<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 September 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 (November 10, 2004): 5,718,934


<PAGE>



RAND CAPITAL CORPORATION
TABLE OF CONTENTS FOR FORM 10-Q

PART I. - FINANCIAL INFORMATION

   ITEM 1.  FINANCIAL STATEMENTS (Unaudited)

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

         Consolidated Statements of Operations for the Three Months and Nine
         Months Ended September 30, 2004 and 2003

         Consolidated Statements of Cash Flows for the Nine Months Ended
         September 30, 2004 and 2003

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

         Consolidated Schedule of Portfolio Investments as of September 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


<PAGE>


                                     PART I.
                              FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

<Table>
<Caption>

                                                                        SEPTEMBER 30,         DECEMBER 31,
                                                                           2004                   2003
                                                                       --------------        --------------
<S>                                                                    <C>                   <C>
ASSETS
      Investments at fair value (identified cost:  at 9/30/04 -        $   10,427,720        $    7,236,999
             $11,029,933, at 12/31/03 - $7,616,309)
      Cash and cash equivalents                                             1,131,502             1,251,546
      Interest receivable (net of allowance of $122,000 at
      9/30/04, and $122,914 at 12/31/03)                                      331,551               334,734
      Deferred tax asset                                                      558,000               430,000
      Income tax receivable                                                    17,649                    --
      Promissory notes receivable                                              45,200                72,330
      Other assets                                                            215,569                59,528
                                                                       --------------        --------------
      TOTAL ASSETS                                                     $   12,727,191        $    9,385,137
                                                                       ==============        ==============

LIABILITIES AND STOCKHOLDERS' EQUITY (NET ASSETS)

      LIABILITIES:
      Accounts payable and accrued expenses                            $       87,004        $       93,522
      Income taxes payable                                                         --                 6,374
      Deferred revenue                                                         93,053                46,753
      Debentures guaranteed by the SBA                                      3,500,000                    --
                                                                       --------------        --------------
             Total liabilities                                              3,680,057               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)                                    (4,792,170)           (4,700,763)
      Undistributed net realized gain on investments                        6,695,507             6,662,551
      Net unrealized (depreciation) on investments                           (358,755)             (225,852)
      Treasury stock at cost, 44,100 shares at 9/30/04
             and 12/31/03                                                     (47,206)              (47,206)
                                                                       --------------        --------------

        Net assets (per share 9/30/2004-$1.58, 12/31/2003-$1.62)            9,047,134             9,238,488
                                                                       --------------        --------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                             $   12,727,191        $    9,385,137
                                                                       ==============        ==============
</Table>

                             See accompanying notes

<PAGE>


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

<Table>
<Caption>
                                                            THREE MONTHS       THREE MONTHS       NINE MONTHS         NINE MONTHS
                                                                ENDED             ENDED              ENDED               ENDED
                                                            SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,       SEPTEMBER 30,
                                                                2004               2003               2004                2003
                                                            -------------      -------------      -------------        -----------
<S>                                                          <C>                <C>                <C>                <C>
INVESTMENT INCOME:
        Interest from portfolio companies                    $   161,731        $    92,708        $   484,253        $   295,671

        Interest from other investments                              318              3,376              1,952             17,550
        Dividend income                                           21,587             47,668             54,094             47,668
        Other income                                              14,048              2,359             32,200              6,975
                                                             -----------        -----------        -----------        -----------
                                                                 197,684            146,111            572,499            367,864
                                                             -----------        -----------        -----------        -----------
EXPENSES:
        Salaries                                                  82,814             71,793            298,529            260,177
        Employee benefits                                         15,895             14,570             66,476             55,740
        Directors' fees                                            8,050              7,550             34,150             28,050
        Professional fees                                         17,431             26,117             55,526             89,219
        Shareholders and office                                   30,106             29,961             96,841             84,043
        Insurance                                                 11,550             10,800             34,650             32,400
        Corporate development                                     16,296              7,897             35,378             26,059
        Other operating expenses                                   3,778              5,381             12,016             11,944
                                                             -----------        -----------        -----------        -----------
                                                                 185,920            174,069            633,566            587,632
        Interest expense                                          33,001                 --             57,008                 --
        Bad debt (recovery) expense                              122,000            122,914               (914)           122,914
                                                             -----------        -----------        -----------        -----------
        Total expenses                                           340,921            296,983            689,660            710,546
                                                             -----------        -----------        -----------        -----------
INVESTMENT (LOSS) BEFORE INCOME TAXES                           (143,237)          (150,872)          (117,161)          (342,682)
        Income tax expense                                         4,000              4,201             12,246             12,496
        Deferred income tax benefit                              (61,000)           (44,071)           (38,000)          (111,204)
                                                             -----------        -----------        -----------        -----------
NET INVESTMENT (LOSS)                                            (86,237)          (111,002)           (91,407)          (243,974)
                                                             -----------        -----------        -----------        -----------

