<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, 2005

[ ]  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: 001-08205

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

<TABLE>
<S>                                                          <C>
                NEW YORK                                          16-0961359
      (State or Other Jurisdiction                              (IRS Employer
    of Incorporation or organization)                        Identification No.)
</TABLE>

<TABLE>
<S>                                                               <C>
     2200 RAND BUILDING, BUFFALO, NY                                14203
(Address of Principal executive offices)                          (Zip Code)
</TABLE>

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

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. [x] Yes [ ] No

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

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [x] No

Number of shares outstanding of each of the issuer's classes of common stock, as
of the latest practicable date (November 1, 2005): 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 September 30, 2005
          and December 31, 2004

          Consolidated Statements of Operations for the Three Months and Nine
          Months Ended September 30, 2005 and 2004

          Consolidated Statements of Cash Flows for the Nine Months Ended
          September 30, 2005 and 2004

          Consolidated Statements of Changes in Net Assets for the Three Months
          and Nine Months Ended September 30, 2005 and 2004

          Consolidated Schedule of Portfolio Investments as of
          September 30, 2005

          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.   Evaluation of Disclosure - Controls and Procedures


PART II - OTHER INFORMATION

ITEM 1.   Legal Proceedings

ITEM 2.   Unregistered Sales of Equity 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
</TABLE>

<PAGE>

                                     PART I.
                              FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                            RAND CAPITAL CORPORATION
                  CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
                 AS OF SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                 SEPTEMBER 30,   DECEMBER 31,
                                                                      2005           2004
                                                                 -------------   ------------
<S>                                                              <C>             <C>
ASSETS
   Investments at fair value (identified cost: at 9/30/05 -       $13,019,544    $11,035,806
      $13,041,977, at 12/31/04- $11,621,853)
   Cash and cash equivalents                                          483,448        626,744
   Interest receivable (net of allowance of $122,000 at
   9/30/05 and 12/31/04)                                              354,677        260,490
   Deferred tax asset                                                 637,000        566,000

   Income tax receivable                                               15,162         11,579
   Promissory notes receivable                                         14,810         36,195
   Other assets                                                       252,799        206,295
                                                                  -----------    -----------
   TOTAL ASSETS                                                   $14,777,440    $12,743,109
                                                                  ===========    ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET ASSETS)
   LIABILITIES:
   Debentures guaranteed by the SBA                               $ 5,700,000    $ 3,500,000
   Accounts payable and accrued expenses                               70,894        132,897
   Deferred revenue                                                    88,663         83,158
                                                                  -----------    -----------
      Total liabilities                                             5,859,557      3,716,055

   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)                               (4,878,133)    (4,813,146)
   Undistributed net realized gain on investments                   6,306,925      6,689,277
   Net unrealized (depreciation) on investments                       (13,461)      (351,629)
   Treasury stock at cost, 44,100 shares at 9/30/05
      and 12/31/04                                                    (47,206)       (47,206)
                                                                  -----------    -----------
      Net assets (per share 9/30/2005-$1.56, 12/31/2004-$1.58)      8,917,883      9,027,054
                                                                  -----------    -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
   EQUITY (NET ASSETS)                                            $14,777,440    $12,743,109
                                                                  ===========    ===========
</TABLE>

