RAND CAPITAL CORP - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 811-01825
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RAND CAPITAL CORPORATION
(Exact Name of Registrant as specified in its Charter)

NEW YORK 16-0961359
(State or Other Jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
2200 RAND BUILDING, BUFFALO, NY 14203
(Address of Principal executive offices) (Zip Code)

(716) 853-0802
(Registrant's Telephone No. Including Area Code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.10 par value

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of the Record Date, March 11, 2003, was
approximately $4,403,128 based upon the last sale price as quoted by NASDAQ
SmallCap Market on such date. As of March 11, 2003 there were 5,726,634 shares
of the registrant's common stock outstanding.

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the act). Yes [ ] No [X]

DOCUMENTS INCORPORATED BY REFERENCE

The Corporation's definitive proxy statement for the Annual Meeting of
Stockholders to be held on April 24, 2003 is incorporated by reference into
certain sections of Part III herein.
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RAND CAPITAL CORPORATION

TABLE OF CONTENTS FOR FORM 10-K

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PART I

ITEM 1. BUSINESS

Rand Capital Corporation ("Rand") was incorporated under the law of New
York on February 24, 1969. Commencing in 1971, Rand operated as a publicly
traded, closed-end, diversified management company that was registered under
Section 8(b) of the Investment Company Act of 1940 (the "1940 Act"). On August
16, 2001, Rand filed an election to be treated as a business development company
("BDC") under the 1940 Act, which became effective on the date of filing. On
January 16, 2002, Rand formed a wholly-owned subsidiary, Rand Capital SBIC,
L.P., (Rand SBIC) for the purpose of operating it as a small business investment
company. At the same time, Rand organized another wholly owned subsidiary, Rand
Capital Management, LLC ("Rand Management"), as a Delaware limited liability
company, to act as the general partner of Rand SBIC. Rand transferred $5 million
in cash to Rand SBIC to serve as "regulatory capital" in January 2002, and on
August 16, 2002, Rand received notification that its Small Business Investment
Company (SBIC) application had been approved and licensed by the Small Business
Administration (SBA). The following discussion will include Rand, Rand SBIC and
Rand Management (collectively, the "Corporation").

Throughout its history, the Corporation's principal business has been to
make venture capital investments in early-stage and/or developing enterprises
that are principally engaged in the development or exploitation of inventions,
technological improvements, and new or unique products and services. The
Corporation's principal objective is long-term capital appreciation. The
Corporation typically invests in debt securities of these companies and
concurrently acquires an equity interest in the form of stock, warrants or
options to acquire stock or the right to convert the debt securities into stock.
Consistent with its status as a BDC and the purposes of the regulatory framework
for BDC's under the 1940 Act, it provides managerial assistance, often in the
form of a board of director's seat, to the developing companies in which it
invests.

The Corporation operates as an internally managed investment company
whereby its officers and employees conduct its operations under the general
supervision of its Board of Directors. It has not elected to qualify to be taxed
as a regulated investment company as defined under Subchapter M of the Internal
Revenue Code.

REGULATION AS A BDC

Although the 1940 Act exempts a BDC from registration under that Act, it
contains significant limitations on the operations of BDC's. Among other things,
the 1940 Act contains prohibitions and restrictions relating to transactions
between a BDC and its affiliates, principal underwriters and affiliates of its
affiliates or underwriters, and it requires that a majority of the BDC's
directors be persons other than "interested persons," as defined under the 1940
Act. The 1940 Act also prohibits a BDC from changing the nature of its business
so as to cease to be, or to withdraw its election as, a BDC unless so authorized
by the vote of the holders of a majority of its outstanding voting securities.
BDC's are not required to maintain fundamental investment policies relating to
diversification and concentration of investments within a single industry.

Generally, a BDC must be primarily engaged in the business of furnishing
capital and providing managerial expertise to companies that do not have ready
access to capital through conventional financial channels. Such portfolio
companies are termed "eligible portfolio companies." More specifically, in order
to qualify as a BDC, a company must (1) be a domestic company; (2) have
registered a class of its equity securities or have filed a registration
statement with the Commission pursuant to Section 12 of the Securities Exchange
Act of 1934; (3) operate for the purpose of investing in the securities of
certain types of portfolio companies, namely immature or emerging companies and
businesses suffering or just recovering from financial distress; (4) extend
significant managerial assistance to such portfolio companies; and (5) have a
majority of "disinterested" directors (as defined in the 1940 Act).

An eligible portfolio company is, generally, a U.S. company that is not an
investment company and that (1) does not have a class of securities registered
on an exchange or included in the Federal Reserve Board's over-the-counter
margin list; or (2) is actively controlled by a BDC and has an affiliate of a
BDC on its board of directors; or (3) meets such other criteria as may be
established by the Securities and Exchange Commission.

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Control under the 1940 Act is generally presumed to exist where a BDC owns 25%
of the outstanding voting securities of the company.

The 1940 Act prohibits or restricts companies subject to the 1940 Act from
investing in certain types of companies, such as brokerage firms, insurance
companies, investment banking firms and investment companies. Moreover, the 1940
Act limits the type of assets that BDC's may acquire to "qualifying assets" and
certain assets necessary for its operations (such as office furniture, equipment
and facilities) if, at the time of acquisition, less than 70% of the value of
the BDC's assets consist of qualifying assets. Qualifying assets include: (1)
securities of companies that were eligible portfolio companies at the time the
BDC acquired their securities; (2) securities of bankrupt or insolvent companies
that were eligible at the time of the BDC's initial acquisition of their
securities but are no longer eligible, provided that the BDC has maintained a
substantial portion of its initial investment in those companies; (3) securities
received in exchange for or distributed in or with respect to any of the
foregoing; and (4) cash items, government securities and high-quality short-term
debt. The 1940 Act also places restrictions on the nature of the transactions in
which, and the persons from whom, securities can be purchased in order for the
securities to be considered qualifying assets. These restrictions include
limiting purchases to transactions not involving a public offering and acquiring
securities from either the portfolio company or its officers, directors, or
affiliates.

A BDC is permitted to invest in the securities of public companies and
other investments that are not qualifying assets, but those kinds of investments
may not exceed 30% of the BDC's total asset value at the time of the investment.

