<PAGE>

                     UNITED STATES SECURITIES AND  EXCHANGE
                                   COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarter ended June 30, 2004

[ ] 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

                            RAND CAPITAL CORPORATION
             (Exact Name of Registrant as specified in its Charter)

                  NEW YORK                              16-0961359
(State or Other Jurisdiction of Incorporation          (IRS Employer
              or organization)                      Identification No.)

    2200 RAND BUILDING, BUFFALO, NY                       14203
(Address of Principal executive offices)                (Zip Code)

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

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

Number of shares outstanding of each of the issuer's classes of common stock, as
of the latest practicable date (August 6, 2004): 5,718,934

<PAGE>

RAND CAPITAL CORPORATION
TABLE OF CONTENTS FOR FORM 10-Q

<TABLE>
<S>                                                                                   <C>
PART I. - FINANCIAL INFORMATION

     ITEM 1. FINANCIAL STATEMENTS (Unaudited)

            Consolidated Statements of Financial Position as of June 30, 2004
            and December 31, 2003

            Consolidated Statements of Operations for the Three Months and
            Six Months Ended June 30, 2004 and 2003

            Consolidated Statements of Cash Flows for Three Months and Six
            Months Ended June 30, 2004 and 2003

            Consolidated Statements of Changes in Net Assets for the Three
            Months and Six Months Ended June 30, 2004 and 2003

            Consolidated Schedule of Portfolio Investments as of June 30, 2004

            Notes to Consolidated Financial Statements

     ITEM 2. Management's Discussion and Analysis of Financial Condition and
             Results of Operations

     ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

     ITEM 4. Controls and Procedures

PART II - OTHER INFORMATION

     ITEM 1. Legal Proceedings

     ITEM 2. Changes in Securities and Use of Proceeds

     ITEM 3. Defaults Upon Senior Securities

     ITEM 4. Submission of Matters To a Vote of Security Holders

     ITEM 5. Other Information

     ITEM 6. Exhibits and Reports on Form 8-K
</TABLE>
<PAGE>

                                     PART I.
                              FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                            RAND CAPITAL CORPORATION
                  CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
                    AS OF JUNE 30, 2004 AND DECEMBER 31, 2003
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                JUNE 30,       DECEMBER 31,
                                                                                  2004            2003
                                                                              ------------     ------------
<S>                                                                           <C>              <C>
ASSETS
Investments at fair value (identified cost:
      at 6/30/2004 - $10,222,417, at 12/31/2003 - $7,616,309)                 $ 10,156,592     $ 7,236,999
Cash and cash equivalents                                                        1,101,176       1,251,546
Interest receivable (net of allowance of $0 at 6/30/04,$122,914
      at 12/31/2003)                                                               381,637         334,734
Deferred tax asset                                                                 282,000         430,000
Income tax receivable                                                               10,751               -
Promissory notes receivable                                                         56,190          72,330
Other assets                                                                       148,296          59,528
                                                                              ------------     -----------
TOTAL ASSETS                                                                  $ 12,136,642     $ 9,385,137
                                                                              ============     ===========

LIABILITIES AND STOCKHOLDERS' EQUITY (NET ASSETS)

LIABILITIES:
Accounts payable and accrued expenses                                         $     93,282     $    93,522
Income taxes payable                                                                     -           6,374
Deferred revenue                                                                    88,601          46,753
Debentures guaranteed by the SBA                                                 2,500,000               -
                                                                              ------------     -----------
                  Total liabilities                                              2,681,883         146,649
                                                                              ------------     -----------

STOCKHOLDERS' EQUITY (NET ASSETS)

Common stock, $.10 par - shares authorized 10,000,000;
      shares issued 5,763,034                                                      576,304         576,304
Capital in excess of par value                                                   6,973,454       6,973,454
Accumulated net investment (loss)                                               (4,705,932)     (4,700,763)
Undistributed net realized gain on investments                                   6,695,506       6,662,551
Net unrealized (depreciation) on investments                                       (37,367)       (225,852)
Treasury stock at cost, 44,100 shares at 6/30/2004                                 (47,206)        (47,206)
     and 12/31/2003                                                           ------------     -----------
                  Net assets (per share 6/30/2004-$1.65, 12/31/2003-$1.62)       9,454,759       9,238,488
                                                                              ------------     -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                    $ 12,136,642     $ 9,385,137
                                                                              ============     ===========
</TABLE>

                            See accompanying notes.