                             See accompanying notes

<PAGE>

                            RAND CAPITAL CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
     FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                         THREE MONTHS     THREE MONTHS    NINE MONTHS     NINE MONTHS
                                                            ENDED            ENDED           ENDED           ENDED
                                                         SEPTEMBER 30,   SEPTEMBER 30,   SEPTEMBER 30,   SEPTEMBER 30,
                                                              2005            2004            2005            2004
                                                         -------------   -------------   -------------   -------------
<S>                                                      <C>             <C>             <C>             <C>
INVESTMENT INCOME:
   Interest from portfolio companies                      $  156,005      $  161,731      $  438,928      $  484,253
   Interest from other investments                               803             318           2,287           1,952
   Dividend income                                             1,660          21,587          31,364          54,094
   Other income                                               12,535          14,048          34,136          32,200
                                                          ----------      ----------      ----------      ----------
                                                             171,003         197,684         506,715         572,499
                                                          ----------      ----------      ----------      ----------
OPERATING EXPENSES:
   Salaries                                                   88,618          82,814         311,722         298,529
   Employee benefits                                          18,578          15,895          73,307          66,476
   Directors' fees                                             9,750           8,050          46,200          34,150
   Professional fees                                          18,910          17,431          63,750          55,526
   Shareholders and office                                    28,121          30,106          86,494          96,841
   Insurance                                                  11,550          11,550          34,650          34,650
   Corporate development                                      24,810          16,296          45,587          35,378
   Other operating expenses                                    2,876           3,778           8,088          12,016
                                                          ----------      ----------      ----------      ----------
                                                             203,213         185,920         669,798         633,566
   Interest expense                                           73,689          33,001         188,423          57,008
   Bad debt expense (recovery)                                    --         122,000              --            (914)
                                                          ----------      ----------      ----------      ----------
   Total expenses                                            276,902         340,921         858,221         689,660
                                                          ----------      ----------      ----------      ----------
INVESTMENT (LOSS) INCOME BEFORE INCOME TAXES                (105,899)       (143,237)       (351,506)       (117,161)
   Income tax (provision)                                     (5,000)         (4,000)         (9,927)        (12,246)
   Deferred income tax benefit                               212,289          61,000         296,446          38,000
                                                          ----------      ----------      ----------      ----------
NET INVESTMENT INCOME (LOSS)                                 101,390         (86,237)        (64,987)        (91,407)
                                                          ----------      ----------      ----------      ----------

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
   Net (loss) gain on sales and dispositions                (382,353)             --        (382,353)         32,956
                                                          ----------      ----------      ----------      ----------
Unrealized appreciation (depreciation) on investments:
   Beginning of period                                      (420,974)        (65,826)       (586,048)       (379,311)
   End of period                                             (22,433)       (602,214)        (22,433)       (602,214)
                                                          ----------      ----------      ----------      ----------
   Change in unrealized appreciation (depreciation)
   before income taxes                                       398,541        (536,388)        563,615        (222,903)
   Deferred income tax (benefit) provision                  (159,289)        215,000        (225,446)         90,000
                                                          ----------      ----------      ----------      ----------
NET DECREASE (INCREASE) IN UNREALIZED APPRECIATION           239,252        (321,388)        338,169        (132,903)
                                                          ----------      ----------      ----------      ----------
NET REALIZED AND UNREALIZED (LOSS) ON INVESTMENTS           (143,101)       (321,388)        (44,184)        (99,947)
                                                          ----------      ----------      ----------      ----------
NET (DECREASE) IN NET ASSETS FROM OPERATIONS              $  (41,711)     $ (407,625)     $ (109,171)     $ (191,354)
                                                          ----------      ----------      ----------      ----------
WEIGHTED AVERAGE SHARES OUTSTANDING                        5,718,934       5,718,934       5,718,934       5,718,934
BASIC AND DILUTED NET (DECREASE) IN NET ASSETS FROM
OPERATIONS PER SHARE                                      $    (0.01)     $    (0.07)     $    (0.02)     $    (0.03)
</TABLE>

                             See accompanying notes

<PAGE>

                            RAND CAPITAL CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                          SEPTEMBER 30, 2005   SEPTEMBER 30, 2004
                                                          ------------------   ------------------
<S>                                                       <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets from operations                   $  (109,171)         $  (191,354)
                                                             -----------          -----------
Adjustments to reconcile net (decrease) in net assets
   to net cash used in operating activities:
      Depreciation and amortization                               17,138               10,415
      Bad debt recovery                                               --                 (914)
      Change in unrealized depreciation
         of investments                                         (563,615)             222,903
      Deferred tax benefit                                       (71,000)            (128,000)
      Net realized loss (gain) on portfolio investments          382,353              (32,956)
      Non-cash conversion of debentures                          (29,097)             (61,919)
      Changes in operating assets and liabilities:
         (Increase) decrease in interest receivable              (94,187)               4,097
         (Increase) in other assets                               (9,110)             (40,707)
         Increase in deferred revenue                              5,505               46,300
         (Decrease) in accounts payable and other
            accrued expenses                                     (62,002)             (12,892)
                                                             -----------          -----------
         Total adjustments                                      (424,015)               6,327
                                                             -----------          -----------

