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, 2003

[ ] 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 Identification No.)
Incorporation or organization)

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]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Exchange Act) Yes: Yes [ ] No [X]

The aggregate market value of the registrant's outstanding common stock
held by non-affiliates of the registrant as of June 30, 2003 was approximately
$4,637,578 based upon the last sale price as quoted by NASDAQ SmallCap Market on
such date.

As of March 19, 2004 there were 5,718,934 shares of the registrant's common
stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The Corporation's definitive proxy statement for the Annual Meeting of
Stockholders to be held on April 29, 2004 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

1

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 typically in
New York and its surrounding states. The Corporation's principal objective is to
achieve long-term capital appreciation while maintaining a current cash flow
from its debenture instruments. The Corporation invests in a mixture of
debenture and equity instruments. The debt securities most often have an equity
piece attached to the debenture in the form of stock, warrants or options to
acquire stock or the right to convert the debt securities into stock. Rand SBIC
was the primary investment vehicle in 2003 and it is anticipated that will
continue in 2004. 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.

Our website is www.randcapital.com. We make available through our website:
our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current
reports on Form 8-K and any other reports filed with the Securities and Exchange
Commission ("SEC").

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).
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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. 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.

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;

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

- 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 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 to
SBIC's is determined by annual Congressional appropriations.

4

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
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. Under the provisions of the SBIC regulations
the Corporation may apply for SBA's conditional commitment to reserve a specific
amount of Leverage for future use. The Corporation may then apply to draw down
Leverage against the commitment. All SBIC's must obtain a leverage commitment in
order to draw leverage from the SBIC. Commitments expire on September 30 of the
fourth full fiscal year following issuance and require the payment of a fee
equal to 1 percent of the total commitment at the time of issuance. An
additional fee equal to 2 percent of the amount drawn is deducted at the time of
each draw.

In July of 2003, the Corporation paid $50,000 to the SBA to reserve
$5,000,000 of its approved debenture leverage. This fee was 1% of the face
amount of the leverage reserved under the commitment. The fee represents a
partial prepayment of the SBA's nonrefundable 3% leverage fee. As of December
31, 2003, Rand Capital SBIC, LLC had not drawn any leverage from the SBA. In
January and February of 2004 the Corporation did draw down $1,000,000 to fund
three new investments in portfolio companies.

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, 2003, the Corporation had four 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

5

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.

THE CORPORATION 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 the
Corporation makes 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 the Corporation are likely to be restricted from
sale or other transfer for significant periods of time. These securities will be
very illiquid.

The Corporation'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 the Corporation is able to invest substantially
all of the proceeds from debentures at annualized interest or other rates of
return that substantially exceed annualized interest rates that Rand SBIC must
pay the SBA, the Corporation's operating results may be adversely affected which
may, in turn, depress the market price of the Corporation's common stock.

THE CORPORATION 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 PRIVATE COMPANIES

There are significant risks inherent in the venture capital business. The
Corporation typically invests a substantial portion of its assets in small and
medium sized private companies. These private businesses may be thinly
capitalized, unproven 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 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. Since Rand SBIC became
licensed as a debenture SBIC in August of 2002, the Corporation has increased
its investment in interest bearing debenture instruments. These instruments
typically have a current or deferred interest income component. In addition we
also seek to provide stockholders with long-term capital growth through the
appreciation in the value of warrants we may receive when we invest in debt
securities or through direct investment in equity securities.

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.
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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 "Net
increase (decrease) in unrealized appreciation."

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.

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.

PROFIT SHARING AND STOCK OPTION PLANS

In July 2001, the shareholders of the Corporation authorized the
establishment of an Employee Stock Option Plan (the "Plan"). The Plan provides
for an award of options to purchase up to 200,000 common shares to eligible
employees. In 2002, the Corporation placed the Plan on inactive status as it
developed a new profit

7

sharing plan for the Corporation's employees in connection with the
establishment of its SBIC subsidiary. As of December 31, 2003, no stock options
had been awarded under the Plan. Because Section 57(n) of the 1940 Act prohibits
maintenance of a profit sharing plan for the officers and employees of a BDC
where any option, warrant or right is outstanding under an executive
compensation plan, no options will be granted under the Plan while any profit
sharing plan is in effect with respect to the Corporation.