REALIZED AND UNREALIZED GAIN ON INVESTMENTS:

        Net gain on sales and dispositions                            --             43,726             32,956             52,291
                                                             -----------        -----------        -----------        -----------
Unrealized (depreciation) on investments:
        Beginning of period                                      (65,826)          (151,355)          (379,311)          (149,266)
        End of period                                           (602,214)          (346,363)          (602,214)          (346,363)
                                                             -----------        -----------        -----------        -----------
        Change in unrealized appreciation                       (536,388)          (195,008)          (222,903)          (197,097)
        (depreciation) before income taxes
        Deferred income tax benefit                             (215,000)           (80,929)           (90,000)           (81,796)
                                                             -----------        -----------        -----------        -----------
NET INCREASE IN UNREALIZED DEPRECIATION                         (321,388)          (114,079)          (132,903)          (115,301)
                                                             -----------        -----------        -----------        -----------

NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
                                                                (321,388)           (70,353)           (99,947)           (63,010)
                                                             -----------        -----------        -----------        -----------

NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS        $  (407,625)       $  (181,355)       $  (191,354)       $  (306,984)
                                                             ===========        ===========        ===========        ===========

       WEIGHTED AVERAGE SHARES OUTSTANDING                     5,718,934          5,725,333          5,718,934          5,724,071
BASIC AND DILUTED NET (DECREASE) IN NET ASSETS FROM

OPERATIONS PER SHARE                                         $     (0.07)       $     (0.03)       $     (0.03)       $     (0.05)
</Table>

                             See accompanying notes


<PAGE>


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

<Table>
<Caption>

                                                                              NINE MONTHS        NINE MONTHS
                                                                                  ENDED             ENDED
                                                                           SEPTEMBER 30, 2004  SEPTEMBER 30, 2003
                                                                           ------------------  ------------------
<S>                                                                        <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets from operations                                    $  (191,354)       $  (306,984)
                                                                              -----------        -----------
Adjustments to reconcile net decrease in net assets to net cash
 used in operating activities:
      Depreciation and amortization                                                10,415              4,500
      Bad debt recovery                                                              (914)                --
      Change in unrealized depreciation
           of investments                                                         222,903            197,097
      Deferred tax benefit                                                       (128,000)          (193,000)
      Net realized gain on portfolio investments                                  (32,956)           (52,291)
      Non-cash conversion of debentures                                           (61,919)           (24,811)
      Changes in operating assets and liabilities:
         Decrease (increase) in interest receivable                                 4,097            (71,383)
         (Increase) in other assets                                               (40,707)           (18,658)
         Increase in deferred revenue                                              46,300             12,696
         Increase in accounts payable and other
             accrued liabilities                                                  (12,892)            (3,464)
                                                                              -----------        -----------
           Total adjustments                                                        6,327           (149,314)
                                                                              -----------        -----------
NET CASH USED IN OPERATING ACTIVITIES                                            (185,027)          (456,298)
                                                                              -----------        -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
      Investments originated                                                   (3,864,000)        (1,359,000)
      Proceeds from sale of portfolio investments                                  37,502             63,352
      Proceeds from loan repayments                                               534,878             30,860
      Capital expenditures                                                         (5,897)                --
                                                                              -----------        -----------
           NET CASH USED IN INVESTING ACTIVITIES                               (3,297,517)        (1,264,788)
                                                                              -----------        -----------
CASH FLOWS FROM FINANCING ACTIVITIES:

      Proceeds from SBA debentures                                              3,500,000                 --
      Origination costs for SBA debenture loans                                   (87,500)                --
      Purchase of SBA Commitment                                                  (50,000)           (50,000)
      Purchase of treasury shares                                                      --            (21,502)
                                                                              -----------        -----------
             NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES                   3,362,500            (71,502)
                                                                              -----------        -----------

Net decrease in cash and cash equivalents                                        (120,044)        (1,792,588)
Cash and cash equivalents:
      Beginning of period                                                       1,251,546          3,092,189
                                                                              -----------        -----------
      End of period                                                           $ 1,131,502        $ 1,299,601
                                                                              ===========        ===========
</Table>

                             See accompanying notes.


