ROYCE FUND, N-30D, 1996-08-28

ROYCE FUND
N-30D, 1996-08-28

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ROYCE
MICRO-CAP
FUND

SEMI-ANNUAL REPORT
JUNE 30, 1996

THE ROYCE FUNDS

The Royce Funds
1414 Avenue of the Americas
New York, NY 10019
(212) 355-7311
(800) 221-4268

Dear Shareholder:

After a left foot start in January, small company stocks, as measured by the
Russell 2000 Index, outperformed their large company brethren (S&P 500) in
February, March, April and May (15.2% versus 6.2%), but were unable to continue
their winning ways in June (-4.1% versus 0.4%). June's downturn in performance
was the first sign of potentially higher volatility for small-cap issues. In
fact, the Nasdaq Composite closed the second quarter off over 5% from the high
it established on June 5th, its largest decline since a 13.8% drop in the second
quarter of 1994. In spite of June's downturn, and because of the February-May
surge, the Russell 2000 Index of small-cap stocks won the first half performance
derby with a 10.4% total return versus a 10.2% total return for the large-cap
oriented S&P 500.

Within small-cap, 'growth' finished ahead of 'value' with the Russell 2000
Growth Index providing an 11.9% return versus an 8.7% gain for the Russell 2000
Value Index. A similar performance relationship, but with wider disparity, was
also present in the Wilshire Target Small Cap Index Funds, as the Small Cap
Growth Fund (+13.2%) handily outperformed the Small Cap Value Fund (+3.9%).

ROYCE MICRO-CAP FUND ('RMC') outperformed both small-cap value proxies,
posting an 11.0% return for the first six months. Contributing to the Fund's
performance were nice gains in two sectors (retail and services) which had been
mediocre performers in 1995.

The Fund, which went over $100 million in total assets during the first half,
is one of the few micro-cap funds with almost five years of performance history.
Over both short and longer terms, the Fund's returns are highly competitive on
an absolute and risk adjusted basis. Average annual total returns for the Fund
over the last one year, three year and since inception (December 31, 1991)
periods were 18.6%, 15.6% and 19.1%, respectively, and its risk profile remained
low. According to independent mutual fund evaluation service, Morningstar, RMC
was one of the lowest risk small-cap funds for the three years ended June 30,
1996, as measured by standard deviation (24th lowest out of 194 funds), beta
(4th lowest out of 194 funds) and Morningstar's risk ratio (22nd lowest out of
194 funds). WE BELIEVE THAT THE MICRO-CAP SECTOR REMAINS THE MOST ATTRACTIVE
SEGMENT OF THE DOMESTIC EQUITY UNIVERSE AND THAT OUR RISK AVERSE APPROACH, WHICH
USES ABSOLUTE VALUATION STANDARDS, IS AN APPROPRIATE STRATEGY FOR GENERATING
ABOVE AVERAGE RESULTS.

[GRAPHIC]

FIREWORKS IN JULY

Louis Pasteur once
said, 'Chance favors the prepared mind.' Although everyone was prepared for the
fireworks of July 4th, few were prepared for the market fireworks which began in
June and intensified throughout July. Double digit gains in small-cap indices
were erased and many investors now find themselves starting over at mid-year.

PERFORMANCE UPDATE THROUGH JULY 31

% DECLINE JULY '96 YTD RETURN
FROM HIGH* RETURN THRU 7/31/96
---------- -------- ------------

RMC -8.4% -6.5% +3.9%

Russell 2000 -13.1% -8.7% +0.7%
Nasdaq Comp. -13.4% -8.8% +2.7%

*Russell 2000 high was made on 5/22/96.

We view the current pyrotechnics of July from the vantage point that these
fluctuations are inevitable and desirable, and part of the normal rhythm of the
market. We are prone to keep ourselves at a distance. This is largely common
sense -- no special preparation needed.

WORTH REPEATING

To be quoted is flattering. To quote oneself presents the dual risk of boring
our readers and tooting our own horn. Nevertheless, we want to repeat some of
our comments from the 1995 Annual Report. (We promise we won't do this again.)

IN OUR LAST REPORT WE SAID:

'An interesting aspect of this five year rise in both stocks and bonds is the
ever increasing participation of individual investors....In fact, it is that
very same demand which is believed to ensure future success and prevent any
major reversal in market fortunes....The suggestion that continued success is
nearly guaranteed by demand is a scary proposition....We remain most astonished,
not with the magnitude of investor appetite for stocks, but the nearly universal
assumption of its permanence.'

WE NOW THINK:

In a perverse way, the least informed (the purchasing public) now appear to
be dictating investment policy to those presumed most knowledgeable (portfolio
managers). Normally prudent professionals have taken comfort in the fact that
the public is pouring money into equity mutual funds. As one of our shareholders
commented, 'The inmates are running the asylum.'

ALSO IN THE 1995 ANNUAL REPORT WE SAID:

'We are certain, particularly in a global economy, that an ample supply of
securities can be created to meet and even exceed investors' demands.'

