You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our 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 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" contained in Part I, Item 1A, 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.

Business Overview

Rand Capital Corporation ("Rand") was incorporated under the law of New York on February 24, 1969. Beginning in 1971, Rand operated as a publicly traded, closed-end, diversified management company that was registered under Section 8 of the Investment Company Act of 1940 (the "1940 Act"). On August 16, 2001, Rand elected to be treated as a business development company ("BDC") under the 1940 Act. In 2002, Rand formed a wholly-owned subsidiary for the purpose of operating it as a small business investment company ("SBIC") licensed by the U.S. Small Business Investment Administration ("SBA"). The subsidiary received an SBA license to operate as an SBIC in August 2002. The subsidiary, which had been organized as a Delaware limited partnership, was converted into a New York corporation on December 31, 2008, at which time its operations as a licensed small business investment company were continued by a newly formed corporation under the name of Rand Capital SBIC, Inc. ("Rand SBIC"). The following discussion will describe the operations of Rand, its wholly-owned subsidiary Rand SBIC, and the predecessor wholly-owned limited partnership (collectively, the "Corporation").

The Corporation anticipates that most, if not all, of its investments in the next year will be originated through the SBIC subsidiary.

The Corporation's primary business is making investments in companies, usually in the form of subordinated debt, membership interests, or preferred and common stock. The investment focus is usually on small and medium-sized companies that meet certain criteria, including:

1) a qualified and experienced management team

2) a new or unique product or service with a sustainable competitive advantage

3) a potential for growth in revenue and cash flow

4) a potential to realize appreciation in an equity position, if any.

The Corporation makes investments in portfolio companies that typically range from $500,000 to $1,000,000 and it invest either directly in the equity of a company through equity shares or in a debt instrument. The debt instruments generally have a maturity of not more than five years and usually have detachable equity warrants. Interest is either paid currently or deferred.

The Corporation's management team identifies investment opportunities. Throughout the Corporation's history it has established a large network of investment referral relationships. Investment proposals may, however, come to the Corporation from many other sources, and may include unsolicited proposals from the public and referrals from banks, lawyers, financial accountants and other members of the financial community. The Corporation believes that its reputation in the community and experience provide a competitive advantage in originating qualified new investments.

In a typical private financing, the management team of the Corporation will review, analyze, and confirm, through due diligence, the business plan and operations of the potential portfolio company. Additionally, the Corporation will become familiar with the portfolio company's industry and competitive landscape and may conduct additional reference checks with customers and suppliers of the portfolio company.

Following an initial investment in a portfolio company, the Corporation may be requested to make follow-on investments in the company. Follow-on investments may be made to take advantage of warrants or other preferential rights granted to the Corporation or otherwise to increase or maintain the Corporation's position in a promising portfolio company. The Corporation may also be called upon to provide an additional investment to a portfolio company in order for that company to fully implement its business plans, to develop a new line of business or to recover from unexpected business problems. Follow-on investments in a portfolio company are evaluated individually and may be subject to regulatory restrictions.

The Corporation will exit its investments generally through the maturation of the debt security or when a liquidity event takes place, such as the sale, recapitalization, or initial public offering of a portfolio company. The method and timing of the disposition of the Corporation's portfolio investments can be critical to the realization of maximum total return. The Corporation generally expects to dispose of its equity securities through the private sales of securities to other investors or through an outright sale of the company or a merger. The Corporation anticipates its debentures will be repaid with interest and hopes to realize further appreciation from the warrants or other equity type instruments it receives in connection with the origination of the debenture. The Corporation anticipates generating cash for new investments and operating expenses through SBA leverage draw downs, and interest and principal payments from its portfolio concerns.

2008 Highlights and Outlook

The Corporation's net asset value increased $0.07, or 2% during 2008, closing the year at $3.54 per share up from $3.47 at December 31, 2007. At December 31, 2008, the Corporation's total investment portfolio was valued at $28.1 million, which exceeds its cost basis of $14.4 million, reflecting $13.7 million in net unrealized appreciation.