A BDC must make significant managerial assistance available to the issuers
of eligible portfolio securities in which it invests. Making available
significant managerial assistance means, among other things, any arrangement
whereby the BDC, through its directors, officers or employees, offers to
provide, and, if accepted does provide, significant guidance and counsel
concerning the management, operations or business objectives and policies of a
portfolio company.

SBIC SUBSIDIARY

On January 16, 2002, Rand formed two wholly-owned subsidiaries, Rand SBIC
and Rand Management. On August 16, 2002, Rand received notification that its
Small Business Investment Company (SBIC) application had been approved and
licensed by the Small Business Administration (SBA). The approval will allow
Rand SBIC to obtain loans up to two times its initial $5 million of "regulatory
capital" from the SBA for purposes of making new investment's in portfolio
companies. As of December 31, 2002 Rand SBIC, did not make a leverage commitment
or draw leverage from the SBA.

Rand formed Rand SBIC as a subsidiary for the purpose of causing it to be
licensed as a small business investment company ("SBIC") under the Small
Business Investment Act of 1958 (the "SBA Act") by the Small Business
Administration (the "SBA"), in order to have access to various forms of leverage
provided by the SBA to SBIC's. On May 28, 2002, the Corporation filed an
Exemption Application with the SEC seeking an order under Sections 6(c),
12(d)(1)(J), 57(c), and 57(i) of, and Rule 17d-1 under, the 1940 Act for
exemptions from the application of Sections 2(a)(3), 2(a)(19), 12(d)(1), 18(a),
21(b), 57(a)(1), (2), (3), and (4), and 61(a) of the 1940 Act to certain aspects
of its operations. The application also seeks an order under Section 12(h) of
the Securities Exchange Act of 1934 Act (the "Exchange Act") for an exemption
from separate reporting requirements under Section 13(a) of the Exchange Act. In
general, the Corporation applications seek orders that would permit:

- a BDC (Rand) to operate a BDC/small business investment company (Rand
SBIC) as its wholly owned subsidiary in limited partnership form;

- Rand, Rand Management and Rand SBIC to engage in certain transactions
that the Corporation would otherwise be permitted to engage in as a BDC
if its component parts were organized as a single corporation;

- Rand, as a BDC, and Rand SBIC, as its BDC/SBIC subsidiary, to meet asset
coverage requirements for senior securities on a consolidated basis;

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- Rand SBIC, as a BDC/SBIC subsidiary of Rand as a BDC, to file Exchange
Act reports on a consolidated basis as part of Rand's reports.

The Corporation has not identified from among the similar exemption applications
on file with the SEC an example of a specific grouping of all of the exemptions
requested by the Corporation in its application, but the SEC has commonly
granted applications to other companies for orders applicable to each of the
exemptions requested and for orders applicable to various combinations of those
exemptions, and the Corporation's applications do not appear to raise any
specific policy issues that have not also been raised by applications for which
exemptions have been granted.

Rand operates Rand SBIC through Rand Management for the same investment
purposes, and with investments in similar kinds of securities, as Rand. Rand
SBIC's operations are consolidated with those of Rand for both financial
reporting and tax purposes.

REGULATION OF SBIC SUBSIDIARY

LENDING RESTRICTIONS. The SBA licenses SBIC's as part of a program
designed to stimulate the flow of private debt and/or equity capital to
"Eligible Concerns" and "Smaller Concerns." SBIC's use funds borrowed from the
SBA, together with their own capital, to provide loans to, and make equity
investments in, concerns that (a) do not have a net worth in excess of $18
million and do not have average net income after U.S. federal income taxes for
the two years preceding any date of determination of more than $6 million, or
(b) meet size standards set by the SBA that are measured by either annual
receipts or number of employees, depending on the industry in which the concerns
are primarily engaged. The types and dollar amounts of the loans and other
investments an SBIC may make are limited by the 1940 Act, the SBA Act and SBA
regulations. The SBA is authorized to examine the operations of SBIC's, and an
SBIC's ability to obtain funds from the SBA is also governed by SBA regulations.

In addition, at the end of each fiscal year, an SBIC must have at least 20%
(in total dollars) invested in "Smaller Enterprises". The SBA defines "Smaller
Enterprises" as concerns that (a) do not have a net worth in excess of $6
million and do not have average net income after U.S. federal income taxes for
the preceding two years no greater than $2 million, or (b) meet size standards
set by the SBA that are measured by either annual receipts or number of
employees, depending on the industry in which the concerns are primarily
engaged.

SBA regulations also set certain limitations on the terms of loans by
SBIC's. The maximum maturity of these loans may not exceed 20 years. A borrower
from an SBIC cannot be required during the first five years to repay, on a
cumulative basis, more principal than an amount calculated on a straight line,
five year amortization schedule. SBIC regulations also limit the rate of
interest that an SBIC can charge on the loans it makes, the amount of the limit
depending upon whether or not equity components are included with the loan.

SBIC's may invest directly in the equity of their portfolio companies, but
they may not become a general partner of a non-incorporated entity or otherwise
become jointly or severally liable for the general obligations of a
non-incorporated entity. An SBIC may acquire options or warrants in its
portfolio companies, and the options or warrants may have redemption provisions,
subject to certain restrictions. In general, an SBIC may not "control" a
portfolio company. For SBA Act purposes, control is defined as the ownership (or
control) of a 50% or greater interest in the outstanding voting securities of a
portfolio company if it is held by fewer than 50 shareholders, or if there are
50 or more shareholders, a 20% to 25% interest (depending on the holdings of the
other shareholders in the portfolio company).

SBA LEVERAGE. The SBA raises capital to enable it to provide funds to
SBIC's by guaranteeing certificates or bonds that are pooled and sold to
purchasers of the government guaranteed securities. The amount of funds that the
SBA may lend is determined by annual Congressional appropriations of amounts
necessary to cover anticipated losses in the program. Congress authorizes
appropriations to the extent it determines to fund SBIC borrowings from the SBA.