In July 2001, the Corporation also formed a Non-Employee Director Stock
Option Plan. In September 2003, the Corporation terminated the Non-Employee
Director Plan and withdrew its application to the SEC regarding its exemption
application for the Non-Employee Director Plan under the requirements of Section
57(n). No shares had been issued under the plan.

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"). There were no contributions to the profit sharing plan for
2003 and 2002.

On March 19, 2004, the Corporation had a total of 981 shareholders, which
included 132 record holders of its common stock, and an estimated 849
shareholders with shares beneficially owned 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, 2004. During 2003 the Corporation
repurchased 19,700 shares at a total cost of $21,502. Through December 31, 2003,
the Corporation had repurchased a total of 44,100 shares with a cost of $47,207.
No additional shares were repurchased from January 1, 2004 through March 19,
2004.

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:

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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 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.

OVERVIEW

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.

Rand is incorporated under the law of New York and is regulated under the
1940 Act as a business development company ("BDC"). In addition, a wholly-owned
subsidiary, Rand Capital SBIC, LP is regulated under the laws of Delaware and
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.

The Corporation's primary business is investing in businesses usually
through investments in the form of subordinated debt (generally with detachable
equity warrants), preferred/common stock or membership interests. We look for
small and medium-sized companies that meet certain criteria, including

1) a highly qualified management team

2) new or unique products or services with favorable industry and
competitive advantage

3) a potential for growth in cash flow

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

Our investments in portfolio companies typically range from $250,000 to
$1,000,000. We invest either directly in the equity of a company through equity
shares or through a debt instrument. Our debt instruments usually have a
maturity of not more than five years and have detachable warrants. Interest is
either current pay (paid monthly) or deferred.

In a typical private financing, we review, analyze, and confirm, through
due diligence, the business plan and operations of the potential portfolio
company. We study the industry and competitive landscape and may conduct
additional reference checks with customers and suppliers.

9

Investment opportunities are identified for the Corporation by the
management team. Investment proposals may, however, come to the Corporation from
many other sources, and may include unsolicited proposals from the public and
from referrals from banks, lawyers, accountants and other members of the
financial community. We believe that our reputation in the community and our
experience provide a competitive advantage in originating new investments.
Throughout our history we have established an extensive network of investment
referral relationships.

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

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

CRITICAL ACCOUNTING POLICIES

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

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

VALUATION OF INVESTMENTS

The most significant estimate inherent in the preparation of the
Corporation's consolidated financial statements is the valuation of its
investments and the related unrealized appreciation or depreciation. The
Corporation has adopted the SBA's valuation guidelines for SBIC's which
describes the policies and procedures used in valuing investments.

Investments are stated at fair value as determined in good faith by the
Board of Directors. There is no single standard for determining fair value in
good faith. As a result, determining fair value requires that judgment be
applied to the specific facts and circumstances of each portfolio investment
while employing a consistently applied valuation process for our investments.
The Board of Directors considers fair value to be the amount which the
Corporation may reasonably expect to receive for portfolio securities when sold
on the valuation date. The Corporation analyzes and values each individual
investment on a quarterly basis, and records unrealized depreciation for an
investment that it believes has become impaired, including where collection of a
loan or realization of an equity security is doubtful. Conversely, the
Corporation will record unrealized appreciation if we believe that the
underlying portfolio company has appreciated in value and, therefore, our equity
security has also appreciated in value. Without a readily ascertainable market
value and because of the inherent uncertainty of
10

valuation, the fair value of our investments determined in good faith by the
board of directors may differ significantly from the values that would have been
used had a ready market existed for the investments, and the favorable or
unfavorable differences could be material.

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

Another key factor used in valuing the equity investments is recent
arms-length equity transactions entered into by the investment company that the
Corporation utilizes to form a basis for its underlying value. Many times the
terms of these equity transactions may not be identical to those of the
Corporation and the impact on these variations as it relates to market value may
be impossible to quantify.

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

REVENUE RECOGNITION (INTEREST INCOME)

Interest income from portfolio debentures is recorded on an accrual basis
to the extent that such amounts are expected to be collected. Interest on debt
securities is not accrued if we have doubt about interest collection, and a
reserve for possible losses on interest receivable is created, if appropriate.
Collection may be considered doubtful if among other things, the company is
delinquent in payment of interest, it is in default under the investment
agreement or it appears that its future estimated cash will be insufficient to
make the required interest payments.