Although the Corporation's stock traded at a premium to its net asset value during 2007, during 2008 its common stock traded in a range that was above and below the current net asset value per share. The year closed with the stock trading at $3.50 which represented a slight discount to the net asset value of $3.54.

During 2008 the Corporation recognized $1,757,003 in total investment income, a decrease of ($545,867) from $2,302,870 of investment income in 2007. The 23.7% decrease is attributable to the decrease in dividends and interest from portfolio companies. Dividends from portfolio companies that are limited liability companies can fluctuate based on the portfolio companies' profitability and the timing of distributions. In addition, lower cash balances in the current year caused the interest income to decrease.

Also during 2008 certain portfolio companies repaid some or all of their outstanding debenture instruments, including: Contract Staffing, Gemcor and New Monarch Machine Tool, Inc. These repayments may impact future earnings by reducing interest income in 2009 and future periods.

The cash balance at December 31, 2008 was $2.8 million which was approximately $1.6 million lower than at the end of 2007. The Corporation was unable to draw the remaining $1.9 million of outstanding leverage available from the Small Business Administration (SBA), due to Rand SBIC's excess cash position, and the leverage expired in September 2008. Given that the Corporation has used up much of its available SBA leverage, in order for the Corporation to raise substantial amounts of capital in the short term, it will need to rely on Rand's ability to sell additional shares of its common stock through public or private offerings. Although Rand currently has no specific plans concerning the timing or amount of any common stock offering it might make, it is considering the possibility of making an offering at some time in the next year in order to have more capital available with which to pursue favorable investment opportunities. See "Liquidity and Capital Resources," below.

While the business of some of our portfolio companies is strengthening, in terms of employee growth, increase in revenue, and strengthening net income position, it remains difficult to forecast when future exits will happen, or if the portfolio companies will have sufficient capital to remain viable while their respective markets mature.

Critical Accounting Policies

The Corporation prepares its financial statements in accordance with United States generally accepted accounting principles (GAAP), which requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities. For a summary of all significant accounting policies, including critical accounting policies, see Note 1 to the consolidated financial statements in Item 8.

The increasing complexity of the business environment and applicable authoritative accounting guidance require the Corporation to closely monitor its accounting policies and procedures. The Corporation has identified two critical accounting policies that require significant judgment. The following summary of critical accounting policies is intended to enhance your ability to assess the Corporation's financial condition and results of operations and the potential volatility due to changes in estimates.

Valuation of Investments

The most important estimate inherent in the preparation of the Corporation's consolidated financial statements is the valuation of its investments and the resulting unrealized appreciation or depreciation.

Investments are valued at fair value as determined in good faith by the management of the Corporation and submitted to the Board of Directors for approval. There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for investments. The Corporation analyzes and values each investment on a quarterly basis, and records unrealized depreciation for an investment that it believes has become impaired, including where collection of a loan or realization of the recorded value of an equity security is doubtful. Conversely, the Corporation will record unrealized appreciation if it believes that the underlying portfolio company has appreciated in value and, therefore, its equity security has also appreciated in value. These estimated fair values may differ from the values that would have been used had a ready market for the investments existed and these differences could be material if our assumptions and judgments differ from results of actual liquidation events.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards ("SFAS") 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This statement was effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. On January 1, 2008, the Corporation adopted SFAS 157.

SFAS No. 157 classifies the inputs used to measure fair value into the following hierarchy:

Level 1: Quoted prices in active markets for identical assets or liabilities, used in the Corporation's valuation at the measurement date.

Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.

Level 3: Unobservable and significant inputs to determining the fair value.

Most of the Corporation's investments are classified in Level 3 due to their privately held restricted nature.

In the valuation process, the Corporation uses financial information received monthly, quarterly, and annually from its portfolio companies, which includes both audited and unaudited financial statements, annual projections and budgets prepared by the portfolio company and other financial and non-financial business information supplied by the portfolio companies' management. This information is used to determine financial condition, performance, and valuation of the portfolio investments. The valuation may be reduced if a company's performance and potential have significantly deteriorated. If the factors which led to the reduction in valuation are overcome, the valuation may be restored.