<PAGE>


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

<Table>
<Caption>

                                         THREE MONTHS       THREE MONTHS        NINE MONTHS        NINE MONTHS
                                            ENDED              ENDED              ENDED               ENDED
                                         SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,       SEPTEMBER 30,
                                             2004               2003               2004                2003
                                         -------------      -------------      -------------       -------------
<S>                                      <C>                <C>                <C>                 <C>
NET ASSETS AT BEGINNING OF PERIOD         $ 9,454,759        $ 9,459,243        $ 9,238,488        $ 9,604,634

Operations:
   Net investment loss                        (86,237)          (111,002)           (91,407)          (243,974)

   Net realized gain on investments                --             43,726             32,956             52,291

   Net decrease in unrealized
      appreciation of investments            (321,388)          (114,079)          (132,903)          (115,301)
                                          -----------        -----------        -----------        -----------
Net decrease in net assets from              (407,625)          (181,355)          (191,354)          (306,984)
   operations

Purchase of treasury shares                        --             (1,740)                --            (21,502)
                                          -----------        -----------        -----------        -----------

NET ASSETS AT END OF PERIOD               $ 9,047,134        $ 9,276,148        $ 9,047,134        $ 9,276,148
                                          ===========        ===========        ===========        ===========
</Table>

                             See accompanying notes


<PAGE>


                    RAND CAPITAL CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
                               SEPTEMBER 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>

APF GROUP, INC. (e)(g)                            $500,000 Senior Subordinated note     7/8/04       6%     $500,000     $500,000
Mount Vernon, NY. Manufacturer of                 at 12.5% due July 1, 2009. Warrants
museum quality picture frames and                 to purchase 10.2941 shares common
framed mirrors for museums, art                   stock.
galleries, retail frame shops,
upscale designers and prominent
collectors. www.apfgroup.com

CAROLINA SKIFF, LLC(e)(g)                         $985,000 Class A preferred            1/30/04      5%    1,000,000     1,000,000
Waycross, GA. Manufacturer of fresh               membership interest at 10%.
water, ocean fishing and pleasure                 Redeemable January 31, 2010. 5%
boats. www.carolinaskiff.com                      common membership interest.


CONTRACT STAFFING                                 10,000 shares Series A 8%             11/8/99      10%     100,000      100,000
Buffalo, NY. PEO providing human                  cumulative preferred stock.
resource administration for small                 Redeemable November 2004.
businesses.
www.contract-staffing.com

D'LISI FOOD SYSTEMS, INC. (g)                     $400,000 note at 10% due December      1/7/04       5%      400,000         -
Rochester, NY. Produces private                   31, 2008. Warrant for up to 5% of
label and branded frozen pizzas for               common stock. Filed for bankruptcy
distribution to convenience stores,               protection 8/13/04.
supermarkets, large club stores and
food services. www.dlisi.com

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

G-TEC NATURAL GAS SYSTEMS                         41.67% Class A membership interest.    8/31/99      42%     300,000      200,000
Buffalo, NY. Manufactures and                     8% cumulative dividend.
distributes systems that allow
natural gas to be used as an
alternative fuel to gases.
www.gas-tec.com

INNOV-X SYSTEMS, INC. (e)(g)                      $350,000 Subordinated Debenture at     9/27/04      10%     350,000      350,000
Woburn, MA. Manufactures portable                 8.5% due September 27, 2009 with
x-ray fluorescence (XRF) analyzers                detachable warrants.
used in metals/alloy analysis.
www.innovx-sys.com

KIONIX, INC. (g)                                  2,862,091 shares Series A preferred    5/17/02      2%    1,000,000     1,000,000
Ithaca, NY. Develops innovative                   stock.
MEMS 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 September     9/24/03      12%     668,182      668,182
Cortland, NY. Manufactures and                    24, 2006. Warrant for 11.59 shares
services vertical/horizontal                      of common stock. $250,000 note at
machining centers.                                14% due March 2, 2005.
www.monarchmt.com


