<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 March 31, 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 (May 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 March 31, 2004
             and December 31, 2003

             Consolidated Statements of Operations for the Three Months Ended
             March 31, 2004 and 2003

             Consolidated Statements of Cash Flows for the Three Months Ended
             March 31, 2004 and 2003

             Consolidated Statements of Changes in Net Assets for the Three
             Months Ended March 31, 2004 and 2003

             Consolidated Schedule of Portfolio Investments as of March 31, 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 MARCH 31, 2004 AND DECEMBER 31, 2003
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                             MARCH 31,     DECEMBER 31,
                                                                               2004            2003
                                                                           ------------    ------------
<S>                                                                        <C>             <C>
ASSETS
Investments at fair value (identified cost:
      at 3/31/2004 - $9,501,979, at 12/31/2003 - $7,616,309)               $  9,111,634    $  7,236,999
Cash and cash equivalents                                                       220,341       1,251,546
Interest receivable (net of allowance of $122,914
      at 12/31/2003)                                                            513,879         334,734
Deferred tax asset                                                              405,000         430,000
Income Tax Receivable                                                             7,459               -
Promissory notes receivable                                                      64,900          72,330
Other assets                                                                    136,355          59,528
                                                                           ------------    ------------
TOTAL ASSETS                                                               $ 10,459,568    $  9,385,137
                                                                           ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY (NET ASSETS)

LIABILITIES:
Accounts payable and accrued expenses                                      $     76,856    $     93,522
Income taxes payable                                                                  -           6,374
Deferred revenue                                                                 85,347          46,753
Debentures guaranteed by the SBA                                              1,000,000               -
                                                                           ------------    ------------

                Total liabilities                                             1,162,203         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)                                            (4,667,807)     (4,700,763)
Undistributed net realized gain on investments                                6,695,507       6,662,551
Net unrealized (depreciation) on investments                                   (232,887)       (225,852)
Treasury stock at cost, 44,100 shares at 3/31/2004 and 12/31/2003               (47,206)        (47,206)
                                                                           ------------    ------------

                Net assets (per share 3/31/2004-$1.63, 12/31/2003-$1.62)      9,297,365       9,238,488
                                                                           ------------    ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                 $ 10,459,568    $  9,385,137
                                                                           ============    ============
</TABLE>

                             See accompanying notes

<PAGE>

                            RAND CAPITAL CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
               FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED     THREE MONTHS ENDED
                                                              MARCH 31, 2004         MARCH 31, 2003
                                                            ------------------     ------------------
<S>                                                         <C>                    <C>
INVESTMENT INCOME:
        Interest from portfolio companies                   $          172,797     $          101,909
        Interest from other investments                                  1,405                  7,845
        Dividend Income                                                  6,587                      -
        Other income                                                     5,405                  2,259
                                                            ------------------     ------------------
                                                                       186,194                112,013
                                                            ------------------     ------------------
EXPENSES:
        Salaries                                                       133,655                116,415
        Employee benefits                                               30,807                 25,349
        Directors' fees                                                 12,100                  5,500
        Professional fees                                               13,431                 20,786
        Shareholders and office operating                               27,541                 25,479
        Insurance                                                       11,550                 10,800
        Corporate development                                            8,507                  9,307
        Other operating                                                  6,805                  4,287
                                                            ------------------     ------------------
                                                                       244,396                217,923
                                                            ------------------     ------------------
        Bad Debt Recovery                                             (122,914)                     -
                                                            ------------------     ------------------
                   Total expenses                                      121,482                217,923

INVESTMENT GAIN (LOSS) BEFORE INCOME TAXES                              64,712               (105,910)
                                                            ------------------     ------------------

        Income tax expense                                               2,756                  3,994
        Deferred income tax expense (benefit)                           29,000                (38,334)
                                                            ------------------     ------------------
NET INVESTMENT GAIN (LOSS)                                              32,956                (71,570)
                                                            ------------------     ------------------
Realized and unrealized gain (loss) on investments:
        Net gain on sales and dispositions                              32,956                      -
                                                            ------------------     ------------------
Unrealized appreciation (depreciation) on investments:
        Beginning of period                                           (379,311)              (149,266)
        End of period                                                 (390,346)              (177,376)
                                                            ------------------     ------------------
        Change in unrealized depreciation before income
        taxes                                                          (11,035)               (28,110)