Another key factor used in valuing equity investments is recent arms-length equity transactions with unrelated new investors entered into by the portfolio company that the Corporation utilizes to form a basis for its underlying value. Many times the terms of these equity transactions may not be identical to the equity transactions between the portfolio company and the Corporation, and the impact of the discrepancy in transaction terms on the market value of the portfolio company may be difficult or impossible to quantify.

Any changes in estimated fair value are recorded in our statement of operations as "Net increase in unrealized appreciation."

Revenue Recognition (Interest Income)

Interest income generally is recognized on the accrual basis except where the investment is in default or otherwise presumed to be in doubt. In such cases, interest is recognized at the time of receipt. A reserve for possible losses on interest receivable is maintained when appropriate. Certain investments of the Corporation are structured to provide a deferred interest period when interest is not currently due.

Rand SBIC's interest accrual is also regulated by the SBA's "Accounting Standards and Financial Reporting Requirements for Small Business Investment Companies". Under these rules interest income cannot be recognized if collection is doubtful, and a 100% reserve must be established. The collection of interest is presumed to be in doubt when there is substantial doubt about a portfolio company's ability to continue as a going concern or the loan is in default more than 120 days. Management also utilizes other qualitative and quantitative measures to determine the value of a portfolio investment and the collectability of any accrued interest.

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement No. 157 (SFAS 157), Fair Value Measurements. This statement defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Corporation adopted the enhanced disclosure provisions of SFAS 157 during 2008.

Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying consolidated financial statements.

Financial Condition

Overview:


                                                          (Decrease)       % (Decrease)
                          12/31/08         12/31/07        Increase          Increase

    Total assets        $ 32,228,797     $ 32,722,151     $  (493,354 )             (1.5 )%
    Total liabilities     12,001,831       12,904,328        (902,497 )             (7.0 )%

    Net assets          $ 20,226,966     $ 19,817,823     $   409,143                2.1 %

Net asset value per share (NAV) was $3.54 per share at December 31, 2008 versus $3.47 per share at December 31, 2007.

The Corporation did not draw down on any of the SBA leverage during the year ended December 31, 2008 and the total owed to the SBA at December 31, 2008 was $8,100,000. These debentures bear a fixed interest rate and an annual fee, averaging 5.9%, payable semi-annually. The debenture principal is repayable in full 10 years from issuance beginning in 2014.

Cash and cash equivalents approximated 14% of net assets at December 31, 2008 compared to 22% at December 31, 2007.

The effect of investment income, realized losses and the change in unrealized appreciation on investments resulted in a net decrease in the net deferred tax liability from $3,955,000 at December 31, 2007 to $3,490,000 at December 31, 2008.

Composition of the Corporation's Portfolio

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 companies. The following summarizes the Corporation's investment
portfolio at the year-ends indicated.


                                 12/31/08         12/31/07        Increase        % Increase

Investments, at cost           $ 14,386,451     $ 13,390,644     $   995,807              7.4 %
Unrealized appreciation, net     13,739,831       13,137,846         601,985              4.6 %

Investments, at fair value     $ 28,126,282     $ 26,528,490     $ 1,597,792              6.0 %

The Corporation's total investments at fair value, as estimated by the Board of Directors, approximated 139% of net assets at December 31, 2008 and 134% of net assets at December 31, 2007.