PHOTONIC PRODUCTS GROUP, INC (OTC: PHPG.OB) *     100 shares convertible Series B       10/31/00      <1%     135,000      112,600
(Formerly INRAD, Inc.) Northvale,                 preferred stock, 10% dividend.
NJ. Develops and manufactures                     14,000 shares common stock.
products for laser photonics
industry. www.inrad.com
</Table>


<PAGE>


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

<Table>
<Caption>
                                                                                           (b)       (c)                    (d)
                                                                                           DATE
                COMPANY AND BUSINESS                         TYPE OF INVESTMENT          ACQUIRED   EQUITY     COST        VALUE
                --------------------                         ------------------          --------   ------     ----        -----
<S>                                                 <C>                                  <C>        <C>       <C>         <C>
RAMSCO (e)(g) **                                    $750,000 note at 13% due November    11/19/02    13%      916,947     916,947
Albany, NY. Distributor of water, sanitary, storm   18, 2007.  Warrants to purchase
sewer and specialty construction materials to the   12.5% of common shares.  $210,000
contractor, highway and municipal markets.          note at 13% due November 18, 2007.
www.ramsco.com

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

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

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

ULTRA - SCAN CORPORATION                            536,569 common shares, 107,104       12/11/92     3%      738,164    1,076,174
Amherst, NY.  Biometrics application developer of   Series A-1 preferred shares.
ultrasonic fingerprint technology.
www.ultra-scan.com

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

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

WINEISIT.COM, CORP.(e)(g)                           $500,000 Senior Subordinated note    12/18/02     2%      801,918     801,918
Amherst, NY.  Marketing company specializing in     at 10% due December 17, 2009.
customer loyalty programs supporting the wine and   $250,000 note at 10% due April 16,
spirit industry.                                    2005.Warrants to purchase100,000
www.wineisit.com                                    shares Class B common stock.

Other Investments                                   Other                                 Various             585,800        93,562
                                                                                                           ------------ -----------

                                                    Total portfolio investments                             $11,029,933 $10,427,720
                                                                                                            =========== ===========
</Table>

                             See accompanying notes


<PAGE>


                    RAND CAPITAL CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
                         SEPTEMBER 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 September 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 September 30, 2004, the aggregate cost
         of investment securities approximated $11.0 million. Net unrealized
         depreciation aggregated approximately $602,000 of which $485,000
         related to appreciated investment securities and $1,087,000 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 NINE MONTHS ENDED SEPTEMBER 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").

         The Corporation paid $100,000 to the SBA to reserve $10,000,000 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 September 30, 2004, Rand Capital
SBIC, L.P. had drawn $3,500,000 in leverage from the SBA.

         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 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),


<PAGE>


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:

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

         o    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;

         o    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;

         o    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 September 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
                         June 30, 2004, March 31, 2004, and September 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 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.

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. Certain investments of the Corporation are structured to provide a
deferred interest period where interest is not currently due.

         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. Management also utilizes other qualitative and quantitative
measures to determine the value of a portfolio investment and the collectability
of any accrued interest.

         During the nine month period ending September 30, 2004 the Corporation
reversed its reserve of $122,914 relating to a Somerset Gas Transmission
Company, LLC (Somerset) interest receivable that was paid in April of 2004. In
addition the Corporation fully reserved the interest receivable from G-TEC
Natural Gas Systems (G-TEC) for $122,000. The net effect of the reversal of
Somerset and the reserve for G-TEC 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 $137,500 of SBA debenture costs during the
nine month period ended September 30, 2004 attributed to its draw down on the
SBA commitment and the $50,000 commitment fee paid to reserve an additional
$5,000,000 in SBA leverage.

SBA DEBENTURES - During the nine month period ended September 30, 2004, the
Corporation drew down $3,500,000 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%.


<PAGE>


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.

STATEMENT OF CASH FLOWS - During the nine month period ended September 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 September 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 28, 2005. 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
shares were purchased for the Corporation's treasury in the nine months ended
September 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 September 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.

SUBSEQUENT EVENT - Subsequent to the quarter end of September 30, 2004, the
Corporation made one investment totaling $400,000.