In order to obtain SBA leverage, an SBIC must demonstrate its need to the
SBA. To demonstrate need, an SBIC must invest 50% of its Leverageable Capital
(defined as Regulatory Capital less unfunded commitments and federal funds) and
any outstanding SBA Leverage. Other requirements include compliance with SBA

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regulations, adequacy of capital, and meeting liquidity standards. An SBIC's
license entitles an SBIC to apply for SBA leverage, but does not assure that it
will be available, or if available, that it will be available at the level of
the relevant matching ratio. Availability depends on the SBIC's continued
regulatory compliance and sufficient SBA funds being available when the SBIC
applies to draw down SBA leverage.

SBA debentures are issued with 10-year maturities. Interest only is payable
semi-annually until maturity. Ten-year SBA debentures may be prepaid with a
penalty during the first 5 years, and then are pre-payable without penalty. Rand
initially capitalized Rand SBIC with $5 million in Regulatory Capital. Rand SBIC
was approved to obtain SBA leverage at a 2:1 matching ratio, resulting in a
total capital pool eligible for investment of $15 million. The Corporation
expects to use Rand SBIC as its primary investment vehicle.

EMPLOYEES

As of December 31, 2002, the Corporation had four employees including three
full time employees.

RISK FACTORS AND OTHER CONSIDERATIONS

INVESTING IN THE CORPORATION'S STOCK IS HIGHLY SPECULATIVE AND AN INVESTOR
COULD LOSE SOME OR ALL OF THE AMOUNT INVESTED

The value of the Corporation's common stock may decline and may be affected
by numerous market conditions, which could result in the loss of some or the
entire amount invested in its shares. The securities markets frequently
experience extreme price and volume fluctuations which affect market prices for
securities of companies generally, and technology and very small capitalization
companies in particular. General economic conditions, and general conditions in
the Internet and information technology, life sciences, material sciences and
other high technology industries, will also affect the stock price.

INVESTING IN THE CORPORATION'S SHARES MAY BE INAPPROPRIATE FOR THE INVESTOR'S
RISK TOLERANCE

The Corporation's investments, in accordance with its investment objective
and principal strategies, result in a far above average amount of risk and
volatility and may well result in loss of principal. Its investments in
portfolio companies are highly speculative and aggressive and, therefore, an
investment in its shares may not be suitable for investors for whom such risk is
inappropriate.

COMPETITION

The Corporation faces competition in its investing activities from many
entities including other SBIC's, private venture capital funds, investment
affiliates of large companies, wealthy individuals and other domestic or foreign
investors. The competition is not limited to entities that operate in the same
geographical area as the Corporation. As a regulated BDC, the Corporation is
required to disclose quarterly and annually the name and business description of
portfolio companies and the value of its portfolio securities. Most of its
competitors are not subject to this disclosure requirement. The Corporation's
obligation to disclose this information could hinder its ability to invest in
certain portfolio companies. Additionally, other regulations, current and
future, may make the Corporation less attractive as a potential investor to a
given portfolio company than a private venture capital fund.

RAND IS SUBJECT TO RISKS CREATED BY ITS REGULATED ENVIRONMENT

Rand and Rand SBIC are subject to regulation as BDC's, and Rand SBIC is
subject to regulation as an SBIC. The loans and other investments that Rand and
Rand SBIC make, in small business concerns are extremely speculative.
Substantially all of these concerns are and will be privately held. Even if a
public market for their securities later develops, the debt obligations and
other securities purchased by Rand and Rand SBIC are likely to be restricted
from sale or other transfer for significant periods of time. These securities
will be very illiquid.

Rand's and Rand SBIC's leverageable capital may include large amounts of
debt securities issued through the SBA, and all of the debentures will have
fixed interest rates. Until and unless Rand SBIC is able to invest substantially
all of the proceeds from debentures at annualized interest or other rates of
return that substantially

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exceed annualized interest rates that Rand SBIC must pay the SBA, Rand's
operating results may be adversely affected which may, in turn, depress the
market price of Rand's common stock.

RAND IS DEPENDENT UPON KEY MANAGEMENT PERSONNEL FOR FUTURE SUCCESS

The Corporation is dependent for the selection, structuring, closing and
monitoring of its investments on the diligence and skill of its two senior
officers, Allen F. Grum and Daniel P. Penberthy. The future success of the
Corporation depends to a significant extent on the continued service and
coordination of its senior management team. The departure of either of its
executive officers could materially adversely affect its ability to implement
its business strategy. The Corporation does not maintain key man life insurance
on any of its officers or employees.

INVESTMENT IN SMALL, PRIVATE COMPANIES

There are significant risks inherent in the venture capital business. The
Corporation typically invests a substantial portion of its assets in early stage
or start-up companies. These private businesses tend to be thinly capitalized,
unproven small companies with risky technologies that may lack management depth
and have not attained profitability. Because of the speculative nature and the
lack of a public market for these investments, there is significantly greater
risk of loss than is the case with traditional investment securities. The
Corporation expects that some of its venture capital investments will be a
complete loss or will be unprofitable and that some will appear to be likely to
become successful but never realize their potential. The Corporation has been
risk seeking rather than risk averse in its approach to venture capital and
other investments. Neither the Corporation's investments nor an investment in
the Corporation is intended to constitute a balanced investment program. The
Corporation has in the past relied, and continues to rely to a large extent,
upon proceeds from sales of investments rather than investment income to defray
a significant portion of its operating expenses. Such sales are unpredictable
and may not occur.

ILLIQUIDITY OF PORTFOLIO INVESTMENTS

Most of the investments of the Corporation are or will be either equity
securities acquired directly from small companies or below investment grade
subordinated debt securities. The Corporation's portfolio of equity securities
is, and will usually be, subject to restrictions on resale or otherwise have no
established trading market. The illiquidity of most of the Corporation's
portfolio may adversely affect the ability of the Company to dispose of such
securities at times when it may be advantageous for the Company to liquidate
such investments.

Even if the Corporation's portfolio companies are able to develop
commercially viable products, the market for new products and services is highly
competitive and rapidly changing. Commercial success is difficult to predict and
the marketing efforts of the portfolio companies may not be successful.

VALUATION OF PORTFOLIO INVESTMENTS

There is typically no public market of equity securities of the small
privately held companies in which the Corporation invests. As a result, the
valuation of the equity securities in the Corporation's portfolio are stated at
fair value as determined by the good faith estimate of the Corporation's Board
of Directors. In the absence of a readily ascertainable market value, the
estimated value of the Corporation's portfolio of securities may differ
significantly, favorably or unfavorably, from the values that would be placed on
the portfolio if a ready market for the equity securities existed. Any changes
in estimated net asset value are recorded in the statement of operations as
"Change in unrealized appreciation on investments."