DEFERRED TAX ASSETS

The deferred tax assets are primarily related to future tax benefits
associated with the utilization of the Corporations net operating loss
carryforwards (NOL's). The realization of these deferred tax assets is dependent
on the Corporation generating sufficient taxable income through operations and
realization of gains on its investments to utilize these NOL's. Management has
determined that a valuation allowance is not required based upon future
estimated income and historical significant gains realized on the liquidation of
its portfolio investment. In the event that management's estimates or
expectations regarding its future profitability do not come to fruition, the
Corporation may be required to record a valuation allowance against the deferred
tax asset.

FINANCIAL CONDITION

The Corporation's total consolidated assets decreased by ($300,536) or (3%)
to $9,385,137 and its net assets decreased by ($366,146) or (4%) to $9,238,488
at December 31, 2003, versus $9,685,673 and $9,604,634 at December 31, 2002,
respectively.

The decrease in total assets and net assets can be attributed to operating
losses, the revaluation of our investment and interest receivable in Somerset
Gas Transmission Company, LLC (Somerset) and the realized and unrealized gain on
investments. The net investment loss of ($346,043) was offset by a realized gain
of $87,841 and the net increase in unrealized depreciation of ($86,441). The
realized gain is comprised of the net gain derived from the sale of 7,500 shares
of Advanced Digital Information Corporation ("ADIC") stock during 2003 at an
average sale price of $14 and a cost basis of $2.28.

The Corporation's financial condition is dependent on the success of its
portfolio holdings. It has invested a substantial portion of its assets in small
and medium-sized 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.

11

The increase in investments at cost is due to the $1,359,000 of new
investments made in 2003 by the Corporation. In addition, the Corporation
converted the accrued interest of Synacor, Inc (Synacor) in the amount of
$35,000 and the accrued interest of Ultra-Scan Corporation (Ultra-Scan) in the
amount of $24,811 into preferred equity shares of the individual companies. An
$200,000 Ultra-Scan loan made in November 2002 was also converted in equity
shares in 2003.

The increase in unrealized depreciation of the investments is primarily
attributable to the establishment of a reserve on the Somerset membership
interest for ($183,333). This adjustment was done in accordance with the
Corporation's established valuation policies. (see "Investment Income" below for
further discussion).

During the first quarter of 2003, the Corporation revalued its equity
holdings in UStec, from $50,000 to $25,000, in accordance with the established
valuation policies and based on the fact that UStec received a new round of
financing from an unrelated SBIC lead investor at a lower valuation.

The Corporation's total investments at fair value, whose fair value have
been estimated by the Board of Directors, approximated 77% of net assets at
December 31, 2003 and 63% of net assets at December 31, 2002. This increase in
this percentage is due to the increase in new investments during 2003.

The cash and cash equivalents approximated 14% of net assets at December
31, 2003 compared to 32% at December 31, 2002. The decrease in cash as it
relates to net assets from December 31, 2003 to December 31, 2002 can be
attributed to the $1,359,000 in new investments during the year.

The effect of the increase in tax net operating loss carryforwards and the
change in unrealized depreciation on investments resulted in a net increase in
the net deferred tax asset from $112,000 at December 31, 2002 to a net deferred
tax asset of $430,000 at December 31, 2003.

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 instruments. Therefore, the Corporation will invest in a
mixture of debenture and equity instruments which will provide a current 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
may 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.

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

Total investment income was $449,858 and $261,230 for the years ended
December 31, 2003 and 2002, an increase of $188,628 or 72%. This income is
comprised mainly of interest and dividend income from portfolio companies as
well as interest income on idle cash.

Portfolio interest income was $369,517 in 2003 and $145,771 in 2002, an
increase of 153%. This increase is attributable to the fact that the 63% or
$850,000 of the new 2003 investments originated out of Rand SBIC are in
debenture instruments that earn interest income at a blended interest rate of
approximately 10%.

The portfolio interest income for the year ended December 31, 2003 includes
$122,914 in accrued interest on a $900,000 convertible note from Somerset. The
Somerset note matured on January 15, 2003, and accrued interest at a 14% rate
subsequent to that date. The Corporation has issued a demand letter to Somerset
regarding its repayment, however, as the note is in technical default and is
more that 120 days due to non-payment, the Corporation's accounting policies
require a 100% reserve to be established for the unpaid interest. In

12

September 2003, the Corporation established a reserve for the accrued interest
of $122,914 and has ceased further accrual of interest under the note. The
Corporation has had continuing communications with Somerset, and has been active
with its management team throughout the time of the investment, and believes
that Somerset will successfully obtain additional financing resulting in the
repayment or conversion of the note into a more favorable debt or equity
investment. Somerset has advised Rand that its pipeline operations have begun to
generate cash flows and that projected short supplies and higher prices for
natural gas should continue to improve its financial outlook.