<PAGE>

                            RAND CAPITAL CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
    FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2004 AND JUNE 30, 2003
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                    THREE MONTHS    THREE MONTHS    THREE MONTHS    THREE MONTHS
                                                                       ENDED           ENDED           ENDED           ENDED
                                                                   JUNE 30, 2004   JUNE 30, 2003   JUNE 30, 2004   JUNE 30, 2003
                                                                   -------------   -------------   -------------   -------------
<S>                                                                <C>             <C>             <C>             <C>
INVESTMENT INCOME:
         Interest from portfolio companies                          $   149,725     $   101,054     $   322,522     $   202,963
         Interest from other investments                                    229           6,329           1,634          14,174
         Dividend Income                                                 25,920               -          32,507               -
         Other income                                                    12,747           2,357          18,152           4,616
                                                                    -----------     -----------     -----------     -----------
                                                                        188,621         109,740         374,815         221,753
                                                                    -----------     -----------     -----------     -----------
EXPENSES:
         Salaries                                                        82,060          71,969         215,715         188,384
         Employee benefits                                               19,774          15,821          50,581          41,170
         Directors' fees                                                 14,000          15,000          26,100          20,500
         Professional fees                                               24,664          42,316          38,095          63,102
         Shareholders and office                                         39,194          28,603          66,735          54,082
         Insurance                                                       11,550          10,800          23,100          21,600
         Corporate development                                           10,575           8,855          19,082          18,162
         Other operating expenses                                         4,457           2,275           8,238           6,562
                                                                    -----------     -----------     -----------     -----------
                                                                        206,274         195,639         447,646         413,562
                                                                    -----------     -----------     -----------     -----------

         Interest Expense                                                20,983               -          24,007               -
         Bad Debt Recovery                                                    -                        (122,914)
                                                                    -----------     -----------     -----------     -----------
         Total expenses                                                 227,257         195,639         348,739         413,562
                                                                    -----------     -----------     -----------     -----------
INVESTMENT (LOSS) INCOME BEFORE INCOME TAXES                            (38,636)        (85,899)         26,076        (191,809)
         Income tax expense (benefit)                                     5,490           4,301           8,246           8,295
         Deferred income tax (benefit) expense                           (6,000)        (28,799)         23,000         (67,133)
                                                                    -----------     -----------     -----------     -----------
NET INVESTMENT (LOSS)                                                   (38,126)        (61,401)         (5,170)       (132,971)
                                                                    -----------     -----------     -----------     -----------

REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
         Net gain on sales and dispositions                                   -           8,565          32,956           8,565
                                                                    -----------     -----------     -----------     -----------
Unrealized appreciation (depreciation) on investments:
         Beginning of period                                           (390,346)       (177,376)       (379,311)       (149,266)
         End of period                                                  (65,826)       (151,355)        (65,826)       (151,355)
                                                                    -----------     -----------     -----------     -----------
         Change in unrealized appreciation (depreciation) before        324,520          26,021         313,485          (2,089)
         income taxes

         Deferred income tax expense (benefit)                          129,000          10,799         125,000            (867)
                                                                    -----------     -----------     -----------     -----------
NET INCREASE (DECREASE) IN UNREALIZED APPRECIATION                      195,520          15,222         188,485          (1,222)
                                                                    -----------     -----------     -----------     -----------

NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS                         195,520          23,787         221,441           7,343
                                                                    -----------     -----------     -----------     -----------

NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS               $   157,394     $   (37,614)    $   216,271     $  (125,628)
                                                                    ===========     ===========     ===========     ===========
WEIGHTED AVERAGE SHARES OUTSTANDING                                   5,718,934       5,722,737       5,718,934       5,726,284

BASIC AND DILUTED NET (DECREASE) IN NET ASSETS FROM OPERATIONS      $      0.03     $     (0.01)    $      0.04     $     (0.02)
PER SHARE
</TABLE>

                            See accompanying notes.

<PAGE>

                            RAND CAPITAL CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                   SIX MONTHS      SIX MONTHS
                                                                                      ENDED           ENDED
                                                                                  JUNE 30, 2004   JUNE 30, 2003
                                                                                  -------------   -------------
<S>                                                                               <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets from operations                              $   216,271     $  (125,628)
                                                                                   -----------     -----------

Adjustments to reconcile net increase (decrease) in net assets to net cash used
 in operating activities:
      Depreciation and amortization                                                      5,769           3,000
      Bad debt recovery                                                               (122,914)              -
      Change in unrealized depreciation
            of investments                                                            (313,485)          2,089
      Deferred tax expense(benefit)                                                    148,000         (68,000)
      Net realized gain on portfolio investments                                       (32,956)         (8,565)
      Non-cash conversion of debentures                                                (61,919)        (24,811)
      Changes in operating assets and liabilities:
           Decrease (increase) in interest receivable                                   76,011        (127,214)
           (Increase) in other assets                                                  (36,892)        (36,698)
           Increase in deferred revenue                                                 41,848           5,054
           (Decrease) increase in accounts payable and other
               accrued liabilities                                                      (6,614)         20,528
                                                                                   -----------     -----------

            Total adjustments                                                         (303,152)       (234,617)
                                                                                   -----------     -----------

            Net cash used in operating activities                                      (86,881)       (360,245)
                                                                                   -----------     -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Investments originated                                                        (3,010,000)       (609,000)
      Proceeds from sale of portfolio investments                                       37,503          10,844
      Proceeds from loan repayments                                                    477,405
                                                                                                        19,530

      Capital expenditures                                                              (5,897)              -
                                                                                   -----------     -----------

            NET CASH USED IN INVESTING ACTIVITIES                                   (2,500,989)       (578,626)
                                                                                   -----------     -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Proceeds from SBA debentures                                                   2,500,000               -
      Origination costs for SBA debenture loans                                        (62,500)              -
      Purchase of treasury shares                                                            -         (19,763)
                                                                                   -----------     -----------
            NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES                         2,437,500         (19,763)
                                                                                   -----------     -----------

Net decrease in cash and cash equivalents                                             (150,370)       (958,634)

Cash and cash equivalents:
      Beginning of period                                                            1,251,546       3,092,189
                                                                                   -----------     -----------

      End of period                                                                $ 1,101,176     $ 2,133,555
                                                                                   ===========     ===========
</TABLE>

                             See accompanying notes.