FLUCTUATIONS OF QUARTERLY RESULTS

The Corporation's quarterly operating results could fluctuate as a result
of a number of factors. These factors include, among others, variations in and
the timing of the recognition of realized and unrealized gains or losses, the
degree to which portfolio companies encounter competition in their markets and
general economic conditions. As a result of these factors, results for any one
quarter should not be relied upon as being indicative of performance in future
quarters.

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ITEM 2. PROPERTIES

Rand maintains its offices at 2200 Rand Building, Buffalo, New York 14203,
where it leases approximately 1,300 square feet of office space pursuant to a
lease agreement that expires December 31, 2005. Rand believes that its leased
facilities are adequate to support its current staff and expected future needs.

ITEM 3. LEGAL PROCEEDINGS

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Rand's common stock, par value $0.10 per share ("Common Stock"), is traded
on the NASDAQ Small Cap Market ("NASDAQ") under the symbol "RAND." The following
table sets forth, for the period indicated, the range of high and low closing
prices per share as reported by NASDAQ:

Rand did not sell any securities during the period covered by this report
that were not registered under the Securities Act. Rand has not paid any cash
dividends in its most recent two fiscal years, and it has no present intention
of paying cash dividends in the coming fiscal year.

On March 11, 2003, the Corporation had a total of 877 shareholders, which
included 142 record holders of its common stock, and an estimated 735
shareholders with shares held under beneficial ownership in nominee name or
under clearinghouse positions of brokerage firms or banks.

On October 18, 2001 the Board of Directors authorized the repurchase of up
to 5% of the Corporation's outstanding stock through purchases on the open
market through the period ending October 16, 2003. Through December 31, 2002 the
Corporation purchased 24,400 shares at a total cost of $25,704. Through March
11, 2003, the Corporation acquired an additional 12,000 shares for a cost of
$12,983. The total shares held by the Corporation at March 11, 2003 are 36,400
with a total cost of $38,688.

PROFIT SHARING AND STOCK OPTION PLANS

In July 2001, the shareholders of the Corporation authorized the
establishment of two stock option plans - the Employee Plan, and the
Non-Employee Director Plan. The Plans provide for an aggregate of 200,000 and
100,000 shares, respectively, to be awarded to eligible employees and
non-officer directors. No stock options have been awarded under either plan.

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The Corporation established a Profit Sharing Plan for its executive
officers in accordance with Section 57(n) of the Investment Company Act of 1940
(the "1940 Act"). Under the provisions of Section 61 of the 1940 Act, for so
long as the Profit Sharing Plan is in effect, no options may be issued under the
Employee Plan or Non-Employee Director Plan.

ITEM 6. SELECTED FINANCIAL DATA

The following table provides selected consolidated financial data of the
Corporation for the periods indicated. You should read the selected financial
data set forth below in conjunction with Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and with our
financial statements and related notes appearing elsewhere in this report.

BALANCE SHEET DATA AS OF DECEMBER 31:

OPERATING DATA FOR THE YEAR ENDED DECEMBER 31:

ITEM 7. 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 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

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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 and Other
considerations" contained in Part I, Item 1, which is incorporated herein by
reference.

FINANCIAL CONDITION

The following discussion will include Rand Capital Corporation ("Rand"),
Rand Capital SBIC, L.P., (Rand SBIC), and Rand Capital Management, LLC ("Rand
Management"), (collectively, the "Corporation") financial position and results
of operations.

The Corporation's total consolidated assets decreased by ($596,820) or (6%)
to $9,685,673 and its net assets decreased by ($453,650) or (5%) to $9,604,634
at December 31, 2002, versus $10,282,493 and $10,058,284 at December 31, 2001,
respectively.

The decrease in total assets and net assets is due to the annual operating
loss of ($738,046) that was offset by a realized gain of $888,399 and the net
increase in unrealized depreciation of ($578,299). The realized gain is
comprised of a $938,399 net gain from the sale of 61,051 shares of Advanced
Digital Information Corporation ("ADIC") stock and the forfeiture of 4,181
escrow shares. The cost basis of the ADIC shares was $148,331. Another component
of the realized gain is the $50,000 write off of the equity portion of the
Corporation's investment in MemberWare Technologies Inc. (MemberWare).

The Corporation's financial condition is dependent on the success of its
holdings. It has invested a substantial portion of its assets in early stage or
start-up companies. These businesses tend to be thinly capitalized, small
companies that may lack experienced management. The following summarizes the
Corporation's investment portfolio at the year-ends indicated.

The increase in investments at cost is due to the $3,300,000 of new
investments in 2002 made by the Corporation. The investment cost decreased due
to the sale of the ADIC stock with a cost basis of $148,331 and the repayment of
the debt portion of the MemberWare investment for $50,000 and the write off of
the equity portion of the MemberWare investment for $50,000.

The decrease in unrealized appreciation (depreciation) of the investments
is primarily attributable to the realized gain recognized on the sale of ADIC
stock in 2002 and the net effect of the unrealized portfolio valuation
adjustments to the following portfolio companies during the year ended December
31, 2002: Minrad $(652,058), Ultra-Scan Corporation Inc. $239,805, MemberWare
$(50,000), ADIC escrow share valuation $(63,745) and the valuation of $183,333
in membership interests in Somerset Gas Transmission Company, LLC (Somerset)
received with the 2002 debenture instrument.

The Corporation's total investments at fair value, whose fair value have
been estimated by the Board of Directors, approximated 63% of net assets at
December 31, 2002 and 40% of net assets at December 31, 2001. This increase in
this percentage is due to the increase in new investments during 2002. Its cash
and cash equivalents approximated 32% of net assets at December 31, 2002
compared to 59% at December 31, 2001. The decrease in cash as it relates to net
assets from December 31, 2002 to December 31, 2001 can be attributed to the
$3,300,000 in new investments during the year. The parent Rand Capital invested
$1,100,000 in new portfolio concerns during 2002. Rand SBIC invested $2,200,000
in new portfolio concerns.

