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. Corporate Structure
The following discussion will describe the financial position and operations of Rand Capital Corporation (Rand), its wholly-owned subsidiary Rand SBIC, Inc. (Rand SBIC), and the predecessor wholly-owned limited partnership (collectively, the "Corporation").
Rand is incorporated in New York and has elected to operate as a business development company ("BDC") under the 1940 Act. Its wholly-owned subsidiary, Rand SBIC, operates as a small business investment company ("SBIC") regulated 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.
Business Developments
The financial markets have experienced extreme volatility since late 2007 due to uncertainty and disruption in large segments of the credit markets. Throughout 2008 and the first six months of 2009, the financial markets remained unstable causing significant distress on the functioning of the markets and unprecedented strain on the availability of liquidity in the short-term debt market. This lack of liquidity may continue to have far-reaching negative consequences across many industries.
These and other economic factors may impact the operations and future financial performance of the Corporation in the following ways:

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• The ability of the Corporation's portfolio companies to obtain necessary credit financing for their operations may be impaired.

• The Corporation's portfolio companies may experience greater difficulty in obtaining equity financing to continue to fund their operations.

• The slowdown in capital goods spending may impact the goods and services that the portfolio companies sell.

• The Corporation may find it more difficult to exit its investments 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 approving Rand SBIC's $1.9 million in undrawn leverage may be adversely affected by the status of the financial markets.

While the effect of these market uncertainties on the Corporation's portfolio cannot be determined, many of the Corporation's portfolio companies have developed 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 Corporation's December 31, 2008 Form 10-K under Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations".

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Financial Condition
Overview:

                             6/30/09          12/31/08         Decrease       % Decrease
      Total assets        $ 30,896,841     $ 32,228,797     $ (1,331,956 )        (4.1 %)
      Total liabilities     11,348,532       12,001,831         (653,299 )        (5.4 %)

      Net assets          $ 19,548,309     $ 20,226,966     $   (678,657 )        (3.4 %)

The Corporation's financial condition is dependent on the success of its portfolio holdings. The following summarizes the Corporation's investment portfolio at the period-ends indicated.

                                                                                       %
                                                                     Increase       Increase
                                    6/30/09          12/31/08       (Decrease)     (Decrease)
  Investments, at cost           $ 14,688,768     $ 14,386,451     $  302,317           2.1 %
  Unrealized appreciation, net     12,859,507       13,739,831       (880,324 )        (6.4 %)

  Investments at fair value      $ 27,548,275     $ 28,126,282     $ (578,007 )        (2.1 %)

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

                                                                              Amount
New Investments:
Innov-X Systems, Inc. (Innovex)                                             $  250,000
Niagara Dispensing Technologies, Inc. (Niagara Dispensing)                      50,000
Associates Interactive, LLC (Associates Interactive)                            43,518
Golden Goal, LLC (Golden Goal)                                                  38,238

Total of new investments made during the six months ended June 30,
2009                                                                        $  381,756

Changes to Investments:
APF Group, Inc (APF) interest conversion                                    $   24,212
GridApp Systems, Inc. (GridApp)                                                 18,137

Total of changes to investments made during the six months ended
June 30, 2009                                                               $   42,349

Sales/Investment Repayments:
Photonic Products Group, Inc. (Photonics)                                   $  (88,750 )
Gemcor II, LLC (Gemcor)                                                        (33,038 )

Total of sales and investment repayments during the six months ended
June 30, 2009                                                               $ (121,788 )


Total change in investment balance, at cost, during the six months
ended June 30, 2009                                                         $  302,317

Net asset value (NAV) per share was $3.42/share at June 30, 2009 versus $3.54/share at December 31, 2008.
The Corporation's total investments at fair value, whose fair value have been estimated by the Board of Directors, approximated 141% and 139% of net assets at June 30, 2009 and December 31, 2008, respectively.
Cash and cash equivalents approximated 10% of net assets at June 30, 2009 compared to 14% at December 31, 2008.