<PAGE>

                            RAND CAPITAL CORPORATION
           CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
        FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                              THREE MONTHS    THREE MONTHS    SIX MONTHS      SIX MONTHS
                                                 ENDED           ENDED           ENDED           ENDED
                                             JUNE 30, 2004   JUNE 30, 2003   JUNE 30, 2004   JUNE 30, 2003
                                             -------------   -------------   -------------   -------------
<S>                                          <C>             <C>             <C>             <C>
NET ASSETS AT BEGINNING OF PERIOD             $ 9,297,365     $ 9,502,974     $ 9,238,488     $ 9,604,634

Operations:
      Net investment loss                         (38,126)        (61,401)         (5,170)       (132,971)

      Net realized gain on investments                  -           8,565          32,956           8,565

      Net increase (decrease) in unrealized
               appreciation of investments        195,520          15,222         188,485          (1,222)
                                              -----------     -----------     -----------     -----------
Net increase (decrease) in net assets             157,394         (37,614)        216,271        (125,628)
    from operations

Purchase of treasury shares                             -          (6,117)              -         (19,763)
                                              -----------     -----------     -----------     -----------

NET ASSETS AT END OF PERIOD                   $ 9,454,759     $ 9,459,243     $ 9,454,759     $ 9,459,243
                                              ===========     ===========     ===========     ===========
</TABLE>

                            See accompanying notes.

<PAGE>

                    RAND CAPITAL CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
                                  JUNE 30, 2004
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                              (b)     (c)                   (d)
                                                                                             DATE
           COMPANY AND BUSINESS                             TYPE OF INVESTMENT             ACQUIRED  EQUITY     COST        VALUE
           --------------------                             ------------------             --------  ------     ----        -----
<S>                                                    <C>                                 <C>       <C>     <C>         <C>
CAROLINA SKIFF, LLC (g)                                $985,000 Class A preferred           1/30/04     5%   $1,000,000  $1,000,000
Waycross, GA.  Manufacturer of fresh water             membership interest at 10%.
and ocean fishing and pleasure boats.                  5% common membership interest.
www.carolinaskiff.com

CONTRACT STAFFING                                      10,000 shares Series A 8%            11/8/99    10%      100,000     100,000
Buffalo, NY. PEO providing human resource              cumulative preferred stock.
administration for small businesses.
www.contract-staffing.com

D'LISI FOOD SYSTEMS, INC. (g)                          $400,000 note at 10% due              1/7/04     5%      400,000     400,000
Rochester, NY.  Produces private label and             December 31, 2008.  Warrant for
branded frozen pizzas for distribution to              up to 5% of common stock.
convenience stores, supermarkets, large club
stores and food service distributors.
www.dlisi.com

GEMCOR II, LLC(g)                                      $250,000 note at 8% due              6/28/04    31%      750,000     750,000
West Seneca, NY.  Designs and sells automatic          June 28, 2009 with warrant to
riveting machines used in the assembly of              purchase 6.25 membership units.
aircraft components.  www.gemcor.com                   25 common membership units.

G-TEC NATURAL GAS SYSTEMS (e)                          41.67% Class A membership            8/31/99    42%      300,000     300,000
Buffalo, NY. Manufactures and distributes              interest. 8% cumulative dividend.
systems that allow natural gas to be used
as an alternative fuel to gases.
www.gas-tec.com

KIONIX, INC.(g)                                        2,862,091 shares Series A            5/17/02     2%    1,000,000   1,000,000
Ithaca, NY.  Develops innovative MEMS                  preferred stock.
based technology applications.
www.kionix.com

MINRAD, INC.                                           677,980 common shares.                8/4/97     3%      919,422     847,000
Buffalo, NY. Developer of acute care devices
and anesthetics.  www.minrad.com

NEW MONARCH MACHINE TOOL, INC .(E)(G) **               $500,000 note at 12% due             9/24/03    12%      688,636     688,636
Cortland, NY.  Manufactures and services               September 24, 2006. Warrant
vertical/horizontal machining centers.                 for 11.59 shares of common stock.
www.monarchmt.com                                      $250,000 note at 14% due March 2,
                                                       2005.