NET CASH USED IN OPERATING ACTIVITIES                           (533,186)            (185,027)
                                                             -----------          -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Investments originated                                  (1,901,178)          (3,864,000)
      Proceeds from sale of portfolio investments                 17,647               37,502
      Proceeds from loan repayments                              131,537              534,878
      Capital expenditures                                        (3,116)              (5,897)
                                                             -----------          -----------
           NET CASH USED IN INVESTING ACTIVITIES              (1,755,110)          (3,297,517)
                                                             -----------          -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
      Proceeds from SBA debentures                             2,200,000            3,500,000
      Origination costs for SBA debenture loans                  (55,000)             (87,500)
      Origination costs for SBA debenture loans                       --              (50,000)
                                                             -----------          -----------
             NET CASH PROVIDED BY FINANCING ACTIVITIES         2,145,000            3,362,500
                                                             -----------          -----------
Net decrease in cash and cash equivalents                       (143,296)            (120,044)
Cash and cash equivalents:
      Beginning of period                                        626,744            1,251,546
                                                             -----------          -----------
      End of period                                          $   483,448          $ 1,131,502
                                                             ===========          ===========
</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, 2005 AND 2004
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                              THREE MONTHS    THREE MONTHS    NINE MONTHS     NINE MONTHS
                                                 ENDED           ENDED           ENDED           ENDED
                                             SEPTEMBER 30,   SEPTEMBER 30,   SEPTEMBER 30,   SEPTEMBER 30,
                                                  2005            2004            2005            2004
                                             -------------   -------------   -------------   -------------
<S>                                          <C>             <C>             <C>             <C>
NET ASSETS AT BEGINNING OF PERIOD             $8,959,594      $9,454,759      $9,027,054      $9,238,488
Operations:
   Net investment gain (loss)                    101,390         (86,237)        (64,987)        (91,407)
   Net realized (loss) gain on investments      (382,353)             --        (382,353)         32,956
   Net increase (decrease) in unrealized
      depreciation of investments                239,252        (321,388)        338,169        (132,903)
                                              ----------      ----------      ----------      ----------
Net (decrease) in net assets
   from operations                               (41,711)       (407,625)       (109,171)       (191,354)
                                              ----------      ----------      ----------      ----------
NET ASSETS AT END OF PERIOD                   $8,917,883      $9,047,134      $8,917,883      $9,047,134
                                              ==========      ==========      ==========      ==========
</TABLE>

                             See accompanying notes

<PAGE>

                    RAND CAPITAL CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
                               SEPTEMBER 30, 2005
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                  (B)                                         PER
                                                                                 DATE      (C)                    (D)        SHARE
          COMPANY AND BUSINESS                     TYPE OF INVESTMENT          ACQUIRED  EQUITY      COST        VALUE      OF RAND
-----------------------------------------  ----------------------------------  --------  ------  -----------  -----------  ---------
<S>                                        <C>                                 <C>       <C>     <C>          <C>          <C>
APF GROUP, INC. (E)(G)                     $500,000 Senior Subordinated note     7/8/04     6%   $   594,594  $   594,594     .10
Mount Vernon, NY. Manufacturer of          at 12.5% due July 1, 2009.
museum quality picture frames and framed   $94,594 Senior Subordinated note
mirrors for museums, art galleries,        at 14% due July 31, 2007.
retail frame shops, upscale designers      Warrants to  purchase 10.2941
and prominent collectors.                  shares common stock.
www.apfgroup.com

CAROLINA SKIFF LLC (E)(G)                  $985,000 Class A preferred           1/30/04     5%     1,000,000    1,000,000     .18
Waycross, GA. Manufacturer of fresh        membership interest at 11%.
water, ocean fishing and pleasure boats.   Redeemable January 31,
 www.carolinaskiff.com                     2010. 5% common
                                           membership interest.

