MICRO-CAP PORTFOLIO

PREMIER PORTFOLIO

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          What a difference the turn of a century makes! Just six months ago, the world seemed like a very different place, dominated by large-cap companies, Internet IPOs (Initial Public Offerings) and growth-stock investing. Market savvy was the province of those who ignored traditional valuation yardsticks and breezily asserted, "This time it's different." For one brief, heady moment, it seemed as if anyone who wanted to be a millionaire could, and it did not require sweating it out with Regis Philbin. All it took was a hot stock tip or two and the click of a mouse. Today, thanks to a once unthinkable bear market in the Nasdaq Composite and a bursting bubble in Internet (particularly e-commerce) stock performance, we are in a market in which the discarded investment ideas of the past - small-cap companies, energy stocks and value investing - now look like great finds at an eBay auction. In fact, swashbuckling, multi-millionaire hedge fund managers, once the toast of the investment world, now look like the exiled participants on the hit series, Survivor. Whoever said life imitates art (or at least television) must have known something about the stock market.

          The changes involve not just a shift in market psychology, but perhaps in market leadership as well. Small-cap stocks arrived late to the high-return party, finally showing up in 2000's opening quarter, just before the Federal Reserve helped break up the celebration by once again raising interest rates. The arrival of small-caps was welcome news for those of us who watched the Russell 2000 finish third in a three-index race behind the Nasdaq Composite and S&P 500 for much of the late '90s. Yet, after starting the new year in fine fashion - all three indices were up in the first quarter - the trio posted negative second-quarter returns, below their respective highs from March. As befits latecomers, small-caps endured the post-boom hangover with more grace than their large-cap counterparts. The Russell 2000 (+3.0 year-to-date) was the only index to finish the six months in positive territory (S&P 500: -0.4% YTD; Nasdaq Composite: -2.5% YTD).

          The Russell 2000 managed to outperform the other indices year-to-date despite suffering a 25% decline from March 9, 2000 through April 14, 2000. This took place against a backdrop of rising interest rates, lower overall equity returns (the S&P 500's one-year trailing total return dropped to 7.3% from 21.1% at 12/31/00) and higher market volatility. According to The New York Times, the Nasdaq Composite rose or fell 3% or more in a single trading session on only 40 occasions from 1971 to 1997. Between 1998 and 1999, there were 35 such occasions. Through the first six months of 2000, there were 41, which accounts for 33% of the index's trading sessions year-to-date. Historically, a more volatile, lower return environment has generally been positive for small-cap value investing, yet it's still too early to gauge whether small-caps can develop and extend market leadership.

          Value began the year looking like the losing tribe on Survivor, unable to build a simple hut or even start a fire. But after falling behind in January and February, value proved that it could survive some pretty tough conditions, as the Russell 2000 Value index outperformed the Russell 2000 Growth index in March, April and May, and for the year-to-date period as well. As we would expect, the performance edge from March through May occurred during a small-cap decline of 17.3% (as measured by the Russell 2000). The Russell 2000 Value index was down 0.5% versus a loss of 26.6% for the Russell 2000 Growth index. While the virtues of growth may be alluring, inside small-cap, we think that value's virtues are more lasting and better suited for a long-term investment horizon.

          While momentum and emotion will remain potent motivators, many investors now seem to realize that millions are not easily made by answering trivial questions on a one-hour game show or by investing in every stock whose name begins with a small "e" or "i." Throughout the euphoria of the previous cycle, we resisted the siren song of what looked like easy, short-term gains. Instead, we chose to concentrate on a long-term time frame and continued to select securities using the same criteria that we always have, even though our methods looked antiquated to some observers at the time. Today, this same approach may look like the next big thing to some of those same people. Regardless of what's trendy, we still believe that portfolio diversification, attractive valuations and long-term investing can continue to help people meet their financial goals, regardless of whether they want to be "millionaires" or just "survivors."

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LOWER OVERALL RETURNS, BETTER SMALL-CAP VALUE PERFORMANCE?

[PHOTO]

(l-r) Charlie Dreifus, Jack Fockler, Buzz Zaino, Whitney George, Chuck Royce

          We have been claiming that the market's high returns were too good to last (our own take on "irrational exuberance") since 1997. However poor or premature our forecasting has been, our guess is that equity returns going forward will be closer to their historical norms than they were through the late '90s, and that this would be a positive development for small-cap value investors. More historically typical equity returns do not necessarily mean lower, or negative, small-cap returns. While historical market performance is not necessarily indicative of future results, our research indicates that when the S&P 500 has provided what we view as a more normal level of return (13.8% or lower on a rolling 10-year basis), small-caps tended to outperform on average about 80% of the time.*

          We believe that small-caps are finally reversing the significant performance divergence that previously plagued the asset class. In fact, we think that the major market peaks in March coincided with a leadership shift favoring small-caps in general and small-cap value in particular. At a minimum, we think we are in the early innings of a new game, prepared as always to play every inning with the same consistent approach.