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The effect of the portfolio valuation changes, net operating losses for the
period, and the realized gain from the sale of ADIC securities, resulted in a
net change in net deferred tax liability from $(150,000) at December 31, 2001 to
a net deferred tax asset of $112,000 at December 31, 2002.

RESULTS OF OPERATIONS

INVESTMENT INCOME AND EXPENSES

Investment income for the years ended December 31, 2002, 2001, and 2000 was
$261,230 $159,479, and $239,769, respectively. This income is comprised mainly
of interest income from portfolio companies and income on cash and cash
equivalents.

The Corporation's primary investment objective is to achieve long-term
capital appreciation on its portfolio investments. Therefore, the Corporation
will invest in a mixture of debenture and equity investing and will earn a
current interest return on a portion of the portfolio. The equity features
contained in our investment portfolio are structured to realize capital
appreciation over the long-term and not necessarily 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 Corporation had portfolio interest income of $145,771, $118,192, and
$169,590 for the years ended December 31, 2002, 2001, and 2000, respectively,
which comprised 56%, 74% and 71% of the total investment income for those years.
This income includes investments that have interest accruals and often do not
pay a current yield. Interest from other investments was $99,085 (38%), $29,194
(18%), and $69,585 (29%) for the years ended December 31, 2002, 2001, and 2000,
respectively. A majority of the new investments occurred in the fourth quarter
of 2002, thus the cash balances and the related earned interest income were high
during the year ended December 31, 2002.

Operating expenses were $858,305 in 2002, $825,765 in 2001, and $633,403 in
2000. The operating expenses predominately consist of employee compensation and
benefits, shareholder related costs, office expenses, expenses related to
identifying and reviewing investment opportunities and professional fees. The
Corporation incurred expenses of $135,251 in 2002 and $81,523 in 2001 that
related primarily to professional costs incurred for preparing an application
for the Small Business Administration (SBA) for participation in the SBIC
program in both 2002 and 2001 and for restructuring the Corporation to a BDC in
2001.

Net investment losses from operations were $(738,046) in 2002, $(1,551,001)
in 2001, and $(109,864) in 2000. The fluctuations from year to year are partly
due to the impact of deferred income taxes. The deferred income tax expense
(benefit) was $162,841 in 2002, $837,148 in 2001, and $(297,288) in 2000.
Deferred income tax expense (benefit) relates to the net unrealized appreciation
(depreciation) of investments. Such appreciation (depreciation) is not included
in taxable income until realized.

NET REALIZED GAINS AND LOSSES ON INVESTMENTS:

In 2002, Rand sold 61,051 shares and forfeited 4,181 shares of ADIC stock
with gross proceeds of approximately $1.1 million and a net realized gain of
$938,399. The Corporation also realized a loss of $(50,000) for the equity
portion of its investment in MemberWare.

During the twelve months ended December 31, 2001, Rand realized total net
gains of $3,286,078, including the $5.3 million gain on the sale of 483,313
shares of its ADIC holdings. Also, during 2001, Rand recognized realized losses
on several of its holdings, most notably ARIA Wireless Systems, Inc. (ARIA) for
$(543,840), Reflection Technology, Inc. for $(500,000), BNKR, Inc. for
$(400,000) and TSS Transnet for $(316,401).

During 2000, Rand realized total net losses of $(296,298). These realized
net losses included losses of $(142,666) from Hammertime Kitchen & Bath Works,
Inc., $(98,115) from CMO, Inc. and $(55,517) in various publicly traded
securities.

10

NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:

The Corporation accounts for its operations under accounting principles
generally accepted in the United States of America for investment companies. The
principal measure of its financial performance is "net increase or decrease in
net assets from operations" on its statements of operations. For 2002, the net
(decrease) in net assets from operations was $(427,946) as compared to net
increases in net assets from operations of $1,640,712 for 2001 and $723,254 for
2000. The 2002 net decrease in net assets from operations is due to a net
investment loss of $(738,046), a realized gain on investments of $888,399 and a
net decrease in unrealized appreciation of investments of $(578,299). The 2001
net increase in net realized and unrealized gain on investments during 2001 is
primarily attributable to the sale of ADIC securities at a gain. The 2000 net
increase is due to the change in unrealized appreciation on investments from the
Pathlight valuation offset by $(296,298) in net realized losses.

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. The Corporation does earn interest
income on idle cash balances and has historically relied on and continues to
rely to a large extent upon proceeds from sales of investments rather than
investment income to defray a significant portion of its operating expenses.
Because such sales cannot be predicted with certainty, the Corporation attempts
to maintain adequate working capital necessary for short-term needs.

As of December 31, 2002, 2001 and 2000, the Corporation's total liquidity,
consisting of cash and cash equivalents, was $3,092,189, $5,941,517 and
$304,152, respectively. Management believes that the cash and cash equivalents
at December 31, 2002 will provide the Corporation with the liquidity necessary
to fund operations over the next twelve (12) months.

ITEM 7A. 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 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 the "Notes to Schedule of
Portfolio Investments" in the financial statements contained in Item 8 of this
report 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
unrealized appreciation (depreciation) on investments."

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 December 31, 2002, the Corporation did not have any off-balance sheet
investments or hedging investments.

11

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial statements and consolidated
supplemental schedule of the Corporation and report of independent auditors
thereon are set forth below:

Statements of Financial Position as of December 31, 2002 and 2001

Statements of Operation for the three years in the period ended December
31, 2002

Statements of Cash Flows for the three years in the period ended
December 31, 2002

Statements of Changes in Net Assets for the three years in the period
ended December 31, 2002

Schedule of Portfolio Investments as of December 31, 2002

Schedules of Selected Per Share Data and Ratios for the five years in
the period ended December 31, 2002

Notes to Financial Statements

Supplemental Schedule of Consolidated Changes in Investments at Cost and
Realized Gain (Loss) for the year ended December 31, 2002

Independent Auditors' Report

12

RAND CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2002 AND 2001

See notes to consolidated financial statements.

13

RAND CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

See notes to consolidated financial statements.

14

RAND CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

See notes to consolidated financial statements.

15

RAND CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

See notes to consolidated financial statements.