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

New Investments:                                                           Amount

GridApp Systems, Inc. (GridApp)                                          $   666,667
Niagara Dispensing Technologies, Inc. (Niagara Dispensing)                   374,990
SOMS Technologies, LLC (SOMS)                                                250,000
Associates Interactive, LLC (Associates)                                     200,000
Mezmeriz, Inc. (Mezmeriz)                                                    100,000
Rocket Broadband Networks, Inc. (Rocket Broadband)                            35,000

Total of investments made during the year ended December 31, 2008        $ 1,626,657
Other Changes to investments:
APF Group, Inc. (APF) interest conversion                                     40,832
Niagara Dispensing interest conversion                                        41,783

Total of new investments and changes to investments during the year
ended December 31, 2008                                                  $ 1,709,272

Sales/Investment Repayments                                                 Amount

New Monarch Machine Tool, Inc. (Monarch)                                    (520,147 )
Contract Staffing                                                           (131,066 )
Gemcor II, LLC (Gemcor)                                                      (62,252 )

Total of sales and investment repayments during the year ended
December 31, 2008                                                           (713,465 )

Total change in investment balance, at cost, during the year ended
December 31, 2008                                                         $  995,807

The Corporation's top five portfolio companies represented 68% of total assets at December 31, 2008:

                                                                   Fair Value at        % of Total Assets
                                                                   December 31,          at December 31,
Company                                   Industry                     2008                   2008

Innov-X Systems, Inc.          Manufacturing - Metals Testing
(Innov-X)                      Equipment                          $     8,761,700                       27 %
                               Manufacturing - Aerospace
Gemcor                         Machinery                          $     5,803,201                       18 %
Synacor Inc. (Synacor)         Software                           $     4,168,001                       13 %
Kionix, Inc . (Kionix)         Manufacturing - Silicon Chips      $     2,000,000                        6 %
Ultra-Scan Corporation
(Ultra-Scan)                   Electronics - Hardware/Software    $     1,203,000                        4 %

The Corporation's top five portfolio companies represented 61% of total assets at December 31, 2007:

                                                             Fair Value at        % of Total Assets
                                                             December 31,          at December 31,
Company                                Industry                  2007                   2007

                               Manufacturing - Metals
Innov-X                        Testing Equipment            $     8,761,700                       27 %
Synacor                        Software                     $     4,168,001                       13 %
                               Manufacturing - Aerospace
Gemcor                         Machinery                    $     4,165,451                       13 %
Carolina Skiff LLC (Carolina
Skiff)                         Manufacturing - Boating      $     1,227,000                        4 %
                               Manufacturing - Silicon
Kionix                         Chips                        $     1,221,568                        4 %

Below is the Geographic breakdown of the Corporation's investments, at fair value, to the net asset value as of December 31, 2008 and 2007:

                          % of Net Asset Value at       % of Net Asset Value at
     Geographic Region       December 31, 2008             December 31, 2007

     USA - East                                 95 %                          94 %
     USA - South                                 5 %                           6 %

                                               100 %                         100 %

As of December 31, 2008 and 2007, the Corporation's investment portfolio consisted of the following investments:

                                                      Percentage of                           Percentage of
                                       Cost          Total Portfolio        Fair Value       Total Portfolio

December 31, 2008:
Subordinated Debt and Promissory
Notes                              $  3,240,266                    23 %    $  2,111,013                     8 %
Convertible Debt                        356,667                     2 %         356,667                     1 %
Equity and Partnership Interests     10,721,519                    75 %      25,525,261                    91 %
Equity Warrants                          68,000                     -           133,341                     -

Total                              $ 14,386,452                   100 %    $ 28,126,282                   100 %

December 31, 2007:
Subordinated Debt and Promissory
Notes                              $  3,992,927                    30 %    $  3,071,009                    11 %
Convertible Debt                         50,000                     -            50,000                     -
Equity and Partnership Interests      9,279,717                    69 %      23,274,140                    88 %
Equity Warrants                          68,000                     1 %         133,341                     1 %

Total                              $ 13,390,644                   100 %    $ 26,528,490                   100 %

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 held at high grade financial institutions.

Comparison of the years ended December 31, 2008 and 2007

                                         December 31,        December 31,
                                             2008                2007           (Decrease)       % (Decrease)

Interest from portfolio companies       $      608,180      $      618,430      $   (10,250 )             (1.7 )%
Interest from other investments                 90,660             173,664          (83,004 )            (47.8 )%
. . .