        Deferred income tax benefit                                     (4,000)               (11,666)
                                                            ------------------     ------------------
Net decrease in unrealized appreciation                                 (7,035)               (16,444)
                                                            ------------------     ------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS                  25,921                (16,444)
                                                            ------------------     ------------------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS       $           58,877     $          (88,014)
                                                            ==================     ==================
WEIGHTED AVERAGE SHARES OUTSTANDING                                  5,718,934              5,729,901

BASIC AND DILUTED NET INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS PER SHARE                                   $              .01     $             (.02)
                                                            ==================     ==================
</TABLE>

                             See accompanying notes

<PAGE>

                            RAND CAPITAL CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
               FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                       THREE MONTHS         THREE MONTHS
                                                                                          ENDED                 ENDED
                                                                                      MARCH 31, 2004        MARCH 31, 2003
                                                                                      --------------        --------------
<S>                                                                                   <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets from operations                                 $       58,877        $      (88,014)
                                                                                      --------------        --------------
Adjustments to reconcile net increase (decrease) in net assets to net cash used
 in operating activities:
      Depreciation and amortization                                                            2,165                 1,500
      Bad debt recovery                                                                     (122,914)                    -
      Change in unrealized depreciation of investments                                        11,035                28,110
      Deferred tax expense(benefit)                                                           25,000               (50,000)
      Net realized gain on portfolio investments                                             (32,956)                    -
      Non-cash conversion of debentures                                                      (51,918)                    -
      Changes in operating assets and liabilities:
         (Increase) in interest receivable                                                   (56,231)              (77,595)
         (Increase) in other assets                                                          (61,454)              (44,167)
         Increase in deferred revenue                                                         38,594                 1,742
         (Decrease) in accounts payable and other accrued liabilities                        (23,041)               (8,920)
                                                                                      --------------        --------------
           Total adjustments                                                                (271,720)             (149,330)
                                                                                      --------------        --------------
           Net cash used in operating activities                                            (212,843)             (237,344)
                                                                                      --------------        --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
      Investments originated                                                              (1,860,000)             (350,000)
      Proceeds from sale of portfolio investments                                             37,503                     -
      Proceeds from loan repayments                                                           29,135                10,220
                                                                                      --------------        --------------
           NET CASH USED IN INVESTING ACTIVITIES                                          (1,793,362)             (339,780)
                                                                                      --------------        --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
      Proceeds from SBA debentures                                                         1,000,000                     -
      Origination costs for SBA debenture loans                                              (25,000)                    -
      Purchase of treasury shares                                                                  -               (13,646)
                                                                                      --------------        --------------
           NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES                                  975,000               (13,646)
                                                                                      --------------        --------------
Net decrease in cash and cash equivalents                                                 (1,031,205)             (590,770)
Cash and Cash equivalents:,
      Beginning of period                                                                  1,251,546             3,092,189
                                                                                      --------------        --------------
      End of period                                                                   $      220,341        $    2,501,419
                                                                                      ==============        ==============
</TABLE>

                             See accompanying notes.

<PAGE>

                            RAND CAPITAL CORPORATION
           CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
               FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED      THREE MONTHS ENDED
                                                          MARCH 31, 2004          MARCH 31, 2003
                                                        ------------------      ------------------
<S>                                                     <C>                     <C>
NET ASSETS AT BEGINNING OF PERIOD                       $        9,238,488               9,604,634
                                                        ------------------      ------------------
Operations:
    Net investment gain (loss)                                      32,956                 (71,570)
    Net realized gain on investments                                32,956                       -
    Net (decrease) in unrealized
               appreciation of investments                          (7,035)                (16,444)
                                                        ------------------      ------------------
Net increase (decrease) in net assets                               58,877                 (88,014)
    from operations
Purchase of treasury shares                                              -                 (13,646)
                                                        ------------------      ------------------
NET ASSETS AT END OF PERIOD                             $        9,297,365      $        9,502,974
                                                        ==================      ==================
</TABLE>

                             See accompanying notes

<PAGE>

                    RAND CAPITAL CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
                                 MARCH 31, 2004
                                   (UNAUDITED)

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

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

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

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

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

MINRAD, INC.                                          677,980 common shares.              8/4/97     3%       919,422     508,500
Buffalo, NY. Developer of acute care devices          Stock option - 10,000 shares
and anesthetics.  www.minrad.com                      common.