The dividend and other investment income was $59,371 in 2003 and $16,374 in
2002. This income increased due to an increase in LLC related distributions
generated by Topps Meat Company, LLC (Topps) and G-Tec Natural Gas Systems
(G-Tec). The Corporations investment agreements with certain pass through
entities 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.

The remaining interest income from idle cash was $20,970 in 2003 and
$99,085 in 2002. The reduction is primarily due to the redeployment of cash from
idle cash money market accounts into investment instruments. This, coupled with
lower short term interest rates, accounted for the ($78,115) decrease in the
income from idle cash balances category.

FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001

Total investment income was $261,230 and $ 159,479 for the years ended
December 31, 2002 and 2001, an increase of $101,751 or 64%. This income is
comprised mainly of interest and dividend income from portfolio companies as
well as interest income on idle cash.

Portfolio interest income was $145,771 in 2002 and $118,192 in 2001, an
increase of 27,579 or 23%. This increase was due to the higher interest yields
on the new investments made in 2002. This income includes investments that have
interest accruals that often do not pay a current yield.

Interest from other investments was $99,085 in 2002 and $29,194 in 2001, an
increase of $69,891. This income is derived from interest income on idle cash
balances. The cash balances were higher during 2002 due to the sale of ADIC
stock in late 2001 and throughout 2002. In addition, most of the investments in
portfolio companies occurred in the fourth quarter of 2002, thus the cash
balances and the related earned interest income were higher in the year ended
December 31, 2002 versus 2001.

The dividend and other investment income was $16,374 in 2002 and $12,093 in
2001. This income increased due to an increase in LLC related distributions
generated by G-Tec.

OPERATING EXPENSES

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

Total operating expenses were $942,799 in 2003 and $858,305 in 2002, an
increase of $84,494 or 10%.

The operating expenses predominately consist of employee compensation and
benefits, shareholder related costs, office expenses, professional fees,
expenses related to identifying and reviewing investment opportunities and bad
debt expense. The expense for the twelve month period ending December 31, 2003
included $122,914 in bad debt expense related to the full reserve against
accrued interest receivable for the Somerset investment. This reserve was
established in accordance with our established revenue recognition policy
discussed above.

In addition the Corporation increased its provision for future anticipated
health benefits for the spouse of a former officer of the Corporation by
approximately $26,500 in 2003. Increases in salaries and professional costs
contributed to the remaining increase in operating expense for the year ended
December 31, 2003. Professional fees increased in the 2003 due to the additional
accounting and legal expenses related to the increasingly more complex
regulatory environment in which the Corporation operates.

13

The operating expenses for 2002 included $135,251 of organizational costs
that related to the professional costs incurred for preparing an application for
the Small Business Administration (SBA) for participation in the SBIC program.
The Corporation became a licensed SBIC in August of 2002.

FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001

Operating expenses were $858,305 in 2002 and $825,765 in 2001, an increase
of $32,540 or 4%.

The Corporation incurred organizational 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 LOSS FROM OPERATIONS

Net investment loss from operations was ($346,043) in 2003, ($738,046) in
2002 and ($1,551,001) in 2001. The fluctuations from year to year are partly due
to the impact of deferred income taxes. The deferred income tax (benefit)
expense was ($174,396) in 2003, $162,841 in 2002 and $837,148 in 2001. Deferred
income tax (benefit) expense relates to the net unrealized appreciation
(depreciation) of investments And the deferred tax benefits relate to the
investment losses from operations.

NET REALIZED GAINS AND LOSSES ON INVESTMENTS:

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

Net realized gains were $87,841 in 2003 and $888,399 in 2002, a decrease of
$800,558.

The realized gain for 2003 resulted from the sale of 7,500 shares of ADIC
stock at an average sale price of $14 and an average cost of $2.28.

The net realized gain for 2002 resulted from the sale of 61,051 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 for the year ended December 31,
2002.

FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001

Net realized gains were $888,399 in 2002 and $3,286,078 in 2001, a decrease
of $2,397,679.

During the twelve months ended December 31, 2001, the Corporation 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, the Corporation
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).