PHOTONIC PRODUCTS GROUP, INC (OTC:  PHPG.OB) *         100 shares convertible Series B     10/31/00    <1%      135,000     120,300
(Formerly INRAD, Inc.) Northvale, NJ.  Develops and    preferred stock, 10% dividend.
manufactures products for laser photonics industry.    14,000 shares common stock.
www.inrad.com

RAMSCO(e)(g) **                                        $750,000 note at 13% due            11/19/02     7%      942,143     942,143
Albany, NY. Distributor of water, sanitary, storm      November 18, 2007. Warrants
sewer and specialty construction materials to the      to purchase 12.5 % of common
contractor, highway and municipal markets.             shares.  $210,000 note at 13% due
www.ramsco.com                                         February 17, 2005.

SOMERSET GAS TRANSMISSION COMPANY, LLC                 $500,000 convertible note at         7/10/02    <1%      500,000     618,000
Buffalo, NY.  Natural gas transportation company.      10% due on demand after
                                                       July 30, 2004.
                                                       0.88 membership units.

SYNACOR, INC.(g)                                       $350,000 convertible note at        11/18/02     4%      385,000     389,337
Buffalo, NY.  Develops provisioning platforms          10% due November 18, 2007.
for aggregation and delivery of content for broadband  14,957 Series A preferred shares.
access providers.                                      Warrants for 149,573 common
www.synacor.com                                        shares.

TOPPS MEAT COMPANY, LLC(e)(g)                          Preferred A and Class A               4/3/03     3%      259,000     259,000
Elizabeth, NJ - Producer and supplier of               common membership
premium branded frozen hamburgers and other            interest.
portion controlled meat products.
</TABLE>

<PAGE>

                    RAND CAPITAL CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
                                  JUNE 30, 2004
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                              (b)     (c)                    (d)
                                                                                             DATE
             COMPANY AND BUSINESS                          TYPE OF INVESTMENT              ACQUIRED  EQUITY     COST        VALUE
             --------------------                          ------------------              --------  ------     ----        -----
<S>                                                    <C>                                 <C>       <C>     <C>         <C>
ULTRA - SCAN CORPORATION                               504,596 common shares,              12/11/92     3%       734,164   1,072,174
Amherst, NY.  Biometrics application                   107,104 Series A-1 preferred
developer of ultrasonic fingerprint technology.        shares. Warrants for 32,000
www.ultra-scan.com                                     common shares.

USTEC, INC. (e)                                        $100,000 note at 5% due              6/26/98    <1%       450,500     475,000
Victor, NY.  Markets digital wiring systems            February 2006. 50,000
for new home construction.                             common shares. Warrants for
www.ustecnet.com                                       139,395 common shares.
                                                       (g) $350,000 Senior
                                                       Subordinated Convertible
                                                       Debenture at 6% due
                                                       February 2, 2008.

VANGUARD MODULAR BUILDING SYSTEMS (e)                  Preferred Units - 2,673 units       12/16/99    <1%       270,000     270,000
Philadelphia, PA. Leases and sells high-end            with warrants, 14% accrued
modular space solutions.                               distribution rate.
www.vanguardmodular.com

WINEISIT.COM, CORP.(g)                                 $500,000 Senior Subordinated        12/18/02     2%       801,918     801,918
Amherst, NY.  Marketing company specializing           note at 10% due December 17,
in customer loyalty programs supporting the wine       2009.  $250,000 note at 10% due
and spirit industry.                                   April 16, 2005.Warrants to
www.wineisit.com                                       purchase 100,000 shares Class B
                                                       common stock.

Other Investments                                      Other                                Various     -        586,634     123,084
                                                                                                             ----------- -----------

                                                       Total portfolio investments                           $10,222,417 $10,156,592
                                                                                                             =========== ===========
</TABLE>

                             See accompanying notes.

<PAGE>

RAND CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 2004 (CONTINUED)

NOTES TO CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

(a)   Unrestricted securities (indicated by * ) 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 June 30, 2004 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 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 might reasonably
      expect to receive if the 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 June 30, 2004, the aggregate cost of
      investment securities approximated $10.2 million. Net unrealized
      depreciation aggregated approximately $66,000 of which $485,000 related to
      appreciated investment securities and $551,000 related to depreciated
      investment securities.

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

*     Publicly owned company

**    Reduction in cost and value reflects current principal repayment.

                             See accompanying notes.

<PAGE>

                            RAND CAPITAL CORPORATION
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
                                   (UNAUDITED)

NOTE 1. ORGANIZATION

      Rand Capital Corporation ("Rand") was incorporated under the laws of the
state of New York on February 24, 1969. From 1971 to August 16, 2001, 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. 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. Rand continues to operate as a publicly held venture
capital company, listed on the NASDAQ Small Cap Market under the symbol "RAND."

FORMATION OF SBIC SUBSIDIARY

      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 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 investments in portfolio companies.

      The following discussion will include the Rand, Rand SBIC and Rand
Management (collectively, the "Corporation").

      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 June 30,
2004, Rand Capital SBIC, L.P. had drawn $2,500,000 in leverage from the SBA.
Subsequent to the quarter end of June 30, 2004 the Corporation drew down an
additional $1,000,000 bringing the total outstanding SBA leverage to $3,500,000
through August 6, 2004.