NEW MONARCH MACHINE TOOL, INC. (e) (g)                $500,000 note at 12%.               9/24/03   12%       709,091     709,091
Cortland, NY.  Manufactures and services              Payable monthly through
vertical/horizontal machining centers.                September 24, 2006.  Warrant
www.monarchmt.com                                     for 11.59 shares of common stock.
                                                      $250,000 note at 14% due March 2,
                                                      2005.

PHOTONIC PRODUCTS GROUP, INC (OTC:  PHPG.OB) *        100 shares convertible Series B    10/31/00   <1%       125,000     104,600
(Formerly INRAD, Inc.) Northvale, NJ.  Develops and   preferred stock, 10% dividend.
manufactures products for laser photonics industry.   10,000 shares common stock.
www.inrad.com

RAMSCO(e) (g)                                         $750,000 note at 13% due           11/19/02    7%       960,000     960,000
Albany, NY. Distributor of water, sanitary, storm     November 18, 2007.  Warrants
sewer and specialty construction materials to the     to purchase 12.5 % of common
contractor, highway and municipal markets.            shares.  $210,000 note at 13% due
www.ramsco.com                                        February 17, 2005.

SOMERSET GAS TRANSMISSION COMPANY, LLC                $900,000 convertible note at        7/10/02   <1%       900,000   1,018,000
Buffalo, NY.  Natural gas transportation company.     14% due on demand after
                                                      January 15, 2003.
                                                      0.88 membership units.

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

<PAGE>

                    RAND CAPITAL CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
                                 MARCH 31, 2004
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                           (b)      (c)                    (d)
                                                                                           DATE
            COMPANY AND BUSINESS                              TYPE OF INVESTMENT         ACQUIRED  EQUITY     COST       VALUE
---------------------------------------------------   --------------------------         --------  ------  ----------  ----------
<S>                                                   <C>                                <C>       <C>     <C>         <C>
TOPPS MEAT COMPANY, LLC(e) (g)                        Preferred A and Class A             4/3/03     3%       259,000     259,000
Elizabeth, NJ - Producer and supplier of              common membership
premium branded frozen hamburgers and other           interest.
portion controlled meat products.

ULTRA - SCAN CORPORATION                              504,596 common shares,             12/11/92    3%       734,164   1,072,174
Amherst, NY.  Biometrics application                  107,104 Series A-1 preferred
developer of ultrasonic fingerprint technology.       shares.  Warrants for 32,000
www.ultra-scan.com                                    common shares.

USTEC, INC. (e)                                       $100,000 note at 5% due            6/26/98    <1%       300,500     325,000
Victor, NY.  Markets digital wiring systems           February 2006. 50,000
for new home construction.                            common shares. Warrants for
www.ustecnet.com                                      139,395 common shares.
                                                      (g) $200,000 Senior Subordinated
                                                      Convertible Debenture at 6% due
                                                      February 2, 2008.

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

WINEISIT.COM, CORP.(g)                                $500,000 Senior Subordinated       12/18/02    2%       551,918     551,918
Amherst, NY.  Marketing company specializing          note at 10% due December 17,
in customer loyalty programs supporting the wine      2009.  Warrants to purchase
and spirit industry.                                  100,000 shares Class B common
www.wineisit.com                                      stock.

Other Investments                                     Other                              Various     -        587,884     144,014
                                                                                                           ----------  ----------
                                                      Total portfolio investments                    (f)   $9,501,979  $9,111,634
                                                                                                           ==========  ==========
</TABLE>

                             See accompanying notes

<PAGE>

RAND CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 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 March 31, 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 March 31, 2004, the aggregate cost of
         investment securities approximated $9.5 million. Net unrealized
         depreciation aggregated approximately $390,000, of which $487,000
         related to appreciated investment securities and $877,000 related to
         depreciated investment securities.

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

*        Publicly owned company

                             See accompanying notes.