CONCENTRIX CORPORATION (E)(G)              $600,000 Senior Subordinated note     6/1/05    <1%       600,000      600,000     .11
Pittsford, NY. Marketing service           at 14% due November 11, 2007.
company generating returns through
multi-channel demand generation and
renewal marketing services.
www.concentrix.com

CONTRACT STAFFING                          Preferred Stock Repurchase           11/8/99    10%       141,400      141,400     .02
Buffalo, NY. PEO providing human           Agreement through March 31, 2010
resource administration for small          at 5%.
businesses.
www.contract-staffing.com

GEMCOR II, LLC (E)(G)                      $250,000 note at 8% due June 28,     6/28/04    31%       750,000      750,000     .13
West Seneca, NY. Designs and sells         2010 with warrant to purchase
automatic riveting machines used in the    6.25 membership units. 25
assembly of aircraft components.           membership units.
www.gemcor.com

G-TEC NATURAL GAS SYSTEMS                  41.322% Class A membership           8/31/99    41%       400,000      300,000     .05
Buffalo, NY. Manufactures and              interest. 8% cumulative
distributes systems that allow natural     dividend.
gas to be used as an alternative fuel to
gases.
www.gas-tec.com

INNOV-X SYSTEMS, INC. (E)(G)               $350,000 Subordinated Debenture      9/27/04    10%       635,000      635,000     .11
Woburn, MA. Manufactures portable x-ray    at 8.5% due September 27, 2009
fluorescence (XRF) analyzers used in       with detachable warrants. 3,500
metals/alloy analysis.                     Series A preferred stock.
www.innovxsys.com                          $250,000 Series B Secured
                                           Subordinated term note at 8.5%
                                           due March 1, 2010.

KIONIX, INC.                               30,241 shares Series B preferred     5/17/02     2%     1,260,585      976,108     .17
Ithaca, NY. Develops innovative MEMS       stock. (G) 2,862,091 shares
based technology applications.             Series A  preferred stock.
www.kionix.com                             714,285 shares Series B
                                           preferred stock.

MINRAD INTERNATIONAL, INC.                 677,981 common shares.                8/4/97     3%       919,422     1,356,000    .24
(OTC: MNRD:OB) (H) (J)
Buffalo, NY. Developer of acute care
devices and anesthetics.
www.minrad.com

NEW MONARCH MACHINE TOOL, INC.             $500,000 note at 12% due             9/24/03    12%       559,091      559,091     .10
(E)(G)(I) **                               September 24, 2006. Warrant for
Cortland, NY. Manufactures and services    11.59 shares of common stock.
vertical/horizontal machining centers.     $250,000 note at 14% due December
www.monarchmt.com                          31, 2005.
</TABLE>

<PAGE>

                    RAND CAPITAL CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
                               SEPTEMBER 30, 2005
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                  (B)                                         PER
                                                                                 DATE      (C)                    (D)        SHARE
          COMPANY AND BUSINESS                     TYPE OF INVESTMENT          ACQUIRED  EQUITY      COST        VALUE      OF RAND
-----------------------------------------  ----------------------------------  --------  ------  -----------  -----------  ---------
<S>                                        <C>                                 <C>       <C>     <C>          <C>          <C>
PHOTONIC PRODUCTS GROUP, INC  (A) (J)      100 shares convertible Series       10/31/00    <1%       145,000      117,640     .02
(OTC:PHPG.OB)                              B preferred stock, 10%
(Formerly INRAD, Inc.) Northvale, NJ.      dividend. 18,000 shares
Develops and manufactures products for     common stock.
laser photonics industry.
www.inrad.com

RAMSCO (E)(G)                              $916,947.23 notes at 13% due        11/19/02    13%       916,947      916,947     .16
Albany, NY. Distributor of water,          November 18, 2007. Warrants
sanitary, storm sewer and specialty        to purchase 12.5% of common
construction materials to the              shares.
contractor, highway and municipal
markets.
www.ramsco.com

SOMERSET GAS TRANSMISSION COMPANY, LLC     26.5337 Units.                       7/10/02     3%       719,097      786,748     .14
(E)
Buffalo, NY. Natural gas transportation
company.
www.somersetgas.com

SYNACOR, INC. (E)(G)                       $350,000 convertible note at        11/18/02     5%       820,000      828,674     .15
Buffalo, NY. Develops provisioning         10% due November 18, 2007.
platforms for aggregation and delivery     200,000 shares of Series B
of content for broadband access            preferred stock. 59,828 Series
providers.                                 A preferred shares. Warrants
www.synacor.com                            for 299,146 common shares.