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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 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 cannot be predicted with any certainty. 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 held at high grade financial institutions.
Comparison of the six months ended June 30, 2009 to the six months ended

June 30, 2008

                                                                                                Increase          % Increase
                                                 June 30, 2009          June 30, 2008          (Decrease)         (Decrease)

Interest from portfolio companies               $     287,523          $     361,781          $  (74,258 )            (20.5 )%
Interest from other investments                        12,294                 53,104             (40,810 )            (76.8 %)
Dividend and other investment income                  384,271                434,581             (50,310 )            (11.6 %)
Other income                                           15,166                 11,167               3,999               35.8 %

Total investment income                         $     699,254          $     860,633          $ (161,379 )            (18.8 %)

Interest from portfolio companies - The portfolio interest income decrease is a result of several factors. Two portfolio companies (Contract Staffing, Inc. and New Monarch Machine Tool, Inc.) repaid their debt instruments during 2008 and one portfolio company (Niagara Dispensing) converted its debenture instrument into equity during 2008. In addition, non- recurring interest of $43,067 was recognized on the outstanding Innovex escrow balance during the six months ended June 30, 2008. The Innovex escrow of $711,249 and the earned interest of $43,067 were received in the second quarter of 2008.
After reviewing the portfolio companies' performance and the circumstances surrounding the investments, the Corporation has ceased accruing interest income on the following investment instruments:

                                                                              Year that
                                             Interest       Investment        Interest
                Company                        Rate            Cost        Accrual Ceased

Associates Interactive, LLC (Associates)     9% and 10 %    $ 293,518                2009
G-Tec Natural Gas Systems                            8 %    $ 400,000                2004
Rocket Broadband Networks, Inc.                  11.25 %       35,000                2008
UStec, Inc.                                          5 %      100,000                2006
WineIsIt.com (Wineisit)                             10 %      801,918                2005

Interest from other investments - The decrease in interest from other investments is primarily due to lower cash balances and a decrease in interest rates. The cash balance at June 30, 2009 and 2008 was $1,875,944 and $3,725,850, respectively.
Dividend and other investment income - Dividend income is comprised of distributions from Limited Liability Companies (LLCs) in which the Corporation has invested. The Corporation's investment agreements with certain LLCs require the entities to distribute funds to the Corporation for payment of

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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, 2009 consisted of distributions from Gemcor for $366,526 and from Somerset Gas Transmission Company, LLC (Somerset) for $17,745. Dividend income for the six months ended June 30, 2008 consisted of distributions from Gemcor for $420,954 and Carolina Skiff LLC (Carolina Skiff) for $13,627.
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 $4,167 for both the six months ended June 30, 2009 and 2008. The annualized financing fee income based on the existing portfolio will be approximately $2,600 for the remainder of 2009 and $2,600 in 2010.
The income associated with board attendance fees was $11,000 and $7,000 for the six months ended June 30, 2009 and 2008, respectively. Operating Expenses
Comparison of the six months ended June 30, 2009 to the six months ended

June 30, 2008

                          June 30, 2009      June 30, 2008      Increase     % Increase
        Total Expenses    $     856,254      $     833,356     $ 22,898           2.7 %

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 minor increase in operating expenses during the six months ended June 30, 2009 can be attributed to the 39% or $24,188 increase in stockholder expenses and the 16% or $19,382 increase in professional fees. Stockholder expense increased due to the additional expenses associated with preparing for the private placement of additional shares of the Corporation's common stock. Professional fees consist of legal, accounting and tax expenses. In order to comply with the SEC rules regarding the Corporation's operating structure, the Corporation has incurred additional legal fees in the current fiscal year associated with the corporate reorganization of the SBIC subsidiary. These increases were offset by a recovery of $10,977 a previously written off UStec Inc. (UStec) escrow receivable and a 31% decrease or $10,790 in corporate development expenses.
Net Realized Gains and Losses on Investments During the six months ended June 30, 2009, the Corporation recognized a net realized loss of ($31,271) on the sale of 35,500 shares of Photonic stock. Photonic is a publicly traded stock (NASDAQ symbol: PHPG.OB). The average sales price of Photonic was $1.66/share and the cost basis of the stock was $2.50/share.
There were no realized gains or losses during the six months ended June 30, 2008.

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Net Change in Unrealized Appreciation of Investments The Corporation recorded a net decrease in unrealized appreciation on investments before income taxes of ($880,324) during the six months ended June 30, 2009, and a decrease of ($194,700) for the six months ended June 30, 2008.
The decrease in unrealized appreciation of ($880,324) for the six months ended June 30, 2009 is comprised of the following items:

                                                                             June 30, 2009
Photonic                                                                    $        19,450
Associates Interactive                                                             (293,518 )
APF Group, Inc. (APF)                                                              (174,213 )
Niagara Dispensing                                                                 (168,702 )
Golden Goal LLC (Golden Goal)                                                      (100,000 )
G-TEC Natural Gas Systems (G-Tec)                                                   (98,000 )
Adampluseve, Inc. (Adampluseve)                                                     (65,341 )