Sincerely,

/s/Charles M. Royce     /s/W. Whitney George    /s/Jack E. Fockler, Jr.

Charles M. Royce           W. Whitney George           Jack E. Fockler, Jr.
        President                  Vice President                   Vice President

NOTES TO PERFORMANCE AND RISK INFORMATION

Historical market trends are not necessarily indicative of future movements. All performance information is presented on a total return basis and reflects the reinvestment of distributions. Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that shares may be worth more or less than their original cost when redeemed. Royce Capital Fund portfolios invest in small- and/or micro-cap companies that may involve considerably more risk than investments in securities of larger-cap companies (see "Primary Risks" in the prospectus). Please read the prospectus carefully before investing or sending money. This report must be accompanied or preceded by a current prospectus for the Funds. Please read the prospectus carefully before investing or sending money.

The thoughts expressed in this report concerning recent market movements and future prospects for small-cap company stocks are solely those of Royce, and, of course, historical market trends are not necessarily indicative of future market movements. Statements regarding the future prospects for particular securities held in the Funds' portfolios and Royce's investment intentions with respect to those securities reflect Royce's opinions as of June 30, 2000 and are subject to change at any time without notice. There can be no assurance that securities mentioned in this report will be included in any Royce-managed portfolio in the future.

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Micro-Cap Portfolio
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* Excludes 15.5% of portfolio holdings with zero or negative earnings as of 6/30/00.

          There was nothing micro about Royce Micro-Cap Portfolio's (RCM) performance in the first half. The Portfolio turned in a 6.36% return year-to-date through June 30, more than doubling its small-cap benchmark, the Russell 2000, which was up 3.04%. RCM also survived the second-quarter correction by posting a gain of 1.56%. The Portfolio's average annual total return since inception (12/27/96) was 16.76%.

          Sterling performances from energy services and oil and gas companies helped to make the Natural Resources sector the Portfolio's top performer year-to-date through 6/30/00. Each group made a comeback in the first half, although gains seemed to trickle down to the industries' micro-cap companies a little more slowly than they did for larger capitalization issues. We began to act on what we thought were great bargains in these stocks throughout 1999, adding to existing positions and initiating new ones in these groups this year. For example, in late June we took a significant position in 3TEC Energy. The company represents the consolidation of several small regional natural gas exploration businesses that focus on East Texas and the Gulf Coast. We like the company's business fundamentals, its experienced and talented CEO and the fact that it remains overlooked by Wall Street. Even allowing for the gains made so far, we think that energy services and oil and gas continue to offer considerable performance potential.

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PERFORMANCE AND PORTFOLIO REVIEW
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          The significant correction in technology stocks is old news by now, but in RCM's portfolio, the story read more like A Tale of Two Sectors. We steadily reduced our Technology exposure from 12/31/99, primarily via first-quarter selling just before the end of the bear's long hibernation. This included the sale of REMEC, a designer and manufacture of multi-function modules for microwave transmission systems. The proceeds from such sales were then used to make purchases in what we regard as promising companies in the sector. In the second-quarter "tech-wreck," we initiated positions in ESS Technology, a designer of integrated mixed signal semiconductor, hardware and software for multimedia applications, and Ducommun, a component manufacturer for domestic and foreign commercial and military aircraft and space programs, when their prices plummeted. Each company's stock had rebounded before the end of the second quarter.

          One underperforming group that we feel remains attractively undervalued (because performance in general has been wretched) is insurance. We established a large position in Medical Assurance, a leading provider of medical liability insurance, and took advantage of low prices to substantially increase our holdings in PXRE Group, a property and casualty reinsurer. We are confident that our long patience with these companies will be rewarded.

          Although recognition is growing, micro-caps are still struggling towards official institutional acceptance, which suits us just fine. Investor indifference often creates the kinds of conditions where we believe our approach works best.

Richardson Electronics - Wall Street finally noticed this distributor of electronic components and equipment for industrial, communications, medical, and scientific applications. The company first got our attention back in 1998's third-quarter correction. Unlike many technology stocks, its price kept climbing throughout the second quarter.

Stein Mart - We bought shares of this well-managed department store chain below book value after earnings disappointments drove the stock price down. Sales rebounded and institutional interest returned, moving the price higher and higher in the second quarter.