TOPPS MEAT COMPANY LLC (E)(G)              Preferred A and Class A common       4/3/03      3%       595,000      595,000     .10
Elizabeth, NJ - Producer and supplier of   membership interest.
premium branded frozen hamburgers and
portion controlled meat products.
www.toppsmeat.com

ULTRA - SCAN CORPORATION                   536,596 common shares, 107,104      12/11/92     3%       938,164    1,276,174     .22
Amherst, NY. Biometrics application        Series A-1 preferred shares.
developer of ultrasonic fingerprint        (G)  95,284 Series A preferred
technology.                                shares.
www.ultra-scan.com

USTEC, INC.                                $100,000 note at 5% due              6/26/98    <1%       450,500      475,000     .08
Victor, NY. Markets digital wiring         February 2006(e). 50,000
systems 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          2,673 preferred units with          12/16/99    <1%       270,000      270,000     .05
Philadelphia, PA. Leases and sells         warrants, 14% accrued
high-end modular space solutions.          distribution rate.
www.vanguardmodular.com

WINEISIT.COM, CORP.(G)                     $500,000 Senior Subordinated        12/18/02     2%       801,918      801,918     .14
Amherst, NY. Marketing company             note at 10% due December 17,
specializing in customer loyalty           2009. $250,000 note at 10%
programs supporting the wine and spirit    due April 16, 2005.Warrants to
industry.                                  purchase 100,000 shares Class
www.wineisit.com                           B common stock.

Other Investments                          Other                                Various          $   525,260  $    39,250     .01

                                           Total portfolio investments                           $13,041,978  $13,019,544   $2.28
                                                                                                 ===========  ===========   =====
</TABLE>

                             See accompanying notes

<PAGE>

                    RAND CAPITAL CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
                         SEPTEMBER 30, 2005 (CONTINUED)

NOTES TO CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS

(a)  Unrestricted securities 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, 2005 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
     describe 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, 2005, the aggregate cost of
     investment securities approximated $13.0 million. Net unrealized
     depreciation aggregated approximately $22,000 of which $875,000 related to
     appreciated investment securities and $897,000 related to depreciated
     investment securities.

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

(h)  This is a publicly owned security. The Corporation's shares are restricted
     until December 2005 at which time they become tradable in the open market
     under Rule 144.

(i)  Reduction in cost and value reflects current principal repayment.

(j)  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, 2005 AND 2004
                                   (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 and license had been approved 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 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. The fees were paid in two installments of $50,000
each in July of 2003 and in August of 2004. These fees were 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, 2005, Rand Capital SBIC, L.P. had drawn $5,700,000 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.

<PAGE>

     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), 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 September 30, 2005 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, 2004. 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

<PAGE>

     Form 10-K      Annual Report on Form 10-K for the year ended
                    December 31, 2004
     Form 10-Q      Quarterly Report on Form 10-Q for the quarters ended
                    June 30, 2005, March 31, 2005, and September 30, 2004
     Form N-23C-1   Reports by closed-end investment companies of purchases of
                    their own securities

     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.

     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.

DEFERRED DEBENTURE COSTS - SBA debenture origination and commitment costs, which
are included in other assets, will be amortized ratably over the terms of the
SBA debentures. Amortization expense was $11,738 for the nine months ended
September 30, 2005, compared to $4,790 for the nine months ended September 30,
2004.

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>

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, 2005 and December 31, 2004,
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 27, 2006. During the year ended
December 31, 2004 and the nine month period ended September 30, 2005 the
Corporation did not purchase any shares for the treasury.

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,
2005, 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,
2004 Form 10-K in Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations".