<PAGE>

                            RAND CAPITAL CORPORATION
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               FOR THE THREE MONTHS ENDED MARCH 31, 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.

         In July of 2003, the Corporation paid $50,000 to the SBA to reserve
$5,000,000 of its approved debenture leverage. This fee was 1% of the face
amount of the leverage reserved under the commitment. The fee represents a
partial prepayment of the SBA's nonrefundable 3% leverage fee. As of March 31,
2004, Rand Capital SBIC, LLC had drawn $1,000,000 in leverage from the SBA.
Subsequent to the quarter end of March 31, 2004 the Corporation drew down an
additional $800,000 bringing the total outstanding SBA leverage to $1,800,000
through May 10, 2004.

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

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

         The Company formed Rand SBIC as a subsidiary for the purpose of causing
it to be licensed as a SBIC under the Small Business Investment Act of 1958 (the
"SBA Act") by the SBA, in order to have access to various forms of leverage
provided by the SBA to SBIC's. On May 28, 2002, the Corporation filed an
Exemption Application with the Securities and Exchange

<PAGE>

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

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

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

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

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

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

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

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION - In Management's opinion, the accompanying consolidated
financial statements include all adjustments necessary for a fair presentation
of the consolidated financial position, results of operations, and cash flows
for the interim periods presented. Certain information and note disclosures
normally included in audited annual financial statements prepared in accordance
with accounting principles generally accepted in the United States of America,
have been omitted; however, the Corporation believes that the disclosures made
are adequate to make the information presented not misleading. The interim
results for the period ending March 31, 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
                       September 30, 2003, June 30, 2003, and March 31, 2003

         Form N-23C-1  Reports by closed-end investment companies of purchases
                       of their own securities

<PAGE>

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

PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Rand, Rand SBIC and Rand Management, collectively, the
"Corporation". All intercompany accounts and transactions have been eliminated
in consolidation. For fiscal 2001, prior to the formation of Rand SBIC and Rand
Management, Rand Capital Corporation was a stand-alone entity.

INVESTMENTS - Investments are stated at fair value as determined in good faith
by the Board of Directors, as described in the Notes to Consolidated Schedule of
Portfolio Investments. Certain investment valuations have been determined by the
Board of Directors in the absence of readily ascertainable fair values. The
estimated valuations are not necessarily indicative of amounts which may
ultimately be realized as a result of future sales or other dispositions of
securities, and these favorable or unfavorable differences could be material.

         Certain investment agreements require the companies to meet certain
financial and non-financial covenants. At March 31, 2004 certain of the
portfolio investments were in violation of the covenants, or are delinquent as
to required principal payment due. Management of the Corporation is pursuing
compliance and will consider, based upon available information, the
appropriateness of the carrying value of each investment.

         Amounts reported as realized gains and losses are measured by the
difference between the proceeds of sale or exchange and the cost basis of the
investment without regard to unrealized gains or losses reported in prior
periods. The cost of securities that have, in the Board of Directors' judgment,
become worthless, are written off and reported as realized losses.

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

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

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

         During the quarter ended March 31, 2004 the Corporation reversed its
reserve of $122,914 relating to interest receivable which was paid subsequent to
the quarter end. This reversal is reflected as a bad debt recovery in the
accompanying statement of operations.

DEFERRED DEBENTURE COSTS - SBA debenture costs, which are included in other
assets, will be amortized ratably over the terms of the SBA debentures. The
Corporation incurred an additional $25,000 of SBA debenture costs during the
current quarter attributed to its draw down on the SBA commitment.

<PAGE>

SBA DEBENTURES - During the quarter ended March 31, 2004, the Corporation drew
down $1,000,000 on its available SBA leverage which it used to fund certain
investments. Subsequent to the quarter end, the Corporation drew down an
additional $800,000 in leverage to fund investments. The debentures are due in
10 years and provide for semi-annual interest only payments at approximately 5%.

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

STATEMENT OF CASH FLOWS - During the quarter ended March 31, 2004, the
Corporation converted accrued interest of $51,918 to a debenture 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.

INCOME TAXES - Rand has not elected pass-through tax treatment as a regulated
investment company under Subchapter M of the Internal Revenue Code for Income
tax purposes. Therefore, Rand is taxed as a corporation under regulation C.