Reliance Group Holdings - We bought the stock of this property and casualty insurer on a takeover announcement from a larger firm that we knew and liked. Reliance's financial condition, which was never especially great, turned out to be even worse than we first thought. Now their takeover suitor is dawdling, most likely holding out for a better price for the assets.

RCM Technologies - Not only did a hoped-for turnaround for this information technology staffing and consulting company not materialize following the non-event of Y2K, but its price crashed further in the second quarter. We think that its industry will grow and thus like its potential to recover.

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Royce Premier Portfolio
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* Not annualized.

MANAGER'S DISCUSSION

          Royce Capital Premier (RCP) seems to have been in the right place at the right time so far in 2000. The Portfolio was up 14.34% through June 30, 2000, substantially ahead of its small-cap benchmark, the Russell 2000, which was up 3.04% for the same period. RCP's concentrated portfolio of what we think are high-quality small-cap stocks helped performance in the dynamic first quarter, when the Portfolio was up 10.71%, versus 7.08% for the Russell 2000. With its risk-averse value approach, RCP's positive performance in the bearish second quarter was even more impressive. The Portfolio was up 3.28%, compared to a decline of 3.78% for the Russell 2000. The Portfolio's average annual total return since inception (12/27/96) was 14.21%.

          Financial Intermediaries was RCP's top-performing sector, due in large part to the stellar returns of White Mountains Insurance Group, which we discuss below. Fidelity National Financial, a firm engaged in the issuing of title insurance policies and a provider of diversified real estate-related services, also enjoyed a strong first half. In contrast to many insurance underwriters, Zenith National Insurance, a property and casualty insurer, turned in a strong performance as well, leading us to sell half our stake in May. The stocks of insurance brokerage companies, on the other hand, such as Arthur J. Gallagher & Company, performed very well, benefiting from industry consolidation and from the rising cost of premiums. These benefits unfortunately have not yet reached insurance underwriters, including portfolio holdings E. W. Blanch Holdings and Medical Assurance.

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PERFORMANCE AND PORTFOLIO REVIEW
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          Natural Resources, especially energy services and oil and gas stocks, dramatically turned around in the first half, with both industries overcoming long periods of dismal performance. The price of Input/Output, a designer and manufacturer of seismic data acquisition products used on land and water, moved steadily upward through the first half. We began buying shares of Tom Brown, an oil and natural gas exploration and production company, in January just before its price started to climb. In May, we initiated a position in top-ten holding Carbo Ceramics, a producer and supplier of ceramic proppants, an important ingredient in the hydraulic fracturing of natural gas and oil wells.

          We believe that, in spite of the Portfolio's strong first half, it still has plenty of future growth potential. Many of RCP's top performers are companies that we feel can further flourish, especially those in insurance brokerage and energy-related industries. In addition, we think that recent disappointments, such as Medical Assurance, Enesco Group, Charming Shoppes and Claire's Stores, are more than capable of turnarounds.

White Mountains Insurance Group - We took a position in this property and casualty insurer in January when it was trading at what we thought was an attractive price. The return of a well known, talented CEO sparked Wall Street's interest, driving the price up. We sold half our shares in March.

Oakley - After spending much of the last two years wandering in the single-digit wilderness, the stock of this leading designer, manufacturer and distributor of high-performance eyewear and athletic accessories came back as new products were more effectively integrated and institutional interest returned.

Blanch (E.W.) Holdings - A combination of missed earnings estimates and management defections led to a more than fifty percent loss in 2000's first quarter. Still believers in the high value of the firm's core business, we built up our position in
March before selling some shares in May when its price briefly spiked upward.

Lincoln Electric Holdings - This manufacturer of welding and cutting products announced a large acquisition, but followed that news with a report that it would need to borrow funds to complete the deal, which sent its price into a tailspin. We believe in the company's long-term prospects based on its previous business success and on the growth potential that the acquisition offers.

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a  Non-income producing.
+  New Additions in 2000.
Bold indicates the Fund's largest 20 equity holdings in terms of June 30, 2000 market value.

INCOME TAX INFORMATION- The cost of total investments for Federal income tax purposes was $18,300,823. At June 30, 2000 net unrealized appreciation for all securities was $578,087, consisting of aggregate gross unrealized appreciation of $2,205,879 and aggregate gross unrealized depreciation of $1,627,792.

a  Non-income producing.
b  American Depository Receipt.
+  New Additions in 2000.
    Bold indicates the Fund's largest 20 equity holdings in terms of June 30, 2000 market value.

INCOME TAX INFORMATION- The cost of total investments for Federal income tax purposes was $547,584. At June 30, 2000, net unrealized appreciation for all securities was $41,022, consisting of aggregate gross unrealized appreciation of $84,254 and aggregate gross unrealized depreciation of $43,232.

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