<PAGE>

FINANCIAL CONDITION

Overview:

<TABLE>
<CAPTION>
                                                 INCREASE    % INCREASE
                      9/30/05       12/31/04    (DECREASE)   (DECREASE)
                    -----------   -----------   ----------   ----------
<S>                 <C>           <C>           <C>          <C>
Total assets        $14,777,440   $12,743,109   $2,034,331       16%
Total liabilities     5,859,557     3,716,055    2,143,502       58%
Net assets            8,917,883     9,027,054     (109,171)      (1%)
</TABLE>

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

<TABLE>
<CAPTION>
                                 SEPTEMBER 30, 2005   DECEMBER 31, 2004
                                 ------------------   -----------------
<S>                              <C>                  <C>
Investments at cost                  $13,041,977         $11,621,853
Unrealized (depreciation), net           (22,433)           (586,047)
                                     -----------         -----------
Investments at fair value            $13,019,544         $11,035,806
                                     ===========         ===========
</TABLE>

     The increase in investments is due to the effect of Rand SBIC's new
investments during the nine months ended September 30, 2005 in the following
portfolio companies:

<TABLE>
<CAPTION>
NEW INVESTMENTS                                       AMOUNT
---------------                                     ----------
<S>                                                 <C>
Concentrix Corporation (Concentrix)                 $  600,000
Topps Meat Company LLC (Topps)                         336,000
Innov-X Systems, Inc. (Innov-X)                        285,000
Kionix, Inc. (Kionix)                                  260,584
Ultra-Scan Corporation (Ultra-Scan)                    200,000
G-Tec Natural Gas Systems (G-Tec)                      125,000
APF Group, Inc. (APF)                                   94,594
                                                    ----------
TOTAL OF INVESTMENT MADE DURING THE NINE MONTHS
   ENDED SEPTEMBER 30, 2005                         $1,901,178
                                                    ----------
Interest conversion:
Somerset Gas Transmission Company, LLC (Somerset)       19,097
Photonics Products Group, Inc.                          10,000
                                                    ----------
TOTAL OF NEW INVESTMENT AND INTEREST CONVERSIONS
   FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005     $1,930,275
                                                    ==========
</TABLE>

     Net asset value per share (NAV) was $1.56/share at September 30, 2005
versus $1.58/share at December 31, 2004.

     The Corporation's total investments at fair value, whose fair value have
been estimated by the Board of Directors, approximated 146% of net assets at
September 30, 2005 and 122% of net assets at December 31, 2004.

<PAGE>

RESULTS OF OPERATIONS

COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2005 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2004

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.

<TABLE>
<CAPTION>
                            SEPTEMBER   SEPTEMBER    INCREASE     %INCREASE
                             30, 2005    30, 2004   (DECREASE)   (DECREASE)
                            ---------   ---------   ----------   ----------
<S>                         <C>         <C>         <C>          <C>
Portfolio interest income    $438,928    $484,253    ($45,325)      (9.4%)
Other interest income           2,287       1,952         335       17.2%
Dividend income                31,364      54,094     (22,730)     (42.0%)
Other income                   34,136      32,200       1,936        6.0%
                             --------    --------    --------      -----
Total investment income      $506,715    $572,499    ($65,784)     (11.5%)
                             ========    ========    ========      =====
</TABLE>

Portfolio Interest Income - Portfolio interest income decreased $45,325 in the
nine months ended September 30, 2005 as compared to the same period in the prior
year. This is attributable to the fact that the Corporation ceased accruing
interest on two WineIsIt.com (Wineisit) debt instruments in January of 2005 in
anticipation of a restructuring of the portfolio company's balance sheet. These
two notes are technically in default due to nonpayment of principal and
interest. The restructuring will include a debt conversion for which the
Corporation will convert its two outstanding debt instruments, and all interest
that would have been recognized from January 1, 2005 through the closing date,
to an equity instrument. The conversion is projected to occur in the fourth
quarter of 2005.

     The current period decrease in portfolio income can also be attributed to
the fact that the portfolio income for the nine months ended September 30, 2004
included $62,705 of income on a $900,000 convertible note from Somerset. This
note had stopped accruing interest in September 2003 because it was in default
and the Corporation had established a 100% reserve for the total accrued
interest of $122,914. In April 2004 Somerset became current on the note and the
Corporation, therefore, recognized all past due interest in the first quarter of
2004.

     The annualized effect of the interest recognized during September of 2005
from the Corporation's current portfolio companies is approximately $612,000.
This amount is subject to change due to conversions, repayments and or other
changes in the underlying instruments which may affect the actual interest
accruals.