16

RAND CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 2002

17

RAND CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS - (CONTINUED)
DECEMBER 31, 2002

* Publicly-owned Company

18

RAND CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS - (CONTINUED)
DECEMBER 31, 2002

NOTES TO CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

(a) Unrestricted securities (indicated by para.) are freely marketable
securities having readily available market quotations. All other securities
are restricted securities, which are subject to one or more restrictions on
resale and are not freely marketable. At December 31, 2002 restricted
securities represented approximately 99% of the value of the investment
portfolio. Deloitte & Touche LLP has not examined the business descriptions
of the portfolio companies.

(b) The Date Acquired column indicates the year in which the Corporation
acquired its first investment in the company or a predecessor company.

(c) The equity percentages estimate the Corporations ownership interest in the
portfolio investment. The estimated ownership is calculated based on the
percent of outstanding voting securities held by the Corporation or the
potential percentage of voting securities held by the Corporation or the
potential percentage of voting securities held by the Corporation upon
exercise of its warrants or conversion of debentures; or other available
data. Deloitte & Touche LLP has not audited the equity percentages of the
portfolio companies. The symbol "<1%" indicates that the Company holds
equity interest of less than one percent.

(d) Under the valuation policy of the Corporation, unrestricted securities are
valued at the closing price for publicly held securities for the last three
days of the month. Restricted securities, including securities of
publicly-owned companies, which are subject to restrictions on resale, are
valued at fair value as determined by the Board of Directors. Fair value is
considered to be the amount, which the Corporation may reasonably expect to
receive for portfolio securities if such securities were sold on the
valuation date. Valuations as of any particular date, however, are not
necessarily indicative of amounts which may ultimately be realized as a
result of future sales or other dispositions of securities and these
favorable or unfavorable differences could be material. Among the factors
considered by the Board of Directors in determining the fair value of
restricted securities are the financial condition and operating results,
projected operations, and other analytical data relating to the investment.
Also considered are the market prices for unrestricted securities of the
same class (if applicable) and other matters which may have an impact on the
value of the portfolio company.

(e) These investments are income producing. All other investments are non-income
producing.

(f) Income Tax Information - As of December 31, 2002, the aggregate cost of
investment securities approximated $6.225 million. Net unrealized
depreciation aggregated approximately $149,000, of which $610,000 related to
appreciated investment securities and $759,000 related to depreciated
investment securities.

(g) Rand Capital SBIC, L.P. investment

See notes to consolidated financial statements.

19

RAND CAPITAL CORPORATION
SCHEDULES OF SELECTED PER SHARE DATA AND RATIOS
FIVE YEARS ENDED DECEMBER 31, 2002

Selected data for each share of capital stock outstanding throughout the
five most current years is as follows:

- ---------------

(1) Per share data are based on weighted average shares outstanding.

See notes to consolidated financial statements.

20

RAND CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF THE BUSINESS - Effective August 16, 2001, Rand Capital
Corporation ("Rand") made an election, following an authorized vote of its
shareholders to become a Business Development Company, or "BDC". Generally, a
BDC is a specialized type of investment company that is primarily engaged in the
business of furnishing capital and managerial expertise to companies that do not
have ready access to capital through conventional finance channels. There was no
impact on the corporate structure as a result of the change to a BDC. Prior to
this election, Rand operated as a diversified closed-end management investment
company registered under the Investment Company Act of 1940.

Rand continues to operate as a publicly held venture capital company,
listed on the NASDAQ Small Cap Market under the symbol "RAND". Rand was founded
in 1969 and is headquartered in Buffalo, New York. Rand's investment strategy is
to seek capital appreciation through venture capital investments in small,
unseasoned, developing companies, primarily in Upstate New York.

During the first quarter of 2002, Rand formed a wholly-owned subsidiary,
Rand Capital SBIC, L.P., (Rand SBIC) for the purpose of operating it as a small
business investment company. Simultaneously with the formation of Rand SBIC,
Rand Capital Management, LLC (Rand Management) was formed to act as the general
partner of Rand SBIC. On January 25, 2002, Rand transferred $5 million in cash
to Rand SBIC to serve as "regulatory capital." On August 16, 2002, Rand received
notification that its Small Business Investment Company (SBIC) application had
been approved and licensed by the Small Business Administration (SBA). The
approval allows Rand SBIC to obtain loans up to two times its initial $5 million
of "regulatory capital" from the SBA for purposes of making new investment's in
portfolio companies.

PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Rand, Rand SBIC and Rand Management, collectively, the
"Corporation". All intercompany accounts and transactions have been eliminated
in consolidation. Prior to the formation of Rand SBIC and Rand Management, Rand
Capital Corporation was a stand-alone entity.

INVESTMENTS - Investments are stated at fair value as determined in good
faith by the Board of Directors, as described in the Notes to Consolidated
Schedule of Portfolio Investments. Certain investment valuations have been
determined by the Board of Directors in the absence of readily ascertainable
fair values. The estimated valuations are not necessarily indicative of amounts
which may ultimately be realized as a result of future sales or other
dispositions of securities, and these favorable or unfavorable differences could
be material. Amounts reported as realized gains and losses are measured by the
difference between the proceeds of sale or exchange and the cost basis of the
investment without regard to unrealized gains or losses reported in prior
periods. The cost of securities that have, in the Board of Directors' judgment,
become worthless, are written off and reported as realized losses.

CASH AND CASH EQUIVALENTS - Temporary cash investments having a maturity of
three months or less when purchased are considered to be cash equivalents.

INTEREST INCOME - Interest income generally is recorded on the accrual
basis except where the investment is valued at less than cost to reflect risk of
loss. In such cases, interest is recorded at the time of receipt. A reserve for
possible losses on interest receivable is maintained when appropriate.

ORGANIZATIONAL COSTS - During 2002 and 2001, the Corporation expensed
$216,774 in legal and accounting related services in conjunction with the
formation of its wholly owned subsidiary Rand SBIC and the creation of a
business development company.

NET ASSETS PER SHARE - Net assets per share are based on the number of
shares of common stock outstanding.

21

RAND CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

USE OF ESTIMATES - The preparation of the financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.