<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 $3,342,054 or 35.6% to
$12,727,191 and its net assets decreased by ($191,354) or (2.1%) to $9,047,134
at September 30, 2004, versus $9,385,137 and $9,238,488 respectively, at
December 31, 2003.

         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>

                                             SEPTEMBER 30, 2004   DECEMBER 31, 2003
                                             ------------------   -----------------
<S>                                          <C>                  <C>
Investments at cost                             $ 11,029,933        $  7,616,309
Unrealized (depreciation), net                      (602,214)           (379,310)
                                                ------------        ------------
Investments at fair value                        $10,427,720          $7,236,999
                                                ============        ============
</Table>

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

<Table>
<Caption>

NEW INVESTMENTS                                                         AMOUNT
---------------                                                       ----------
<S>                                                                   <C>
APF Group, Inc.                                                       $  500,000
Carolina Skiff, LLC (Carolina Skiff)                                   1,000,000
D'Lisi Food Systems, Inc (D'Lisi)                                        400,000
Gemcor II, LLC (Gemcor)                                                  750,000
Innov-X Systems, Inc.                                                    350,000
New Monarch Machine Tool, Inc (Monarch)                                  250,000
Rexford Albany Municipal
     Supply Company (RAMSCO)                                             210,000
USTec                                                                    150,000
Wineisit.com                                                             250,000
Ultra-Scan Corporation (Ultra-Scan)                                        4,000
                                                                      ----------
TOTAL OF INVESTMENT MADE DURING 2004                                  $3,864,000

Interest Conversions:
WineIsIt.com, Corp. (WineIsIt)                                            51,918
Photonics Product Group (Photonics)                                       10,000
                                                                      ----------
Total of new and additions to previous investments
 during the nine months ended September 30, 2004                      $3,925,918
                                                                      ==========
</Table>

         The increase in investments at cost is due to the $3,864,000 of new
investments made during the first nine months 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. The unrealized depreciation increased in the nine months
ended September 30, 2004 by $222,904. See the section below labeled "Net Change
in Unrealized Appreciation/Depreciation of Investments" for an explanation of
this change.

         A significant development in the nine months ended September 30, 2004
was the increase in the SBA Debenture Loan Payable amount by $3,500,000. The
Corporation began drawing leverage from the SBA during the nine months ended
September30, 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 $1.58/share at September 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 115% of net assets
at September 30, 2004 and 78% of net assets at December 31, 2003. The increase
in this percentage during the nine month period

<PAGE>


ended September 30, 2004 is due to the increase in new investments which were
partially funded by the $3,500,000 draw down on the Corporation's SBA leverage.

RESULTS OF OPERATIONS

Comparison of the nine months ended September 30, 2004 to the nine months ended
September 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.

         During the current year nine-month period, total investment income was
$572,499, an increase of $204,635, or 56%, from total investment income of
$367,864 for the prior year nine month period ended September 30, 2003. 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 $484,253 and $295,671 for the nine months
ended September 30, 2004 and 2003 respectively, an increase of 64%. This
increase is attributable to the fact that 63% or $850,000 of the 2003 new
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 62% or approximately $2,412,000 of the new investments originated
during the nine month period ended September 30, 2004 were debentures and earned
a blended interest rate of 8.6%.

         The portfolio interest income for the nine months ended September 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 $1,952 for the nine months
ended September 30, 2004 and $17,550 for the same nine month period in 2003.
This represented a decrease of $15,598 or 89%. 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 $54,094 for the nine months
ended September 30, 2004 and $47,668 for the same nine month period in 2003.
This income increased due to the fact that the Corporation invested in three
portfolio companies during 2003 and 2004 that were LLC's that had taxable
income. The LLC investment income for the nine months ended September 30, 2004
consisted of LLC distributions from Topps Meat Company, LLC

<PAGE>


(Topps) for $25,760, Carolina Skiff, LLC for $27,090 and Vanguard Modular
Building Systems (Vanguard) for $1,244. The LLC investment income for the prior
year nine months ended was comprised of distributions from Topps for $18,887 and
G-Tec for $28,781.

         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 Corporation typically charges 1 to 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. The amortized fee revenue was $32,200 for
the nine month period ended September 30, 2004 and $6,975 for the same nine
month 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 collected.

