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 nine 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.

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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 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.

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:

                                                               Increase       % Increase
                              9/30/09          12/31/08       (Decrease)      (Decrease)
       Total assets        $ 34,960,088     $ 32,228,797     $ 2,731,291           8.5 %
       Total liabilities     11,642,743       12,001,831        (359,088 )        (3.0 %)

       Net assets          $ 23,317,345     $ 20,226,966     $ 3,090,379          15.3 %

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.

                                    9/30/09          12/31/08       Increase      % Increase
  Investments, at cost           $ 15,020,461     $ 14,386,451     $ 634,010           4.4 %
  Unrealized appreciation, net     14,051,907       13,739,831       312,076           2.3 %

  Investments at fair value      $ 29,072,368     $ 28,126,282     $ 946,086           3.4 %

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

                                                                              Amount
New Investments:
Microcision LLC (Microcision)                                               $   500,000
GridApp Systems, Inc. (GridApp)                                                 300,000
Niagara Dispensing Technologies, Inc. (Niagara Dispensing)                      298,554
Innov-X Systems, Inc. (Innovex)                                                 250,000
Associates Interactive, LLC (Associates Interactive)                             43,518
Golden Goal, LLC (Golden Goal)                                                   38,238

Total of new investments made during the nine months ended
September 30, 2009                                                          $ 1,430,310

Changes to Investments:
GridApp capitalized interest                                                $    31,850
APF Group, Inc (APF) interest conversion                                         24,212
Niagara Dispensing capitalized interest                                           1,445

Total of changes to investments made during the nine months ended
September 30, 2009                                                          $    57,507

Sales/Investment Repayments:
Rocket Broadband                                                              ($715,000 )
Photonic Products Group, Inc. (Photonics)                                       (88,750 )
Gemcor II, LLC (Gemcor)                                                        (50, 057 )

Total of sales and investment repayments during the nine months ended
September 30, 2009                                                            ($853,807 )


Total change in investment balance, at cost, during the nine months
ended September 30, 2009                                                    $   634,010

Net asset value (NAV) was $3.42/share at September 30, 2009 versus $3.54/share at December 31, 2008.

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The Corporation's total investments at fair value, whose fair value have been determined in good faith by management, and submitted to the Board of Directors for approval, approximated 125% and 139% of net assets at September 30, 2009 and December 31, 2008, respectively.
Cash and cash equivalents approximated 19% of net assets at September 30, 2009 compared to 14% at December 31, 2008. 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 nine months ended September 30, 2009 to the nine months ended

September 30, 2008

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

Interest from portfolio companies               $     411,435          $     489,963          $   (78,528 )            (16.0 )%
Interest from other investments                        14,927                 73,004              (58,077 )            (79.6 %)
Dividend and other investment income                  551,091                707,458             (156,367 )            (22.1 %)
Other income                                           20,416                 14,251                6,165               43.3 %

Total investment income                         $     997,869          $   1,284,676            ($286,807 )            (22.3 %)

Interest from portfolio companies - The portfolio interest income decrease for the nine months ending September 30, 2009 is a result of several factors. Two portfolio companies (Contract Staffing, Inc. and New Monarch Machine Tool, Inc.) repaid their debenture 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 nine months ended September 30, 2008. The Innovex escrow balance 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

       APF                                 8 %     $ 631,547                2009
       Associates Interactive       9% and 10%     $ 293,518                2009
       Golden Goal                        13 %     $ 675,652                2009
       G-Tec Natural Gas Systems           8 %     $ 400,000                2004
       UStec, Inc.                         5 %       100,000                2006
       WineIsIt.com (Wineisit)            10 %       801,918                2005

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Interest from other investments - The decrease in interest from other investments is primarily due to lower cash balances throughout the period and a decrease in interest rates. The cash balance at September 30, 2009 and 2008 was $4,320,826 and $3,585,620, respectively. The higher cash balance at September 30, 2009 is due to the sale of the Corporation's common shares during August and September of 2009.
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 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, 2009 consisted of distributions from Gemcor for $526,526 and from Somerset Gas Transmission Company, LLC (Somerset) for $24,565. 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.
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 financing fees are regulated by the SBA and limited to 1% to 3% of the financing amount. 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 $5,417 and $6,250 for the nine months ended September 30, 2009 and 2008, respectively. The annualized financing fee income based on the existing portfolio will be approximately $1,300 for the remainder of 2009 and $2,600 in 2010.
The income associated with board attendance fees was $15,000 and $8,000 for the nine months ended September 30, 2009 and 2008, respectively. Operating Expenses
Comparison of the nine months ended September 30, 2009 to the nine months ended

September 30, 2008

                     September 30, 2009     September 30, 2008     Increase      % Increase

   Total Expenses    $       1,488,832      $       1,192,599     $ 296,233           24.8 %

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, 2009 can be attributed to a 67%, or $213,887 increase in salary expense due to the accrual of $200,000 in profit sharing obligations. The increase in expenses is also due to the 22% or $19,800 increase in stockholder expenses, and the 34% or $47,754 increase in professional fees. Stockholder expense increased due to the 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.