      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.

      The Corporation formed Rand SBIC as a subsidiary for the purpose of
causing it to be licensed as a SBIC under the Small Business Investment Act of
1958 (the "SBA Act") by 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 Securities and Exchange

<PAGE>

Commission ("SEC") seeking an order under Sections 6(c), 12(d)(1)(J), 57(c), and
57(i) of, and Rule 17d-1 under, the 1940 Act for exemptions from the application
of Sections 2(a)(3), 2(a)(19), 12(d)(1), 18(a), 21(b), 57(a)(1), (2), (3), and
(4), and 61(a) of the 1940 Act to certain aspects of its operations. The
application also seeks an order under Section 12(h) of the Securities Exchange
Act of 1934 Act (the "Exchange Act") for an exemption from separate reporting
requirements under Section 13(a) of the Exchange Act. In general, the
Corporation applications seek orders that would permit:

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

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

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

      -     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.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION - In Management's opinion, the accompanying consolidated
financial statements include all adjustments necessary for a fair presentation
of the consolidated financial position, results of operations, and cash flows
for the interim periods presented. Certain information and note disclosures
normally included in audited annual financial statements prepared in accordance
with accounting principles generally accepted in the United States of America,
have been omitted; however, the Corporation believes that the disclosures made
are adequate to make the information presented not misleading. The interim
results for the period ending June 30, 2004 are not necessarily indicative of
the results for the full year.

      These statements should be read in conjunction with the financial
statements and the notes included in the Corporation's Annual Report on Form
10-K for the year ended December 31, 2003. Information contained in this filing
should also be reviewed in conjunction with the Corporation's related filings
with the SEC during the period of time prior to the date of this report. Those
filings include, but are not limited to the following:

      N-30-B2/ARS   Quarterly & Annual Reports to Shareholders
      N-54A         Election to Adopt Business Development Company status
      DEF-14A       Definitive Proxy Statement submitted to shareholders
      Form 10-K     Annual Report on Form 10-K for the year ended
                    December 31, 2003
      Form 10-Q     Quarterly Report on Form 10-Q for the quarters ended
                    March 31, 2004, September 30, 2003 and June 30, 2003
      Form N-23C-1  Reports by closed-end investment companies of purchases
                    of their own securities

<PAGE>

      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 SEC.

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.

      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.

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

      During the six month period ending June 30, 2004 the Corporation reversed
its reserve of $122,914 relating to interest receivable that was paid in April
of 2004. This reversal is reflected as a bad debt recovery in the accompanying
statement of operations.

DEFERRED DEBENTURE COSTS - SBA debenture costs, which are included in other
assets, will be amortized ratably over the terms of the SBA debentures. The
Corporation incurred an additional $62,500 of SBA debenture costs during the six
month period ended June 30, 2004 attributed to its draw down on the SBA
commitment.

SBA DEBENTURES - During the six month period ended June 30, 2004, the
Corporation drew down $2,500,000 on its available SBA leverage which it used to
fund certain investments. The debentures are due in 10 years and provide for
semi-annual interest only payments. The current interest rate is approximately
5%.

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.

<PAGE>

STATEMENT OF CASH FLOWS - During the six month ended June 30, 2004, the
Corporation converted accrued interest of $51,919 to a debenture instrument and
$10,000 to an equity instrument.

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.

STOCKHOLDERS EQUITY (NET ASSETS) - At June 30, 2004 and December 31, 2003, there
were 500,000 shares of $10.00 par value preferred stock authorized and unissued.

      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. No
treasury shares were purchased in the six months ended June 30, 2004.

STOCK OPTION PLAN - 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 sharing plan for the Corporation's employees in
connection with the establishment of its SBIC subsidiary. As of June 30, 2004,
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.

<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

      You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with our 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" BELOW.

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, L.P. is operated as a small business investment
company (SBIC) that is regulated by the Small Business Administration ("SBA").
The Corporation anticipates that most, if not all, of its investments in the
next year will be originated through the SBIC subsidiary.

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 certain of our significant
accounting policies see Note 2 of the consolidated financial statements. A
summary of our critical accounting policies can be found in the December 31,
2003 Form 10-K in Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations".

<PAGE>

FINANCIAL CONDITION

      The Corporation's total assets increased by $2,751,505 or 29.3% to
$12,136,642 and its net assets increased by $216,271 or 2.3% to $9,454,759 at
June 30, 2004, versus $9,385,137 and $9,238,488 at December 31, 2003,
respectively.