OPERATING EXPENSES

         Total operating expenses for the nine months ended September 30, 2004
and 2003 were $689,660 and $710,546, respectively, a decrease of $20,885 or 3%.
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, interest expense and bad debt expense. The total operating
expenses excluding the bad debt expense (recovery) for the nine months ended
September 30, 2004 and 2003 were $690,575 and $587,632, an increase of $102,943
or 18%. This increase in 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. In addition, the
Corporation began to draw down SBA leverage in 2004 and therefore incurred
$57,008 in interest expense during the nine months ended September 30, 2004.
This interest is paid on a semi-annual basis to the SBA.

         In addition, the operating expenses for the nine month period ending
September 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. In
addition, a bad debt reserve was established in the third quarter of 2004 for
G-Tec for $122,000. This represents all of the interest that had been accrued on
this investment and was established after a review of the investment by
management.

NET REALIZED GAINS AND LOSSES ON INVESTMENTS

         During the nine months ended September 30, 2004 the Corporation
realized a $32,956 gain on the sale of the remaining Advanced Digital
Information Corporation (ADIC) stock. During the same nine 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 Corporation recorded a net change in unrealized (depreciation) on
investments of ($222,903) during the current year nine month period, as compared
to ($197,097) during the prior year nine month period. This net change in
unrealized (depreciation) on investments of ($222,903) is the net effect of
decreases in fair value of five portfolio companies totaling ($677,259),
increases in fair value of three portfolio companies totaling $477,812 and the
reversal of unrealized appreciation related to the sale of ADIC stock of
($23,456).

<PAGE>


         The decrease in fair value of ($677,259) is comprised of decreases in
the fair value of D'Lisi ($400,000), Dataview, LLC (Dataview) ($155,179), G-Tec
($100,000) and SmartPill Diagnostics, Inc. (SmartPill) ($19,680). The write
downs of Dataview and SmartPill were done in accordance the Corporation's
established valuation policies. The write down of D'Lisi was precipitated by the
fact that D'Lisi filed for Chapter 11 bankruptcy protection on August 13, 2004.
Accordingly, the collection of our subordinated debenture principal is presumed
in doubt and/or there is substantial doubt about the ability for D'Lisi to pay
the principal. Although the company has continued to operate while it submits
its reorganization plan to the courts, there exists some doubt as to the future
of the company. Management of the Corporation evaluated its investment in G-Tec
and determined that the company's performance and potential have significantly
deteriorated. In the future if the factors which led to the reduction in
valuation are overcome, the valuation may be restored.

         The increase in fair value of $477,812 is primarily attributable to the
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. The
Corporation also increased the 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.
Additionally, the Corporation increased the fair value of its investment in
Clearview Cable (Clearview) by $21,312. These adjustments were done in
accordance with the Corporation's established valuation policies.

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
the nine month period ended September 30, 2004, the net decrease in net assets
from operations was ($191,354) as compared to a net decrease in net assets from
operations of ($306,984) for the same nine month period in 2003.

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 nine months ended September 30, 2004
and it is anticipated that will continue in the future.

         As of September 30, 2004 and 2003, the Corporation's total liquidity,
consisting of cash and cash equivalents, was $1,131,502 and $1,299,601
respectively.

         The Corporation paid a total of $100,000; $50,000 in July 2003 and
$50,000 in August of 2004 to the SBA to reserve $10,000,000 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 September 30, 2004, Rand Capital SBIC, L.P.
had drawn $3,500,000 in leverage from the SBA. SBA debentures are issued with
10-year maturities. Interest only is payable semi-annually until maturity.
Ten-year SBA

<PAGE>


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
by the Corporation 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 fiscal years and management anticipates this amount will continue
at similar levels. The future cash flow may fluctuate based on possible expenses
associated with compliance with potential new SBIC and public company regulatory
rules. Management believes that the cash and cash equivalents at September 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 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

<PAGE>


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

         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.

<PAGE>


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 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 September 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,

<PAGE>


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

         None

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 of the 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.

         (b)   REPORTS ON FORM 8-K

               On July 29, 2004, we furnished a Current Report on Form 8-K
               pursuant to Item 9. Regulation FD Disclosure attaching our press
               release dated July 29, 2003 announcing our earnings results for
               the second quarter of 2004.


<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: November 10, 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