2. INCOME TAXES

Deferred tax assets and liabilities are recorded for temporary differences
between the financial statement and tax bases of assets and liabilities using
the currently enacted tax rate expected to be in effect when the taxes are
actually paid or recovered. The tax effect of the major temporary difference and
carry forwards that give rise to the Corporation's net deferred tax
(liabilities) assets at December 31, 2002 and 2001 are as follows:

The net deferred tax assets (liabilities) are presented in the statements
of financial position as follows:

The components of income tax (benefit) expense reported in the statements
of operations are follows:

22

RAND CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

A reconciliation of the expense for income taxes at the federal statutory
rate to the expense reported is as follows:

Deferred income tax (benefit) expense of approximately ($62,000), $363,000
and $389,000 at December 31, 2002, 2001 and 2000, respectively, relate to net
unrealized appreciation (depreciation) of investments. Such appreciation
(depreciation) is not included in taxable income until realized.

At December 31, 2002 and 2001, the Corporation had a federal net operating
loss carry forward of approximately $379,000 and $679,000, respectively, which
expire commencing in 2007. For state tax purposes the Corporation utilized its
net operating loss carry forward in 2002. At December 31, 2001, the Corporation
had a state net operating loss carryforward of $230,000.

At December 31, 1999, the Corporation had established a valuation allowance
against the deferred tax asset in the event that the tax asset may not be
realized prior to its expiration. The entire valuation allowance was reversed
and taken into the net increase in net assets from operations in 2001.

3. STOCKHOLDERS' EQUITY (NET ASSETS)

At December 31, 2002 and 2001, there were 500,000 shares of $10.00 par
value preferred stock authorized and unissued.

On January 18, 2001, January 21, 2000 and October 2, 2000, the Corporation
sold 15,000, 15,000 and 25,000 shares of common stock through a private stock
offering at $2.125, $1.33 and $1.51 per share, respectively.

On October 18, 2001 the Board of Directors authorized the repurchase of up
to 5% of the Corporation's outstanding stock through purchases on the open
market through October 16, 2003. During the period July 15, 2002 through
December 31, 2002 the Corporation purchased 24,400 shares for the treasury at a
cost of $25,704.

23

RAND CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Summary of change in capital accounts:

4. STOCK OPTION PLANS

In July 2001, the shareholders of the Corporation authorized the
establishment of two stock option plans - the Employee Plan, and the
Non-Employee Director Plan. The Plans provide for an aggregate of 200,000 and
100,000 shares, respectively to be awarded to eligible employees and non-officer
directors. As of December 31, 2002, no stock options have been awarded from
either plan. As of December 31, 2002 both stock option plans have been placed on
inactive status.

5. COMMITMENTS AND CONTINGENCIES

The Corporation has an agreement, which includes health benefits for the
spouse of a former officer of the Corporation. Remaining payments projected to
be paid to the surviving spouse have been fully accrued. Total accrued deferred
compensation under this agreement at December 31, 2002 and 2001 was $21,952 and
$25,874, respectively.

6. EMPLOYEE BENEFIT PLANS

The Corporation has a defined contribution 401(k) Plan. The Plan provides a
base contribution of 1% for eligible employees and also provides up to 5%
matching contribution. Pension plan expense was $18,079, $18,041, and $15,822 in
2002, 2001 and 2000, respectively.

In 2002, the Corporation established a Profit Sharing Plan for its
executive officers in accordance with Section 57(n) of the Investment Company
Act of 1940 (the "1940 Act"). In accordance with provisions of the

24

RAND CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

1940 Act, for as long as the Profit Sharing Plan is in effect, no stock options
may be issued under the Employee Plan or the Non-Employee Director Plan.

7. PROMISSORY NOTES RECEIVABLE

In January 2001, the Corporation received promissory notes from certain
principals of its former portfolio companies. Principal payments commenced in
January 2001. Interest, at the rate of 12%, will accrue during the term of the
promissory notes and may be waived by the Corporation if the payers meet certain
of the promissory note's provisions. Principal installments due subsequent to
December 31, 2002 are as follows: 2003 - $32,750, 2004 - $31,400, and
2005 - $49,320.

8. QUARTERLY OPERATIONS AND EARNINGS DATA - UNAUDITED

25

RAND CAPITAL CORPORATION
CONSOLIDATED CHANGES IN INVESTMENTS AT COST AND REALIZED GAIN (LOSS)

YEAR ENDED DECEMBER 31, 2002

26

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
Rand Capital Corporation
Buffalo, New York

We have audited the accompanying consolidated statements of financial
position of Rand Capital Corporation and subsidiary (the "Corporation") as of
December 31, 2002 and 2001, including the consolidated schedule of portfolio
investments as of December 31, 2002, and the related consolidated statements of
operations, cash flows and changes in net assets for each of the three years in
the period ended December 31, 2002, and the selected per share data and ratios
for each of the five years in the period then ended. These financial statements
and the selected per share data and ratios are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements and selected per share data and ratios based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and selected per share data and ratios are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
examination or confirmation of securities owned as of December 31, 2002, and
2001. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements and selected per
share data and ratios referred to above present fairly, in all material
respects, the financial position of the Corporation as of December 31, 2002 and
2001, the results of their operations, their cash flows and the changes in their
net assets for each of the three years in the period ended December 31, 2002,
and the selected per share data and ratios for each of the five years in the
period then ended, in conformity with accounting principles generally accepted
in the United States of America.

As explained in Note 1, the financial statements include securities valued
at $6,012,442 (63% of net assets) and $3,034,075 (30% of net assets), as of
December 31, 2002 and 2001, respectively, whose fair values have been estimated
by the Board of Directors in the absence of readily ascertainable fair values.
We have reviewed the procedures used by the Board of Directors in arriving at
its estimate of fair value of such securities and have inspected underlying
documentation. In our opinion, those procedures are reasonable, and the
documentation is appropriate to determine the securities' estimated fair values.
The estimated valuations, however, are not necessarily indicative of the amounts
which may ultimately be realized as a result of future sales or other
dispositions of securities, and these favorable or unfavorable differences could
be material.

Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The supplemental schedule of
changes in investments at cost and realized gain (loss) for the year ended
December 31, 2002 is presented for the purpose of additional analysis and is not
a required part of the basic financial statements. This supplemental schedule is
the responsibility of the Corporation's management. Such schedule has been
subjected to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects when
considered in relation to the basic financial statements taken as a whole.