Total change in net unrealized appreciation during the six months
ended June 30, 2009                                                         $      (880,324 )

The Corporation sold 35,500 shares of Photonic stock during the second quarter of 2009.
The Associates Interactive investment was written down to zero based on the deteriorating financial condition of the business caused by the overall downturn in the consumer electronics industry and retailers' hesitancy to invest in this market segment. The portfolio company had little cash flow and has failed to acquire any substantial customers.
The Adampluseve, APF, Golden Goal and G-Tec investments were revalued during the six months ended June 30, 2009 after a review by the Corporation's management which identified that the business of each of these portfolio companies had deteriorated since the time of the original funding. The portfolio companies remain in operation and are developing new business strategies.
The Corporation's investment in Niagara Dispensing was written down by $168,702 during the second quarter of June 30, 2009 based on a financial analysis of the current investment offering expected to close in the third quarter of 2009.
The decrease of ($194,700) in unrealized appreciation on investments for the six months ended June 30, 2008 is due to the following valuation changes made by the Corporation:

                                                                             June 30, 2008
Niagara Dispensing                                                          $      (111,000 )
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 and 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.

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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 resulted from a review by management using the guidance set forth by SFAS 157 and 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 six months ended June 30, 2009, the net decrease in net assets from operations was ($678,657) as compared to a net decrease in net assets from operations of ($109,047) for the same six month period in 2008. The decrease for the six months ending June 30, 2009 can be attributed to the net investment loss of ($89,879), the realized loss of ($31,271) and the unrealized loss of ($880,324). The net investment loss is comprised of a ($157,000) loss from operations and a net income tax benefit of $67,121. The decrease for the six months ended June 30, 2008 can be attributed to a decrease of ($125,366) in unrealized appreciation, net of tax, which is offset by a $16,319 net investment gain from operations.
Liquidity and Capital Resources
The Corporation's principal objective is to achieve capital appreciation. Therefore, a significant portion of the investment portfolio is structured to maximize the potential for capital appreciation and certain of the Corporation's portfolio investments may be structured to provide little or no current yield in the form of dividends or interest payments.
As of June 30, 2009 the Corporation's total liquidity, consisting of cash and cash equivalents, was $1,875,944.
The Corporation had paid $100,000 to the SBA to reserve its approved $10,000,000 leverage. The Corporation drew down $8,100,000 of this leverage prior to September 30, 2008, at which time the remaining leverage commitment of $1,900,000 expired. In 2009, the Corporation re-applied to the SBA for the remaining $1,900,000 in leverage and is awaiting approval.
At the annual meeting of the Corporation held on April 30, 2009 the shareholders of the Corporation approved the sale of the Corporation's common shares. The Corporation's Board of Directors established the pricing of this private offering at $3.42 per share at its July 2009 Board meeting and authorized the Corporation to sell up to 1,100,000 shares. The securities offered will not be registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration. The common stock sale is expected to close in the third quarter of 2009.
Management expects that the cash and cash equivalents at June 30, 2009, coupled with the scheduled interest and dividend payments on its portfolio investments, and the anticipated sale of its common shares will be sufficient to meet the Corporation's cash needs throughout 2009. The Corporation is also evaluating potential exits from portfolio companies in order to increase the amount of liquidity available for new investments and operating activities. The potential sale of stock or portfolio assets is subject to inherent market risks and volatility, which may affect the ability of the Corporation to complete these sales and provide cash to the Corporation over the next twelve months. Item 3. Quantitative and Qualitative Disclosures about Market Risk

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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 valuation of the equity interests in the portfolio is 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 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 Statements of Operations as "Net change in unrealized appreciation."
At times, a portion of the Corporation's portfolio may include marketable securities traded in the over-the-counter market. In addition, there may be a portion of the Corporation's portfolio for which no regular trading market exists. In order to realize the full value of a security, the market must trade in an orderly fashion or a willing purchaser must be available when a sale is to be made. Should an economic or other event occur that would not allow the markets to trade in an orderly fashion, the Corporation may not be able to realize the fair value of its marketable investments or other investments in a timely manner.
As of June 30, 2009 the Corporation did not have any off-balance sheet investments or hedging investments.
Item 4T. Controls and Procedures
Management report on Internal Control Over Financial Reporting The management of the Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. The Corporation's internal control system is a process designed to provide reasonable assurance to the Corporation's management and board of directors regarding the preparation and fair presentation of published financial statements.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Corporation; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Corporation's assets that could have a material effect on our consolidated financial statements.
All internal control systems, no matter how well designed, have inherent . . .