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 (decrease) in
net assets from operations" on its consolidated statements of operations. For
2003, the net (decrease) was ($344,643), as compared to net (decrease) increase
in net assets from operations of ($427,946) in 2002 and $1,640,712 for 2001.

The net (decrease) in net assets from operations in 2003 can primarily be
attributed to the net investment loss of ($346,043). 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 was caused by
the net realized gain of $3,286,078 attributable to the sale of ADIC securities
at a gain.

14

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, 2003, 2002 and 2001, the Corporation's total liquidity,
consisting of cash and cash equivalents, was $1,251,546, $3,092,189 and
$5,941,517 respectively.

As of December 31, 2003 although the Corporation had paid $50,000 to the
SBA to reserve $5,000,000 of its approved $10,000,000 leverage, it had not drawn
down any of this leverage. Subsequent to year end (as of March 19, 2004) the
Corporation borrowed $1,000,000 from the SBIC in the form of 10-year debentures.

Management expects that it will be necessary to draw down leverage in the
next fiscal year from the SBIC in order to fund operations and new investments.
Net cash used in operating activities has averaged $675,000 over the last three
years and management anticipates this amount will continue at similar levels.
The cash flow may fluctuate based on possible expenses associated with
compliance with potential new regulatory rules. Management believes that the
cash and cash equivalents at December 31, 2003 coupled with the anticipated SBIC
leverage draw downs and interest and dividend payments on its portfolio
investments will provide the Corporation with the liquidity necessary to fund
operations over the next twelve months.

The following table summarizes the cash to be received over the next five
years from portfolio companies based on contractual obligations as of December
31, 2003. These payments represent scheduled principal and interest payments
that are contained in the investment documents of each portfolio company.

DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The following table shows the Corporation's contractual obligation at
December 31, 2003. The Corporation does not have any long-term debt obligations,
capital lease obligations, or other long-term liabilities reflected on its
balance sheet.

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
15

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, 2003, the Corporation did not have any off-balance sheet
investments or hedging investments.

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, 2003 and 2002

Statements of Operation for the three years in the period ended
December 31, 2003

Statements of Cash Flows for the three years in the period ended
December 31, 2003

Statements of Changes in Net Assets for the three years in the
period ended December 31, 2003

Schedule of Portfolio Investments as of December 31, 2003

Schedules of Selected Per Share Data and Ratios for the five years
in the period ended December 31, 2003

Notes to Consolidate Financial Statements

Supplemental Schedule of Consolidated Changes in Investments at Cost
and Realized Gain (Loss) for the year ended December 31, 2003

Independent Auditors' Report's -- Freed Maxick Battaglia, CPA's, PC
and Deloitte and Touche, LLP.

16

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

See accompanying notes
17

RAND CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

See accompanying notes
18

RAND CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

See accompanying notes
19

RAND CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

See accompanying notes
20

RAND CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 2003

See accompanying notes
21

RAND CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS - (CONTINUED)
DECEMBER 31, 2003

See accompanying notes
22

RAND CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS - (CONTINUED)
DECEMBER 31, 2003

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, 2003 restricted
securities represented approximately 99% of the value of the investment
portfolio. Freed Maxick & Battaglia, CPA's, PC 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 Corporation's 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. Freed Maxick & Battaglia, CPA's, PC 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) The Corporation has adopted the SBA's valuation guidelines for SBIC's which
describes the policies and procedures used in valuing investments. 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-held
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 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. Income producing investments have generated cash payments of
interest or dividends within the last twelve months.

(f) Income Tax Information - As of December 31, 2003, the aggregate cost of
investment securities approximated $7.616 million. Net unrealized
depreciation aggregated approximately $379,000, of which $390,000 related to
appreciated investment securities and $769,000 related to depreciated
investment securities.

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

* Publicly-owned Company

See accompanying notes
23

RAND CAPITAL CORPORATION AND SUBSIDIARIES
SCHEDULES OF SELECTED PER SHARE DATA AND RATIOS
FIVE YEARS ENDED DECEMBER 31, 2003

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 accompanying notes
24

RAND CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003
NOTE 1. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS - Effective August 16, 2002, Rand Capital Corporation
("Rand") made an election, following an authorized vote of its stockholders 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 the northeastern United States.

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), also a wholly-owned subsidiary,
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. As of December 31, 2003, the
Corporation had not drawn down on its leverage commitments. (see Note 8)

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. For fiscal 2001, 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.

