000 and $2,000 for the nine months ended September 30, 2008 and 2007, respectively.

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Operating Expenses
Comparison of the nine months ended September 30, 2008 to the nine months ended September 30, 2007

September 30, 2008 September 30, 2007 Increase % Increase

Total Expenses $ 1,192,599 $ 1,177,992 $ 14,607 1.2 %

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.
The increase in operating expenses during the nine months ended September 30, 2008 can be attributed to the 5%, or $19,000, increase in interest expense. This increase is due to the fact that the Corporation allowed the remaining SBA approved leverage commitment of $1,900,000 to expire on September 30, 2008. It had prepaid a 1% fee on this leverage, or $19,000, which was charged to interest expense in the third quarter of 2008 due to the expiration of the leverage commitment.
Net Realized Gains and Losses on Investments There were no realized gains or losses during the nine months ended September 30, 2008.
During the nine months ended September 30, 2007, the Corporation recognized a net realized gain of $516,204, comprised of a gain on the sale of Ramsco warrants for $555,000, a loss on USTec of ($39,236) and a minor gain of $440 on a public security. USTec satisfied its $350,000 debenture instrument obligation by a payment in the amount of $310,764 which gave rise to the realized loss. Net Change in Unrealized Appreciation of Investments The Corporation recorded a net decrease in unrealized appreciation on investments before income taxes of ($992,700) during the nine months ended September 30, 2008, as compared to a decrease of ($793,879) for the nine months ended September 30, 2007. The decrease of ($992,700) in unrealized appreciation on investments is due to the following valuation changes made by the Corporation:

                                                                   September 30,
                                                                       2008
 Rocket Broadband                                                 $      (695,000 )
 Photonic Products Group, Inc (Photonic)                                 (158,700 )
 Niagara Dispensing                                                      (111,000 )
 Bioworks                                                                 (28,000 )

 Total change in net unrealized appreciation during the nine
 months ended September 30, 2008                                  $      (992,700 )

Rocket Broadband is currently seeking additional financing to support and maintain its business operations as it continues efforts to execute its' original business plan. While Rocket Broadband has been able to maintain a strong base of customers, it is experiencing a shortage of cash due in part to a longer than expected sales cycle. This has resulted in a deterioration of Rocket Broadband's financial position. Based on a review of the financial restructuring necessary to maintain the portfolio company's operations, the Corporation has recognized unrealized depreciation on its investment in Rocket Broadband and valued its investment at zero. The Corporation's valuation, if any, may be adjusted as it obtains more information about the ultimate structure and amount of the financing that Rocket Broadband is able to secure.

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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 as of September 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. In October 2008 Synacor withdrew its S-1 plans for a public offering in a notification filed with the SEC. No valuation change has occurred with respect to these Synacor filings.
The Corporation recorded a net decrease in unrealized appreciation on investments of $(793,879) during the nine months ended September 30, 2007. The decrease in unrealized appreciation on investments is due to the following valuation changes made by the Corporation:

                                                                   September 30,
                                                                       2007
 Topps Meat Company LLC (Topps) valuation change                  $      (927,000 )
 Adampluseve warrants                                                      65,341
 Reclass USTec to realized loss                                            39,000
 Photonic valuation to market                                              28,780

 Total change in net unrealized appreciation during the nine
 months ended September 30, 2007                                  $      (793,879 )

The Topps investment was revalued to zero during the third quarter of 2007 when the plant that produces its frozen meat products was forced to recall its frozen hamburger products. Topps announced on October 5, 2007 that because of the economic impact of the recall it would close its Elizabeth, NJ plant. The Corporation recognized appreciation on its remaining equity investment in Adampluseve which participated in a round of financing in January 2007 that enabled it to pay off the Corporation's debenture instrument prior to the maturity date. The Corporation still holds warrants in Adampluseve, the value of which was adjusted based on the pricing of this round of financing.
All of these value adjustments are consistent with the Corporation's established valuation policy.
Net Decrease 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 in net assets from operations" on its consolidated statements of operations. For the nine months ended September 30, 2008, the net decrease in net assets from operations was ($446,430) as compared to a net decrease in net assets from operations of ($61,691) for the same period in 2007.
The decrease for the period ending September 30, 2008 can be attributed to the decrease in unrealized appreciation, net of tax, of ($547,076) in the current period.

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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 September 30, 2008 the Corporation's total liquidity, consisting of cash and cash equivalents, totaled $3,585,620.
In 2003 the Corporation paid $100,000 to the SBA to reserve its approved $10,000,000 leverage. This leverage commitment expired on September 30, 2008 and the Corporation has drawn down $8,100,000 of this leverage as of September 30, 2008. These outstanding SBA borrowings have balloon maturities beginning in 2014.
Management believes that the cash and cash equivalents at September 30, 2008, coupled with the anticipated interest and dividend payments from its portfolio investments, will provide the Corporation with the liquidity necessary to fund operations and new investments over the next six to twelve months. The Corporation expects its cash flow related to investing activities will continue to fluctuate based on its success in originating investments and its ability to realize gains on liquidation of investments and, depending on investment activity, the Corporation may re-apply for the expired $1,900,000 of leverage in 2009 or beyond.
Item 3. Quantitative and Qualitative Disclosures about Market Risk The Corporation's investment activities contain elements of risk. The portion of the Corporation's investment portfolio consisting of equity and equity-linked debt securities in private companies is subject to valuation risk. Because there is typically no public market for the equity and equity-linked debt securities in which it invests, the equity interests in the portfolio are stated at "fair value" as determined in good faith by the Board of Directors in accordance with the Corporation's investment valuation policy. (The discussion of valuation policy is contained in Item 1 "Financial Statements" and Supplementary Data in the "Notes to Consolidated Schedule of Portfolio Investments" is hereby incorporated herein by reference.) In the absence of a readily ascertainable market value, the estimated value of the Corporation's portfolio may differ significantly from the values that would be placed on the portfolio if a ready market for the investments existed. Any changes in valuation are recorded in the Corporation's consolidated Statement of Operations as "Net change in unrealized appreciation." . . .