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

<TABLE>
<CAPTION>
                                  JUNE 30, 2004    DECEMBER 31, 2003
                                  -------------    -----------------
<S>                               <C>              <C>
Investments at cost               $ 10,222,417        $ 7,616,309
Unrealized (depreciation), net         (65,825)          (379,310)
                                  ------------        -----------
Investments at fair value         $ 10,156,592        $ 7,236,999
                                  ============        ===========
</TABLE>

      The increase in investments is due to the effect of Rand SBIC's new
investments during the six months ended June 30, 2004 in the following portfolio
companies:

<TABLE>
<CAPTION>
            NEW INVESTMENTS                              AMOUNT
            ---------------                              ------
<S>                                                    <C>
Carolina Skiff, LLC (Carolina Skiff)                   $1,000,000
D'Lisi Food Systems, Inc (D'Lisi)                      $  400,000
Gemcor II, LLC                                         $  750,000
New Monarch Machine Tool, Inc (Monarch)                $  250,000
Rexford Albany Municipal
            Supply Company (RAMSCO)                    $  210,000
USTec                                                  $  150,000
Wineisit.com                                           $  250,000
                                                       ----------

Total of investment made during 2004                   $3,010,000
Interest Conversions:
WineIsIt.com, Corp. (WineIsIt)                         $   51,918
Photonics Product Group (Photonics)                    $   10,000
Total of new and additions to previous
            Investments during the six months ended
            June 30, 2004:                             $3,071,918
                                                       ==========
</TABLE>

      The increase in investments at cost is due to the $3,010,000 of new
investments made during the first half of 2004 by the Corporation. In addition,
the Corporation converted the accrued interest of WineIsIt of $51,918 to the
debenture instrument and $10,000 of accrued interest in Photonics into an equity
instrument.

      A significant development in the six months ended June 30, 2004 was the
increase in the SBA Debenture Loan Payable amount by $2,500,000. The Corporation
began drawing leverage from the SBA during the six months ended June 30, 2004.
These debentures are due in 10 years and provide for semi-annual interest only
payments which are currently at approximately 5%.

      Net asset value per share (NAV) was $1.65/share at June 30, 2004 versus
$1.62/share at December 31, 2003.

      The Corporation's total investments at fair value, whose fair value have
been estimated by the Board of Directors, approximated 107% of net assets at
June 30, 2004 and 78% of net assets at December 31, 2003. This increase in this
percentage during the six months period ended June 30, 2004 is due to the
increase in new investments which were partially funded by the $2,500,000 draw
down on the Corporation's SBA leverage and a reduction of unrealized
depreciation on investments of approximately $313,000.

<PAGE>

RESULTS OF OPERATIONS

Comparison of the six months ended June 30, 2004 to the six months ended June
30, 2003

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.

      Total investment income was $374,815 and $221,753 for the period ended
June 30, 2004 and 2003, an increase of $153,062 or 69%. 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 $322,522 and $202,963 for the six months
ended June 30, 2004 and 2003, an increase of 59%. This increase is attributable
to the fact that the 63% or $850,000 of the total of new 2003 investments
originated out of Rand SBIC are in debenture instruments that earn interest
income at a blended interest rate of approximately 10%. In addition
approximately 51% or $1,561,918 of the new investments originated in the six
month period ended June 30, 2004 were debentures and earned a blended rate of
10%.

      The portfolio interest income for the six months ended June 30, 2004
includes $62,705 of interest income 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. In September 2003 the Corporation had
stopped accruing interest on the Somerset note, had issued a demand letter to
Somerset regarding its repayment, and had established a 100% reserve for the
accrued interest of $122,914. In April 2004 Somerset paid $400,000 in principal
on the $900,000 note and $190,449 in accrued interest. The remaining $500,000
balance of the note was converted to a new debenture instrument earning interest
at 10%.

      The other interest income from idle cash was $1,634 for the six months
ended June 30, 2004 and $14,174 for the six months ended June 30, 2003, a
decrease of $12,540 or 88%. 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 decrease in the
interest income from idle cash balances category.

      Dividend Income is comprised of distributions from Limited Liability
Companies (LLC's) that the Corporation has invested in. The Corporation's
investment agreements with certain LLC companies 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. Dividend income was $32,507 for the six months
ended June 30, 2004 and $0 for the same period in 2003. This income increased
due to the fact that the Corporation invested in portfolio companies during 2003
and 2004 that were LLC's that had taxable income. The LLC investment income for
the six months ended June 30, 2004 consisted of LLC distributions from Topps
Meat Company, LLC (Topps) for $18,575, Carolina Skiff, LLC for $12,688 and
Vanguard Modular Building Systems (Vanguard) for $1,244.

      Other income consists of the revenue associated with the amortization of
financing fees charged to the portfolio companies upon successful closing of
Rand SBIC financing. The SBA regulations limit the amount of fees that can be
charged to a portfolio company and the

<PAGE>

Corporation typically charges 1-3% to the portfolio concerns. These fees are
amortized ratably over the life of the instrument associated with the fees. The
unamortized fees are carried on the balance sheet under Deferred Revenue. These
fees were $18,152 for the six month period ended June 30, 2004 and $4,616 for
the same period in 2003. The increase can be attributable to the fact that the
Corporation is generating more investments through Rand SBIC in 2004 and
therefore more closing fees are being charged.