/s/ Deloitte & Touche LLP

Buffalo, New York
January 13, 2003

27

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information in response to this Item is incorporated herein by reference to
the information under the heading "ELECTION OF DIRECTORS" and "EXECUTIVE
OFFICERS" provided in the Corporation's definitive Proxy Statement for its
Annual Meeting of Shareholders to be held April 24, 2003, to be filed under
Regulation 14A (the "2003 Proxy Statement").

ITEM 11. EXECUTIVE COMPENSATION

Information in response to this Item is incorporated herein by reference to
the information provided in the 2003 Proxy Statement under the heading
"COMMITTEES AND MEETING DATA," "COMPENSATION" and "DIRECTOR COMPENSATION."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information in response to this Item is incorporated herein by reference to
the information provided in the 2003 Proxy Statement under the heading
"BENEFICIAL OWNERSHIP OF SHARES."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

There were no relationships or transactions within the meaning of this item
during the year ended December 31, 2002.

ITEM 14. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. The Corporation's
chief executive officer and chief financial officer, after evaluating the
effectiveness of the Corporation's "disclosure controls and procedures" (as
defined in rule 13a-14(c) under the Securities Exchange Act of 1934) as of a
date (the "Evaluation Date") within 90 days before the filing date of this
annual report, concluded that as of the Evaluation Date the Corporation's
disclosure controls and procedures were effective to ensure that material
information relating to the Corporation was being made known to them by others
within the Corporation, particularly including during the period when this
annual report was being prepared.

(b) Changes in internal controls. There were no significant changes in the
Corporation's internal controls or, to the knowledge of the Corporation's chief
executive officer and chief financial officer, in other factors that could
significantly affect the Corporation's disclosure controls and procedures
subsequent to the Evaluation Date.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

The Corporation may find it necessary to make immediate disclosure, via
their internet website: www.randcapital.com regarding code of ethics disclosure
which may have otherwise been reported on SEC Form 8-K.

(a) The following documents are filed as part of this report and
included in Item 8:

(1) CONSOLIDATED FINANCIAL STATEMENTS

Statements of Financial Position as of December 31, 2002 and 2001

Statements of Operations for the three years in the period ended
December 31, 2002

28

Statements of Cash Flows for the three years in the period ended
December 31, 2002

Statements of changes in Net Assets for the three years in the
period ended December 31, 2002

Schedule of Portfolio Investments as of December 31, 2002

Schedules of Selected Per Share Data and Ratios for the five years
in the period ended December 31, 2002

Notes to Consolidated Financial Statements

Supplemental Schedule of Consolidated Changes in Investments at
Cost and Realized Gain (Loss) for the year ended December 31,
2002

Independent Auditors' Report

(2) FINANCIAL STATEMENT SCHEDULES

There were no schedules required to be filed as part of this
report

(b) Reports on Form 8-K

No Form 8-K reports were filed during the year ended December 31,
2002.

(c) The following exhibits are filed with this report or are
incorporated herein by reference to a prior filing, in accordance with Rule
12b-32 under the Securities Exchange Act of 1934.

(3)(i) Certificate of Incorporation of the Corporation,
incorporated by reference to Exhibit (a)(1) of Form N-2
filed with the Securities Exchange Commission on April 22,
1997.
(3)(ii) By-laws of the Corporation incorporated by reference to
Exhibit (b) of Form N-2 filed with the Securities Exchange
Commission on April 22, 1997.
(4) Specimen certificate of common stock certificate,
incorporated by reference to Exhibit (b) of Form N-2 filed
with the Securities Exchange Commission on April 22, 1997.
(10.1) Employee Stock Option Plan - incorporated by reference
Appendix B to the Corporation's definitive Proxy Statement
filed on June 1, 2002.*
(10.2) Director Stock Option Plan - incorporated by reference
Appendix C to the Corporation's definitive Proxy Statement
filed on June 1, 2002.*
(10.3) Agreement of Limited Partnership for Rand Capital SBIC,
L.P. - incorporated by reference to Exhibit 10.3 to the
Corporation's Form 10-K filed for the year ended December
31, 2001.
(10.4) Certificate of Formation of Rand Capital SBIC,
L.P. - incorporated by reference to Exhibit 10.3 to the
Corporation's Form 10-K filed for the year ended December
31, 2001.
(10.5) Limited Liability Corporation Agreement of Rand Capital
Management, LLC - incorporated by reference to Exhibit 10.3
to the Corporation's Form 10-K filed for the year ended
December 31, 2001.
(10.6) Certificate of Formation of Rand Capital Management,
LLC - incorporated by reference to Exhibit 10.3 to the
Corporation's Form 10-K filed for the year ended December
31, 2001.
(10.7) Computation of Per Share Earnings is set forth under Item 8
of this report.
(10.8) Profit Sharing Plan - filed herewith *
(21) Subsidiaries of the Corporation - filed on the Corporation's
Form 10-K filed December 31, 2001.
(99.1) Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 - Rand Capital Corporation - filed herewith.
(99.2) Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 - Rand Capital SBIC, L.P. - filed herewith.

* Management contract or compensatory plan.

29

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF SECURITIES EXCHANGE ACT
OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT ON FORM 10-K TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.

Date: March 28, 2003 RAND CAPITAL CORPORATION

By: /s/ ALLEN F. GRUM
------------------------------------
Allen F. Grum, President

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
ON FORM 10-K HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
CORPORATION IN THE CAPACITIES AND ON THE DATE INDICATED.

30

I, Allen F. Grum, certify that:

1. I have reviewed this annual report on Form 10-K of Rand Capital
Corporation and Rand Capital SBIC, L.P.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Dated: March 28, 2003

/s/ Allen F. Grum
Allen F. Grum, President
(Chief Executive Officer of Rand
Capital Corporation
and equivalent of Chief Executive
Officer of Rand
Capital SBIC, L.P.)

31

I, Daniel P. Penberthy, certify that:

1. I have reviewed this annual report on Form 10-K of Rand Capital
Corporation and Rand Capital SBIC, L.P.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Dated: March 28, 2003

/s/ Daniel P. Penberthy
Daniel P. Penberthy, Treasurer
(Chief Financial Officer of Rand
Capital Corporation
and equivalent of Chief Financial
Officer of Rand
Capital SBIC, L.P.)

32