Certain investment agreements require the companies to meet certain
financial and non-financial covenants. At December 31, 2003 certain of the
portfolio investments were in violation of the covenants, or are delinquent as
to required principal due. Management of the Corporation is pursuing compliance
and will consider, based upon available information, the appropriateness of the
carrying value of the investment.

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.

REVENUE RECOGNITION -- INTEREST INCOME - Interest income generally is
recognized on the accrual basis except where the investment is in default or
otherwise presumed to be in doubt. In such cases, interest is recognized at the
time of receipt. A reserve for possible losses on interest receivable is
maintained when appropriate.

25

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

DEFERRED DEBENTURE COSTS - SBA debenture costs, which are included in other
assets, will be amortized ratably over the terms of the SBA debentures.

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. There were no expenses incurred during the year
ended December 31, 2003.

NET ASSETS PER SHARE - Net assets per share are based on the number of
shares of common stock outstanding. There are no common stock equivalents.

SUPPLEMENTAL CASH FLOW INFORMATION - Income taxes paid (refunded) for
fiscal 2003, 2002 and 2001 was $19,626, $(18,230) and $8,567, respectively.
During 2003, the Corporation converted a debt investment in the amount of
$200,000 into an equity investment.

CONCENTRATION OF CREDIT AND MARKET RISK - Financial instruments that
potentially subject the Corporation to concentrations of credit risk consisted
of cash and cash equivalents. Cash is invested with banks in amounts, which, at
times, exceed insurable limits.

As of December 31, 2003, 51% of the Corporation's total investment value
was held in five notes and equity securities. As of December 31, 2002, 47% of
the Corporation's total investment value was held in four notes and equity
securities.

ACCOUNTING ESTIMATES - The preparation of 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.

NOTE 2. - 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 will be waived by the Corporation if the payers meet
certain of the promissory note's provisions. Through December 31, 2003, the
provisions have been met and the interest has been waived. Principal
installments due subsequent to December 31, 2003 are as follows: 2004 -$31,400;
and 2005 - $40,930.

NOTE 3. - 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 carryforwards that
give rise to the Corporation's net deferred tax (liabilities) assets at December
31, 2003 and 2002 are as follows:

26

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

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 as follows:

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

Deferred income tax (benefit) expense of approximately $(143,000),
$(62,000) and $363,000 at December 31, 2003, 2002 and 2001, respectively, relate
to net unrealized appreciation (depreciation) of investments. Such appreciation
(depreciation) is not included in taxable income until realized.

At December 31, 2003 and 2002, the Corporation had a federal net operating
loss carryforward of approximately $715,000 and $379,000, respectively, which
expire commencing in 2007. For state tax purposes the Corporation has a net
operating loss carryforward of approximately $339,000 which expire commencing
2018. At December 31, 2001, the Corporation had a state net operating loss
carryforward of $230,000 which was utilized in 2002.

At December 31, 1999, the Corporation had established a valuation allowance
against the deferred tax asset in the event 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.

27

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

NOTE 4. - STOCKHOLDERS' EQUITY (NET ASSETS)

At December 31, 2003 and 2002, there were 500,000 shares of $10.00 par
value preferred stock authorized and unissued.

On January 18, 2001, the Corporation sold 15,000 shares of common stock
through a private stock offering at $2.125 per share.

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 which was extended through October 16, 2004. During the year ended
December 31, 2003 the Corporation purchased 19,700 shares for the treasury at a
cost of $21,502. 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.

Summary of change in equity accounts:

NOTE 5. - STOCK OPTION PLANS

In July 2001, the stockholders of the Corporation authorized the
establishment of an Employee Stock Option Plan (the "Plan"). The Plan provides
for an award of options to purchase up to 200,000 common shares to eligible
employees. In 2002, the Corporation placed the Plan on inactive status as it
developed a new profit sharing plan for the Corporation's employees in
connection with the establishment of its SBIC subsidiary. As of December 31,
2003, no stock options had been awarded under the Plan. Because Section 57(n) of
the 1940 Act prohibits maintenance of a profit sharing plan for the officers and
employees of a BDC where any option, warrant or right is outstanding under an
executive compensation plan, no options will be granted under the Plan while any
profit sharing plan is in effect with respect to the Corporation.

28

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

In July 2001, the Corporation also formed a Non-Employee Director Plan. In
September 2003, the Corporation withdrew its application to the SEC regarding
its exemption application for the Non-Employee Director Plan under these same
requirements of Section 57(n). No shares had been issued under the plan.