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In addition, the Corporation established an allowance for uncollectible interest during the nine month ending September 30, 2009 of $39,867. It consisted of: APF Group, Inc expense for $48,276, Associates Interactive expense for $36,245, Golden Goal LLC expense for $2,568 and a bad debt recovery of $47,222 for USTec, Inc. There was no bad debt expense for the nine months ended September 30, 2008.
Net Realized Gains and Losses on Investments During the nine months ended September 30, 2009, the Corporation recognized a net realized loss of ($736,301) comprised of a realized loss of ($705,030) on Rocket Broadband Networks Inc. (Rocket Broadband) and a 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 nine months ended September 30, 2008.
Net Change in Unrealized Appreciation of Investments The Corporation recorded a net increase in unrealized appreciation on investments before income taxes of $312,076 during the nine months ended September 30, 2009, and a decrease of ($992,700) for the nine months ended September 30, 2008.
The increase in unrealized appreciation of $312,076 for the nine months ended September 30, 2009 is comprised of the following items:

                                                                             September 30,
                                                                                 2009
Kionix, Inc. (Kionix)                                                       $     3,637,000
Reclass Rocket Broadband to a realized loss                                         715,000
Photonic Products Group, Inc (Photonic)                                              21,550
Innovex                                                                          (2,711,700 )
Golden Goal                                                                        (400,000 )
APF Group, Inc. (APF)                                                              (324,213 )
Associates Interactive                                                             (293,518 )
Niagara Dispensing                                                                 (168,702 )
G-TEC Natural Gas Systems (G-Tec)                                                   (98,000 )
Adampluseve, Inc. (Adampluseve)                                                     (65,341 )

Total change in net unrealized appreciation during the nine months
ended September 30, 2009                                                    $       312,076

The Corporation revalued its shares in Kionix during the third quarter as the portfolio company announced that a definitive letter of agreement has been executed for the sale of the company to Japanese chipmaker Rohm Co Ltd. The sale was approved by the Kionix' Board of Directors on October 9th and is expected to close in the fourth quarter.
During the third quarter 2009, the Corporation reduced the valuation of its common equity holdings in Innovex by ($2,711,700) due to changes in the mergers and acquisition market for similar companies. Innovex successfully completed a $4.5 million subordinated debt financing with warrants led by a Massachusetts based institutional mezzanine investor during the second quarter 2009, and the Corporation participated in the financing round with a $250,000 investment. This funding will allow Innovex to continue to aggressively introduce new products, even in the current economic climate, including a major upgrade to their handheld XRF product.

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The Corporation sold 35,500 shares of Photonic stock during the second quarter of 2009.
The Golden Goal investment was written down to zero due to the weakening financial condition of the portfolio company and the Corporation's management belief that the long term sustainability of the business is questionable.
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 and G-Tec investments were revalued during the nine months ended September 30, 2009 after the Corporation's management determined 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 nine months ending September 30, 2009 based on a financial analysis of the most recent investment offering closed in the third quarter of 2009.
The decrease of ($992,700) in unrealized appreciation on investments for the nine months ended September 30, 2008 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 )

In 2008 Rocket Broadband was seeking additional financing to support and maintain its business operations as it was experiencing a shortage of cash due in part to a longer than expected sales cycle. These factors resulted in a deterioration of Rocket Broadband's financial position and, based on a review of the financial restructuring necessary to maintain the portfolio company's operations, the Corporation recognized unrealized depreciation on its investment in Rocket Broadband and valued its investment at zero.
The Corporation converted its debt instruments in Niagara Dispensing to equity during the second quarter of 2008, and revalued its investment 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.
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.

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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, 2009, the net decrease in net assets from operations was ($645,263) as compared to a net decrease in net assets from operations of ($446,430) for the same nine month period in 2008. The decrease for the nine months ending September 30, 2009 can be attributed to the net investment loss of ($116,564), the realized loss of ($736,301) and the unrealized gain of $207,602. The net investment loss is comprised of a ($490,963) loss from operations and a net income tax benefit of $374,399. The decrease for the nine months ended September 30, 2008 can be attributed to a decrease of ($547,076) in unrealized appreciation, net of tax, which is offset by a $100,646 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 September 30, 2009 the Corporation's total liquidity, consisting of cash and cash equivalents, was $4,320,826.
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 received approval of its application on October 26, 2009 and subsequently paid the $19,000 in commitment fee to the SBA.
The Corporation completed a private placement sale of 1,100,000 of its common shares during the third quarter. 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 the Corporation received net cash proceeds of $3,735,642 from the sale.
Management expects that the cash and cash equivalents at September 30, 2009, coupled with the anticipated interest and dividend payments on its portfolio investments will be sufficient to meet the Corporation's cash needs throughout the next year. 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 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 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 . . .