         The tax effect of the major temporary difference and carry-forwards
that give rise to the Corporation's net deferred tax assets (liabilities) as of
March 31, 2004 and December 31, 2003 are as follows:

<TABLE>
<CAPTION>
                                    March 31, 2004   December 31, 2003
                                    --------------   -----------------
<S>                                 <C>              <C>
Operations                          $      (82,000)  $         (28,000)
Investments                                157,000             153,000
Net operating loss carry-forwards          330,000             305,000
                                    --------------   -----------------
Deferred tax assets, net            $      405,000   $         430,000
                                    ==============   =================
</TABLE>

         As of March 31, 2004, the Corporation had federal and state net
operating loss carry-forwards of approximately $775,000 and $440,000 which
expire commencing in 2019.

         The deferred tax asset at March 31, 2004 was $405,000 and represented a
$25,000 decrease in this account from December 31, 2003.

STOCKHOLDERS EQUITY (NET ASSETS)

         At March 31, 2004 and December 31, 2003, there were 500,000 shares of
$10.00 par value preferred stock authorized and unissued.

         On October 18, 2001 the Board of Directors authorized the repurchase of
up to 5% of the Corporation's outstanding stock through purchases on the open
market, which was extended through October 16, 2004. During the year ended
December 31, 2003 the Corporation purchased 19,700 shares for the treasury at a
cost of $21,502. During the period July 15, 2002 through December 31, 2002 the
Corporation purchased 24,400 shares for the treasury at a cost of $25,704. No
treasury shares were purchased in the first quarter 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

<PAGE>

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 March 31, 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.

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, LP is regulated under the laws of
Delaware and the Small Business Administration ("SBA"). The Corporation
anticipates that most, if not all, of its investments in the next year will be
originated through the SBIC subsidiary.

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, including the critical accounting policies, see Note 2 to
the consolidated financial statements.

<PAGE>

FINANCIAL CONDITION

         The Corporation's total assets increased by $1,074,431 or 11.4% to
$10,459,568 and its net assets increased by $58,877 or 0.6% to $9,297,365 at
March 31, 2004, versus $9,385,137 and $9,238,488 at December 31, 2003,
respectively. The increase in net assets during the quarter ended March 31, 2004
can primarily be attributed to the bad debt recovery of $122,914 and the related
unrealized appreciation attributed to the revaluation of our investment in
Somerset Gas Transmission Company LLC (Somerset).These increases were partially
offset by the unrealized depreciation of the Corporation's investment in Data
View, LLC (Dataview) of $105,179.

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

<TABLE>
<CAPTION>
                                    MARCH 31, 2004   DECEMBER 31, 2003
                                    --------------   -----------------
<S>                                 <C>              <C>
Investments at cost                 $    9,501,979   $       7,616,309
Unrealized (depreciation), net            (390,345)           (379,310)
                                    --------------   -----------------
Investments at fair value           $    9,111,634   $       7,236,999
                                    ==============   =================
</TABLE>

         The increase in investments is due to the effect of Rand SBIC's new
investments during the quarter ending March 31, 2004 in the following portfolio
companies:

<TABLE>
<S>                                              <C>
Carolina Skiff, LLC (Carolina Skiff)             $ 1,000,000
D'Lisi Food Systems, Inc (D'Lisi)                $   400,000
New Monarch Machine Tool, Inc (Monarch)          $   250,000
Rexford Albany Municipal
          Supply Company (RAMSCO)                $   210,000
                                                 -----------
  Total of investment made during the quarter
          Ending March 31, 2004                  $ 1,860,000
Interest Conversions:
WineIsIt.com, Corp. (WineIsIt)                   $    51,918
                                                 -----------
Total of new and additions to previous
  Investments during the first quarter 2004:     $ 1,911,918
                                                 ===========
</TABLE>

         The increase in investments at cost is due to the $1,860,000 of new
investments made during the first quarter of 2004 by the Corporation. In
addition, the Corporation converted the accrued interest of WineIsIt of $51,918
to the debenture instrument.