NOTE 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 contributions. Pension plan expense was $18,379, $18,079 and $18,041 in
2003, 2002 and 2001, 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"). There were no contributions to the Plan for 2003
and 2002.

NOTE 7. - COMMITMENTS AND CONTINGENCIES

The Corporation has an agreement, which provides 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 health
benefits under this agreement at December 31, 2003 and 2002 was $43,090 and
$21,952, respectively. During 2003, the Corporation increased its provision for
future anticipated health benefits by approximately $26,000.

The Corporation has a lease for office space which expires December 2005.
Rent expense under this operating lease was approximately $16,000 for the year
ended December 31, 2003 ($15,000 - 2002 and 2001). Future operating lease
obligation for 2004 and 2005 amount to approximately $16,000 per year.

NOTE 8. - SUBSEQUENT EVENTS

Subsequent to the year ended December 31, 2003, the Corporation made two
investments totaling $1,400,000 and borrowed $500,000 from the SBA.

NOTE 9. - QUARTERLY OPERATIONS AND EARNINGS DATA - UNAUDITED

29

RAND CAPITAL CORPORATION AND SUBSIDIARIES
SCHEDULE OF CONSOLIDATED CHANGES IN INVESTMENTS AT
COST AND REALIZED GAIN

YEAR ENDED DECEMBER 31, 2003

30

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
Rand Capital Corporation and Subsidiaries

We have audited the accompanying consolidated statements of financial
position of Rand Capital Corporation and Subsidiaries (the "Corporation") as of
December 31, 2003, including the consolidated schedule of portfolio investments
as of December 31, 2003, and the related consolidated statements of operations,
cash flows and changes in net assets for the year then ended, 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 audit. The consolidated financial statements of the Corporation for
the years ended December 31, 2002 and 2001 were audited by other auditors whose
reports dated January 13, 2003 and January 11, 2002 (February 1, 2002 - Note 9),
expressed an unqualified opinion on those statements.

We conducted our audit 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 and confirmation of securities owned as of December 31, 2003. 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 audit provides 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, 2003, and
the results of their operations, their cash flows and the changes in their net
assets for the year then ended in conformity with accounting principles
generally accepted in the United States of America.

As discussed in Note 1, the investment securities included in the
consolidated financial statements valued at $7,236,999 (77% of net assets) and
$6,076,187 (63% of net assets) as of December 31, 2003 and 2002, respectively,
include securities valued at $7,208,999 and $6,012,442, respectively, whose fair
values have been estimated by the Board of Directors in the absence of readily
ascertainable market value. We have reviewed the procedures used by the
Directors in preparing the valuations of investment securities and have
inspected the underlying documentation, and in the circumstances we believe the
procedures are reasonable and the documentation appropriate. Those estimated
values may differ significantly from the values that would have been used had a
ready market for the investments existed, and those favorable or unfavorable
differences could be material.

Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplementary schedule
of consolidated changes in investments at cost and realized gain is presented
for purposes of additional analysis and is not a required part of the basic
consolidated financial statements. The information has been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.

/s/ Freed Maxick & Battaglia, CPA's, PC

Buffalo, New York
January 16, 2004

31

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated statement of financial
position of Rand Capital Corporation and subsidiary (the "Corporation") as of
December 31, 2002, and the related consolidated statements of operations, cash
flows and changes in net assets for each of the two years in the period ended
December 31, 2002, and the selected per share data and ratios for each of the
four 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. 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, the
results of their operations, their cash flows and the changes in their net
assets for each of the two years in the period ended December 31, 2002, and the
selected per share data and ratios for each of the four 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) as of December 31, 2002 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.

/s/ Deloitte & Touche LLP

Buffalo, New York
January 13, 2003

32

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

The Corporation's Audit Committee, at a meeting held on December 11, 2003,
selected Freed Maxick & Battaglia, CPA's PC (Freed) as the independent auditors
for the fiscal year ending December 31, 2003.

The previous independent accountants of the Corporation, Deloitte & Touche
LLP (Deloitte) communicated to the Corporation on September 22, 2003 that
although they would be willing to conduct the audit of the Corporation for the
year ended December 31, 2003, they would not continue as Rand's independent
accountant subsequent to that date. The Audit Committee dismissed Deloitte as
the Corporation's independent accountant's on December 11, 2003.