OPERATING EXPENSES

      Total operating expenses for the six month periods ended June 30, 2004 and
2003 were $348,739 and $413,562, respectively. The change represents a 16%
decrease or $64,823. This decrease can be attributed to the bad debt recovery of
$122,914. The total expenses excluding the bad debt recovery were $471,653 for
the six months ended June 30, 2004 which represents an increase of $58,091 or
14% over prior year amounts. The increase in the operating expenses is primarily
attributed to employee salary and director fee increases and an increase in
shareholder and office expenses related to the cost of operating as a public
company.

      The Corporation has commenced accruing SBA interest expense in the six
month period ended June 30, 2004 due to the fact that Corporation began to draw
down leverage from the SBA in 2004. This interest is paid on a semi-annual basis
to the SBA.

      The operating expenses predominately consist of employee compensation and
benefits, director fees, shareholder related costs, office expenses,
professional fees, expenses related to identifying and reviewing investment
opportunities and bad debt expense. The operating expenses for the six month
period ending June 30, 2004 were reduced by $122,914 in bad debt recovery
related to the full recovery of the accrued interest related to the Somerset
investment. The reserve was initially established in September 2003 due to the
fact that the underlying note was in technical default. This reserve was
reversed and all accrued interest through April 14, 2004 was paid in full on
April 15, 2004.

NET REALIZED GAINS AND LOSSES ON INVESTMENTS

      During the six months ended June 30, 2004 the Corporation realized a
$32,956 gain on the sale of the remaining Advanced Digital Information
Corporation (ADIC) stock. During the same six month period ended in 2003 the
Corporation realized an $8,565 gain on the sale of the ADIC stock.

NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION OF INVESTMENTS

      The increase in unrealized appreciation of the investments is primarily
attributable to the second quarter valuation of Minrad, Inc. (Minrad). The
Corporation recognized appreciation of $338,500 on its investment in Minrad
following its recent equity financing at a price greater than the fair value
previously recorded by the Corporation. Minrad's plans following the financing
is to merge into a publicly traded shell company, Technology Acquisition
Corporation (TAC) which is traded under the symbol TAQC.OB. The Corporation
currently holds 677,980 shares of Minrad which will be converted into publicly
traded shares of TAC. The Corporation may be restricted in its ability to
immediately trade its shares in TAC. In addition the Corporation increased its
valuation of its 0.88 membership interest in Somerset Gas Transmission Company,
LLC (Somerset) by $118,000. The Somerset membership units were previously
written down in September 2003 to zero. These increases were partially offset by
the unrealized depreciation of the Corporation's investment in Dataview, LLC
(Dataview) of ($105,179) and SmartPill Diagonostics, Inc. (SmartPill) of
($19,680). These adjustments were done in accordance with the Corporation's
established valuation policies.

NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS

<PAGE>

      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
the six month period ended June 30, 2004, the net increase in net assets from
operations was $216,271 as compared to a net (decrease) in net assets from
operations of ($125,628) for the same period in 2003.

      The net increase in net assets from operations for the six month period
ended June 30, 2004 can be attributed to: increased portfolio income, realized
gain from the sale of ADIC stock and the bad debt recovery and the equity
revaluation attributed to the Corporation's Somerset and Minrad investments.

LIQUIDITY AND CAPITAL RESOURCES

      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 through the six months ended June 30, 2004 and it
is anticipated that will continue in the future.

      As of June 30, 2004 and 2003, the Corporation's total liquidity,
consisting of cash and cash equivalents, was $1,101,176 and $2,133,555
respectively.

      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 June 30,
2004, Rand Capital SBIC, L.P. had drawn $2,500,000 in leverage from the SBA.
Subsequent to quarter end the Corporation drew down an additional $1,000,000 in
August 2004 and the total outstanding SBA leverage was $3,500,000. 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.

      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 June 30, 2004 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.

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

<PAGE>

in the Corporation's 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 Corporation's 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. The Corporation's
investments in portfolio companies are highly speculative and aggressive and,
therefore, an investment in its shares may not be suitable for investors for
whom such risk is inappropriate.

COMPETITION

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

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
also subject to regulation as an SBIC. The loans and other investments that the
Corporation makes, or is expected to make, in small business concerns are
extremely speculative. Substantially all of these concerns are and will be
privately held. Even if a public market for their securities later develops, the
debt obligations and other securities purchased by 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 the Corporation's ability
to implement its business strategy. The Corporation does not maintain key man
life insurance on any of its officers or employees.

INVESTMENT IN SMALL, PRIVATE COMPANIES

<PAGE>

      There are significant risks inherent in the venture capital business. The
Corporation typically invests in private companies. These private businesses
tend to be thinly capitalized, small companies that may have higher risk
attributes including risky technologies; lack of management depth; lack of
profitability; or short history of operations. Because of the speculative nature
and the lack of a public market for these investments, there is a significantly
greater risk of loss than is the case with traditional investment securities.
The Corporation expects that some of its venture capital investments may be a
complete loss, or unprofitable, and that some which appear to be likely to
become successful may never realize their potential due to numerous operational
and external market factors. In addition, the accrued interest (if any)
associated with the Corporations portfolio investments may also become
uncollectible, due to both gradual shifts and sometimes sudden changes in the
marketplace, affecting the portfolio companies ability to execute on its
business plan. 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.