         The increase in unrealized depreciation of the investments is primarily
attributable to the establishment of a reserve on the Dataview investment for
($105,179), the increase in the valuation of the 0.88 membership interest in
Somerset Gas Transmission Company, LLC (Somerset) for $118,000. The Somerset
membership units were previously written down to zero in September 2003. These
adjustments were done in accordance with the Corporation's established valuation
policies. (See "Investment Income" below for further discussion).

         The Corporation's total investments at fair value, whose fair value
have been estimated by the Board of Directors, approximated 98% of net assets at
March 31, 2004 and 77% of net assets at December 31, 2003. This increase in this
percentage is due to the increase in new investments during the first quarter of
2004 which were partially funded by the $1,000,000 draw down on the
Corporation's SBA leverage.

<PAGE>

RESULTS OF OPERATIONS

Comparison of the three months ended March 31, 2004 to the three months ended
March 31, 2003

INVESTMENT INCOME

         The Corporation's investment objective is to achieve long-term capital
appreciation on its equity investments while maintaining a current cash flow
from its debenture instruments. Therefore, the Corporation will invest in a
mixture of debenture and equity instruments which will provide a current return
on a portion of the portfolio. The equity features contained in our investment
portfolio are structured to realize capital appreciation over the long-term and
may not necessarily generate current income in the form of dividends or
interest. In addition, the Corporation earns interest income from investing its
idle funds in money market instruments.

         Total investment income was $186,194 and $112,013 for the period ended
March 31, 2004 and 2003, an increase of $74,181 or 66%. 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 $172,797 for the quarter ended March 31,
2004 and $101,909 for the quarter ended March 31, 2003, an increase of 70%. This
increase is attributable to the fact that the 63% or $850,000 of the total of
new 2003 investments originated out of Rand SBIC are in debenture instruments
that earn interest income at a blended interest rate of approximately 10% and
48% of the new investments in the first quarter of 2004 earned a blended rate of
11%.

         The portfolio interest income for the quarter ended March 31, 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 stop
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. The Corporation has had continuing communications with
Somerset, and in April 2004 Somerset has paid $500,000 in principal on the
$900,000 note and $190,449 in accrued interest. The remaining $400,000 balance
of the note will be converted to a new instrument.

         The dividend (LLC related tax distributions) and other investment
income was $6,587 for the quarter ended March 31, 2004 and $0 for the same
period in 2003. This income increased due to an increase in LLC related
distributions generated by new investments made in 2003. The LLC investment
income for the three months ended March 31, 2004 consisted of a LLC distribution
from Topps Meat Company, LLC (Topps) for $6,587. The Corporations investment
agreements with certain pass through entities require the entities to distribute
funds to the Corporation for payment of income taxes on its allocable share of
the entities profits. These dividends will fluctuate based upon the
profitability of the entities.

         The other interest income from idle cash was $1,405 for the quarter
ended March 31, 2004 and $7,845 for the quarter ended March 31, 2003, a decrease
of ($6,440) or (82%). 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.

OPERATING EXPENSES

         Total operating expenses before the bad debt recovery were $238,488 for
the quarter ended March 31, 2004 and $217,923 for the quarter ended March 31,
2003, an increase of $20,565 or 9%. The increase in the operating expenses is
primarily attributed to employee and director salary increases.

<PAGE>

         The operating expenses predominately consist of employee compensation
and benefits, shareholder related costs, office expenses, professional fees,
expenses related to identifying and reviewing investment opportunities and bad
debt expense. The operating expenses for the three month period ending March 31,
2004 were reduced by $122,914 in bad debt recovery related to the full recovery
of the accrued interest related to the Somerset investment. This reserve was
reversed during the quarter ended March 31, 2004 due to the fact that the
Corporation was paid in full for this amount on April 2004.

NET INVESTMENT GAIN (LOSS) FROM OPERATIONS

         Net investment gain (loss) from operations for the three month period
ended March 31, 2004 and 2003 were $48,122 and ($71,570), respectively. The
increase in 2004 can be attributed to the bad debt recovery of $122,914 and the
additional $62,703 in portfolio income associated with the Somerset investment.
In addition, the investment income for the three months ending March 31, 2004 is
higher than the same period in 2003 due to the higher portfolio interest income
yield on the new Rand SBIC investments.