The reports of Deloitte on the Corporation's financial statements for each
of the two fiscal years ended December 31, 2002 and 2001 do not contain an
adverse opinion or a disclaimer of opinion, nor were such reports qualified or
modified as to uncertainty, audit scope or accounting principles.

During the two most recent fiscal years ended December 31, 2002 and 2001,
and the subsequent interim period preceding the date of Deloitte's dismissal,
there have been no disagreements between the Corporation and Deloitte on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Deloitte, would have caused Deloitte to make reference to the
subject matter of the disagreements in its reports on the Corporation's
financial statements. Also, during the aforementioned period, there occurred no
"reportable events" within the meaning of Item 304(a)(v) of Regulation S-K.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. Our management, with the
participation of our principal executive officer and principal financial
officer, has evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the
period covered by this Annual Report on Form 10-K. Based on such evaluation, our
principal executive officer and principal financial officer have concluded that
as of such date, our disclosure controls and procedures were designed to ensure
that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in applicable SEC rules and forms and were
effective.

Changes in Internal Control Over Financial Reporting. There have been no
significant changes in our internal control or in other factors that could
significantly affect those controls subsequent to our evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

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 29, 2004, to be filed under
Regulation 14A (the "2004 Proxy Statement").

The Corporation has adopted a written code of ethics and officer Code of
Ethics that applies to our principal executive officer, principal financial
officer, and controller and a Business Ethics Policy applicable to the
Corporation's directors, officers and employees. Information in response to this
Item is incorporated herein by reference to the information under the heading
"COMMITTEES AND MEETING DATA" and the section labeled "Code of Business Conduct
and Ethics" provided in the Corporation's 2004 Proxy Statement. The Corporations
Code of Ethics and Business Ethics Policy are available, free of charge, in the
Governance section of the Corporation's website located at randcapital.com.

33

ITEM 11. EXECUTIVE COMPENSATION

Information in response to this Item is incorporated herein by reference to
the information provided in the 2004 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 2004 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, 2003.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Information concerning audit committee's pre-approval policy for audit
services and our principal accountant fees and services is contained in the
Corporation's 2004 Proxy Statement under the heading "COMMITTEES AND MEETING
DATA" and the section labeled "Audit Committee", "Independent Accountant Fees"
and "AUDIT COMMITTEE REPORT".

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON 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, 2003 and 2002

Statements of Operations for the three years in the period ended
December 31, 2003

Statements of Cash Flows for the three years in the period ended
December 31, 2003

Statements of changes in Net Assets for the three years in the period
ended December 31, 2003

Schedule of Portfolio Investments as of December 31, 2003

Schedules of Selected Per Share Data and Ratios for the five years in
the period ended December 31, 2003

Notes to Consolidated Financial Statements

Supplemental Schedule of Consolidated Changes in Investments at Cost
and Realized Gain (Loss) for the year ended December 31, 2003

Independent Auditor's Report's

(2) FINANCIAL STATEMENT SCHEDULES There were no schedules required to
be filed as part of this report

(b) Reports on Form 8-K

On February 4, 2004, the Corporation furnished a Current Report on
Form 8-K attaching our press release dated February 4, 2004 announcing our
earnings results and net asset value for the fiscal year ended December 31,
2003.

34

On December 17, 2003 the Corporation filed a Current Report on Form
8-K detailing the change in the Company's Certifying Accountant as Deloitte
& Touche LLP was dismissed and Freed Maxick & Battaglia, CPA's PC was
engaged.

On November 18, 2003 the Corporation furnished a Current Report on
Form 8-K attaching our press release dated November 13, 2003 announcing our
earnings results and net asset value for the quarter ended September 30,
2003.

(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.*
(10.3) 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 - incorporated by reference to Exhibit
10.8 to the Corporation's Form 10-K filed for the year ended
December 31, 2002.*
(21) Subsidiaries of the Corporation - filed on the Corporation's
Form 10-K filed December 31, 2001.
(31.1) Certification of Chief Executive Officer Pursuant to Rules
13a-14(a)/15d-14(a) under the Securities Exchange Act of
1934, as amended-filed herewith
(31.2) Certification of Chief Financial Officer Pursuant to Rules
13a-14(a)/15d-14(a) under the Securities Exchange Act of
1934, as amended - filed herewith
(32.1) Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 - Rand Capital Corporation - filed herewith
(32.2) Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 - Rand Capital SBIC, L.P. - filed herewith

* Management contract or compensatory plan.

35

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.