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 has no
established trading market. The illiquidity of most of the Corporation's
portfolio may adversely affect the ability of the Corporation to dispose of such
securities at times when it may be advantageous to liquidate such investments.

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

VALUATION OF PORTFOLIO INVESTMENTS

      There is typically no public market for equity securities of the small
privately held companies in which the Corporation invests. As a result, the
valuation of the equity securities in the portfolio are stated at fair value as
determined by the good faith estimate of the Board of Directors in accordance
with the Corporation's established valuation policies. In the absence of a
readily ascertainable market value, the estimated value of the 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 valuation are recorded in the Corporation's
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The Corporation's investment activities contain elements of risk. The
portion of the Corporation's investment portfolio consisting of equity and
equity-linked debt securities in

<PAGE>

private companies is subject to valuation risk. Because there is typically no
public market for the equity and equity-linked debt securities in which it
invests, the valuation of the equity interests in the portfolio is stated at
"fair value" as determined in good faith by the Board of Directors in accordance
with the Corporation's investment valuation policy. (The discussion of valuation
policy contained in Item 1 "Financial Statements" in the "Notes to Schedule of
Portfolio Investments" and is hereby incorporated herein by reference.) In the
absence of a readily ascertainable market value, the estimated value of the
Corporation's portfolio may differ significantly from the values that would be
placed on the portfolio if a ready market for the investments existed. Any
changes in valuation are recorded in the Corporation's consolidated statement of
operations as "Net unrealized appreciation (depreciation) on investments."

      At times a portion of the Corporation's portfolio may include marketable
securities traded in the over-the-counter market. In addition, there may be a
portion of the Corporation's portfolio for which no regular trading market
exists. In order to realize the full value of a security, the market must trade
in an orderly fashion or a willing purchaser must be available when a sale is to
be made. Should an economic or other event occur that would not allow the
markets to trade in an orderly fashion, the Corporation may not be able to
realize the fair value of its marketable investments or other investments in a
timely manner.

      As of June 30, 2004 the Corporation did not have any off-balance sheet
investments or hedging investments.

ITEM 4. EVALUATION OF DISCLOSURE 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 Quarterly Report on Form 10-Q. 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

<PAGE>

                                    PART II.
                                OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         None

ITEM 2.  CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUERS PURCHASES
         OF EQUITY SECURITIES

         None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None

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

                  At the Annual Meeting of Shareholders of Rand Capital
         Corporation, Buffalo, New York, on the 29th day of April, 2004, the
         following represents the results of balloting:

         ELECTION OF DIRECTORS:  The following nominees received the number
         of votes set opposite their respective names:

<TABLE>
<CAPTION>
                         VOTES FOR   VOTES WITHHELD
                         ---------   --------------
<S>                      <C>         <C>
Allen F. Grum            5,207,683       60,550
Luiz F. Kahl             5,207,683       60,550
Erland E. Kailbourne     5,204,483       63,750
Ross B. Kenzie           5,202,043       66,190
Willis S. McLeese        5,198,805       69,428
Reginald B. Newman II    5,207,083       61,150
Jayne K. Rand            5,207,583       60,650
</TABLE>

ITEM 5.  OTHER INFORMATION

         None

<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

         (a)      EXHIBITS

                  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 to 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 Limited Partnership of Rand Capital
                           SBIC, L.P. - incorporated by reference to Exhibit
                           10.4 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 10.5 to the Corporation's Form 10-K Report
                           filed for the year ended December 31, 2001.

                  (10.6)   Certificate of Formation of Rand Capital Management,
                           LLC - incorporated by reference to Exhibit 10.6 to
                           the Corporation's Form 10-K Report filed for the year
                           ended December 31, 2001.

                  (10.7)   N/A

                  (10.8)   Profit Sharing Plan - incorporated by reference to
                           Exhibit 10.8 to the Corporation's Form 10-K Report
                           filed for the year ended December 31, 2002.*

                  (21)     Subsidiaries of the Corporation - incorporated by
                           reference to Exhibit 21 to the Corporation's Form
                           10-K Report filed for the of Chief Executive Officer
                           Pursuant to Rules 13a-14(a)/15d- year ended December
                           31, 2001.

                  (31.1)   Certification 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.

         (b)      REPORTS ON FORM 8-K

                  No current reports were filed during the period

<PAGE>

                                   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-Q TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.

Dated: August 11, 2004

                                   RAND CAPITAL CORPORATION

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

                                     By: /s/ Daniel P. Penberthy
                                         ------------------------------
                                         Daniel P. Penberthy, Treasurer

                                   RAND CAPITAL SBIC, L.P.

                                   By: RAND CAPITAL MANAGEMENT LLC
                                         General Partner

                                   By: RAND CAPITAL CORPORATION
                                         Member

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

                                         By: /s/ Daniel P. Penberthy
                                             ------------------------
                                             Daniel P. Penberthy, Treasurer