NET REALIZED GAINS AND LOSSES ON INVESTMENTS:

         During the three months ended March 31, 2004 the Corporation realized a
$32,956 gain on the sale of the remaining Advanced Digital Information
Corporation (ADIC) stock. During the same three months period ended in 2003 the
Corporation did not have any realized gain or loss.

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 quarter ended March 31, 2004, the net increase in net assets from operations
was $70,043 as compared to a net (decrease) in net assets from operations of
($88,014) for the same period in 2003.

         The net increase in net assets from operations for the quarter ended
March 31, 2004 can be attributed to: increased portfolio income, realized gain
from the sale of ADIC stock and the bad debt recovery and the equity revaluation
attributed to the Corporation's Somerset investment.

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
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. It 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 March 31, 2004 and 2003, the Corporation's total liquidity,
consisting of cash and cash equivalents, was $220,341 and $1,251,546
respectively.

         In July of 2003, the Corporation paid $50,000 to the SBA to reserve
$5,000,000 of its approved debenture leverage. This fee was 1% of the face
amount of the leverage reserved

<PAGE>

under the commitment. The fee represents a partial prepayment of the SBA's
nonrefundable 3% leverage fee. As of March 31, 2004, Rand Capital SBIC, LLC had
drawn $1,000,000 in leverage from the SBA.

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

<PAGE>

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 a substantial portion of its assets in early
stage, 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. The
Corporation has in the past relied, and continues to rely to a large extent,
upon proceeds from sales of investments rather than investment income to defray
a significant portion of its operating expenses. Such sales are unpredictable
and may not occur.

ILLIQUIDITY OF PORTFOLIO INVESTMENTS

         Most of the investments of the Corporation's are or will be either
equity securities acquired directly from small companies or below investment
grade subordinated debt securities. The Corporation's portfolio of equity
securities is and will usually be subject to restrictions on resale or otherwise
have no established trading market. The illiquidity of most of the Corporation's
portfolio may adversely affect the ability of the 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 March 31, 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

<PAGE>

principal executive officer and principal financial officer have concluded that
as of such date, our disclosure controls and procedures were designed to ensure
that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in applicable SEC rules and forms and were
effective.

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

<PAGE>

                                    PART II.
                                OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

         None

ITEM 2. CHANGES IN SECURITIES 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 AND REPORTS ON FORM 8-K

         (a)      EXHIBITS

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

                  (3)(i)   Certificate of Incorporation of the Corporation,
                           incorporated by reference to Exhibit (a)(1) of Form
                           N-2 filed with the Securities Exchange Commission on
                           April 22, 1997.

                  (3)(ii)  By-laws of the Corporation incorporated by reference
                           to Exhibit (b) of Form N-2 filed with the Securities
                           Exchange Commission on April 22, 1997.

                  (4)      Specimen certificate of common stock certificate,
                           incorporated by reference to Exhibit (b) of Form N-2
                           filed with the Securities Exchange Commission on
                           April 22, 1997.

                  (10.1)   Employee Stock Option Plan - incorporated by
                           reference to Appendix B to the Corporation's
                           definitive Proxy Statement filed on June 1, 2002.*

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

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

                  (10.5)   Limited Liability Corporation Agreement of Rand
                           Capital Management, LLC - incorporated by reference
                           to Exhibit 10.5 to the Corporation's Form 10-K Report
                           filed for the year ended December 31, 2001.

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

                  (10.7)   N/A

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

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

                  (31.1)   Certification 14(a) under the Securities Exchange Act
                           of 1934, as amended, filed herewith

                  (31.2)   Certification of Chief Financial Officer Pursuant to
                           Rules 13a-14(a)/15d-14(a) under the Securities
                           Exchange Act of 1934, as amended, filed herewith

                  (32.1)   Certification Pursuant to Section 906 of the
                           Sarbanes-Oxley Act of 2002 - Rand Capital Corporation
                           - filed herewith

                  (32.2)   Certification Pursuant to Section 906 of the
                           Sarbanes-Oxley Act of 2002 - Rand Capital SBIC, L.P.
                           - filed herewith

*Management contract or compensatory plan.

         (b)      REPORTS ON FORM 8-K

                  No current reports were filed during the period

<PAGE>

                                   SIGNATURES

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

Dated: May 13, 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