     After reviewing the portfolio companies' performance and the circumstances
surrounding the investments the Corporation has ceased accruing interest income
on the following investment instruments:

<TABLE>
<CAPTION>
               Interest   Investment   Year that Interest
  Company        Rate        Cost        Accrual Ceased
------------   --------   ----------   ------------------
<S>            <C>        <C>          <C>
G-Tec              8%       400,000          2004
Vanguard          14%       270,000          2003
WineIsIt.com      10%       801,918          2005
</TABLE>

<PAGE>

Other Interest Income - The increase in interest income is primarily due to
higher yields on idle cash balances.

Dividend Income - 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 and the timing of the
distributions. Dividend income for the nine months ended September 30, 2005
consisted of distributions from Topps Meat Company LLC (Topps) for $18,379,
Carolina Skiff LLC (Carolina Skiff) for $11,811 and Vanguard Modular Building
Systems (Vanguard) for $1,174.

     Dividend income for the nine months ended September 30, 2004 was comprised
of distributions from Topps for $25,760, Carolina Skiff for $27,090 and Vanguard
$1,244.

Other Income - 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. In addition, other
income includes fees charged by the Corporation to its portfolio companies for
attendance at the portfolio company board meetings.

     The increase in other income for the nine months ended September 30, 2005
can be attributed to the fact that the Corporation generated more investments
through Rand SBIC in 2005 than in 2004, and therefore more closing fees were
collected. The annualized financing fee income based on the existing portfolio
will be approximately $42,000 annually. In addition the board attendance income
amounted to $5,000 for the nine months ended September 30, 2005 and zero for
same period ending September 30, 2004.

OPERATING EXPENSES

<TABLE>
<CAPTION>
                 SEPTEMBER 30, 2005   SEPTEMBER 30, 2004   INCREASE   % INCREASE
                 ------------------   ------------------   --------   ----------
<S>              <C>                  <C>                  <C>        <C>
Total Expenses        $858,221             $689,660        $169,561      24.4%
</TABLE>

     Operating expenses predominately consist of interest expense, employee
compensation and benefits, directors' fees, shareholder related costs, office
expenses, professional fees, expenses related to identifying and reviewing
investment opportunities and bad debt expense (recovery). The increase in
operating expenses during the nine months ended September 30, 2005 can be
primarily attributed to the increase in SBA interest expense. The SBA interest
expense was $188,423 for the nine months ended September 30, 2005 and $57,008
for the nine months ended September 30, 2004. The Corporation has borrowed
$5,700,000 from the SBA as of September 30, 2005 at an average borrowing rate,
including surcharges, of approximately 5.4%. This interest is paid on a
semi-annual basis to the SBA and will continue increasing as outstanding
borrowings increase to fund future investments and operations.

     The operating expenses for the nine month period ending September 30, 2004
were reduced by $914 bad debt recovery. This is comprised of a bad debt reserve
was established in the third quarter of 2004 for G-Tec for $122,000 and a bad
debt recovery of ($122,914) for

<PAGE>

Somerset. The G-Tec reserve was established by established in the third quarter
of 2004 after a review by management. The reserve represents all of the interest
that had been accrued on this investment. 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.

NET REALIZED GAINS AND LOSSES ON INVESTMENTS

     During the nine months ended September 30, 2005, the Corporation recognized
a realized loss of ($382,353) on its investment in D'Lisi Food Systems, Inc.
(D'Lisi). The D'Lisi investment of $400,000 was written down to zero in the
third quarter of 2004 due to fact it filed for bankruptcy protection on August
13, 2004. The final bankruptcy proceeds were distributed in July of 2005 and
resulted in a realized loss of ($382,353). 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.

NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS

     The Corporation recorded a net increase in unrealized (depreciation) on
investments of $563,615 during the nine months ended September 30, 2005, as
compared to ($222,903) decrease during the prior year nine month period. The
increase in unrealized depreciation on investments of $563,615 is due to the
following valuation changes made by the Corporation:

<TABLE>
<S>                                               <C>
Minrad International, Inc. (Minrad)               $ 509,000
Reclass D'Lisi unrealized loss to realized loss     400,000
Kionix                                             (284,476)
Somerset                                            (50,349)
Photonics                                           (10,560)
                                                  ---------
   Total Change in Unrealized Appreciation        $ 563,615
                                                  =========
</TABLE>

     The Corporation recognized appreciation of $509,000 on its 667,981 shares
of Minrad to reflect a private offering of preferred stock that is convertible
into common at $2.00 per share. These preferred securities also provided
warrants, valid of three years, exercisable at $3.85, a 92% premium over the $2
issuance price of the preferred, and in excess of the trading price of the
securities on the market. This information was obtained from an 8-k filed by
Minrad on June 14, 2005. Rand utilized the $2 per share transaction as the
underlying basis upon which its valuation was based.

     Minrad is traded under the symbol MNRD.OB. During the quarter ended
September 30, 2005, Minrad's securities traded between $1.85(Low) and $2.50 per
share, with an average volume of 5,457 shares. Rand Management believes that the
trading activity of Minrad has been light as a majority of the shares
outstanding are restricted in nature.

     The Corporation Minrad shares are also restricted in nature, and cannot be
sold until December 2005, subject to Rule 144.

     Kionix was revalued during the second quarter of 2005 due to the fact that
the portfolio company failed to achieve certain performance milestones,
therefore changing the liquidation preferences of the Series A and B securities.
This caused the Corporation to reprice its shares in Kionix from $0.35/share to
$0.25/share.

<PAGE>

     Somerset was revalued based on a recent round of financing that caused the
price per membership unit to decrease.

     Photonics is a public stock (Nasdaq symbol: PHPG.OB) and is marked to
market at the end of each quarter.

     All of these value adjustments were done in accordance with the
Corporation's established valuation policy.

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 months ended September 30, 2005, the net decrease in net assets from
operations was ($109,171) as compared to a net decrease in net assets from
operations of ($191,354) for the same nine month period in 2004.

LIQUIDITY AND CAPITAL RESOURCES

     The Corporation's principal objective is to achieve capital appreciation.
Therefore, a significant portion of the investment portfolio is structured to
maximize the potential for capital appreciation, and certain of the
Corporation's portfolio investments may be structured to provide little or no
current yield in the form of dividends or interest payments. The Corporation
does earn interest income on idle cash balances and has historically relied on,
and continues to rely to a large extent upon, proceeds from sales of investments
rather than investment income to defray a significant portion of its operating
expenses. Because such sales cannot be predicted with certainty, the Corporation
attempts to maintain adequate working capital necessary for short-term needs.

     As of September 30, 2005 and 2004, the Corporation's total liquidity,
consisting of cash and cash equivalents, was $483,448 and $1,131,502
respectively.

     During 2003 and 2004 the Corporation paid an aggregate of $100,000 to the
SBA to reserve its approved $10,000,000 leverage. It has drawn down $5,700,000
of this leverage as of September 30, 2005. The remaining SBA leverage is
guaranteed by the SBA to be available through September 30, 2008. These SBA
borrowings will have a balloon maturity beginning in 2014.

     Management expects that it will be necessary to continue to draw down SBA
leverage in the current fiscal year in order to fund operations and new
investments. Net cash used in operating activities has averaged $479,000 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 new regulations. Management believes that the
cash and cash equivalents at September 30, 2005, coupled with the anticipated
additional SBIC leverage draw downs and interest and dividend payments on its
portfolio investments, will provide the Corporation with the liquidity necessary
to fund operations and new investments over the next twelve months.

RISK FACTORS AND OTHER CONSIDERATIONS

<PAGE>

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 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.

<PAGE>

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 Corporation's 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
consolidated Statement of Operations as "Net decrease (increase) in unrealized
depreciation."

FLUCTUATIONS OF QUARTERLY RESULTS

<PAGE>

     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 decrease (increase) in unrealized
depreciation."

     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, 2005 the Corporation did not have any off-balance sheet
investments or hedging investments.

<PAGE>

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 was no change
in the Corporation's internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Rule 13a-15 or
15d-15 under the Securities Exchange Act of 1934 that occurred during the
Corporation's last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Corporation's internal control over financial
reporting.

<PAGE>

                                    PART II.
                                OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     None

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     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

     (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
                 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.

<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 4, 2005

                                       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