AND NOW:

The $132 billion of new investments in equity mutual funds for the first half
of 1996 has eclipsed the prior annual record set in 1993 ($130 billion for the
full year). Yet, the dramatic upward progress that this commitment was expected
to produce has not materialized. A move up in long-term interest rates and
increased corporate insider selling activity are partly to blame, as well as a
surge in IPO activity. By late June, roughly 80 new offerings a week were
producing a fresh supply of securities at the rate of approximately $20 billion
a month.

[GRAPHIC]

One of the most instructive offerings of the recent IPO boom was the creation
and issuance of Berkshire Hathaway Inc. Class B shares. Berkshire Hathaway's
Chairman, Warren Buffett, is perhaps the best known investor of our time.
Multiple warnings on the front page of the prospectus included: 'Neither Mr.
Buffett nor Mr. Munger (Vice Chairman) would currently buy Berkshire shares (at
the current price), nor would they recommend that their families or friends do
so' and 'Berkshire has attempted to assess the current demand for Class B shares
and has tailored the size of this offering to fully satisfy that demand (and)
therefore, buyers hoping to capture quick profits are almost certain to be
disappointed.' Yet, despite the warnings, over $500 million was raised. WALL
STREET HAS BEEN SUCCESSFUL IN CREATING AN AMPLE SUPPLY OF NEW AND SECONDARY
OFFERINGS TO FULLY SATISFY DEMAND. HOWEVER, IT PROVIDES NO SIMILAR 'WARNING
LABELS.'

ADDITIONALLY WE SAID:

'The magnitude of the decline in interest rates is virtually not repeatable.
Consequently, a further decline in interest rates will not have the same
favorable impact on stock prices, no matter how bullish one is on rates.'

AND NOW:

The consensus expectations of lower rates (then at 6%) in an election year
have proved to be wrong. Long-term government bond yields rose by over 20% in
the first half to a current yield of over 7.0%. While this surprise has not
ended the party, it's getting hard to find the punch bowl.

AND FINALLY WE SAID:

'THE NEXT FIVE YEARS WILL BE DIFFERENT! It's not likely that the next five years
will rival the previous five in terms of ideal wind conditions or spectacular
performance. History tells us that periods of high valuation and high return are
usually followed by periods of lower, less dynamic returns....We see no reason
why performance should not revert to the mean and, thus, a period of lower five
year returns is likely. Very simply, the last five years was a period in which
risk and reward were synonymous and one in which risk management provided
virtually no benefit. It's likely that we have completed the best five year
performance period for this decade.'

AND NOW?

Enough said.

THE VALUE IN VALUE INVESTING

A basic premise of value investing is that stocks, like other goods and
services, should be purchased at the most attractive prices possible, preferably
at a discount to their 'intrinsic worth.' The reality for most investors is just
the opposite. In other words, investor comfort levels and, therefore, demand
increase when prices rise, and diminish as prices decline. The higher a stock
rises, the greater the perceived opportunity.

Value investing, on the other hand, takes a contrary view to this highly
emotional process. By systematically reducing risk when others ignore it and
taking risk when it is feared, one can capitalize on valuation discrepancies
(opportunities) which develop from time to time. The greatest risk that the
value investor confronts is the loss of either patience or discipline when faced
with the prospect of being out-of-sync with the market. THE VALUE IN 'VALUE
INVESTING' IS TO PROVIDE A COHERENT SYSTEM FOR RATIONAL DECISION MAKING . . .
THE PURPOSE OF WHICH IS TO COMPOUND WEALTH WHILE MINIMIZING RISK. Its basic
premise is that the price one pays for an investment makes a significant
difference in the return one receives.

WHAT WE DO
[GRAPHIC]
Royce Micro-Cap Fund uses a risk-averse approach to
invest in the securities of companies with market
capitalizations below $300 million, the sector known as
'micro-cap.' Experience tells us that paying attention to risk does not diminish
long-term results, although individual market phases may not always confirm
this.

Our approach attempts to understand and value a company's private
worth -- what we believe an enterprise would sell for in a private transaction
between rational parties. The price we will pay for a security must be
significantly under our appraisal of its private worth. The consistent use of
this discipline, applied to less well-known securities, is the source of our
performance.

NO OTHER PLACE WE WOULD RATHER BE

While the Fund focuses on companies with market caps below $300 million, our
weighted average and median market caps are actually much lower: $166 million
and $137 million, respectively, at June 30, 1996.

Although our orientation is micro-cap stocks, our picking universe is by no
means small with over 6,000 companies valued at more than $300 billion in total
market capitalization. It is both robust and perpetuating; IPO's, spin-offs and
reorganizations create hundreds of new prospects each year. The small-cap sector
is rich in opportunity and easily accommodates our strategy given the size of
the investable universe.

From time to time we are criticized for the large number of securities that
we hold in the portfolio. In fact, given the size of our universe, we believe
our strategy is quite focused because total portfolio holdings represent fewer
than 3% of the available small-cap universe. Not many large-cap managers would
be content with only 15 selections from the S&P 500.

Not long ago we had a conversation with a highly successful and respected
fund manager about diversification. His contention was that statistical
diversification could be achieved with just 13 holdings. His own portfolio was
concentrated in a mere 20 selections. We were impressed. Yet, upon further
examination, we discovered his 20 large-cap holdings were involved in 61
different businesses. As defined by Standard Industrial Classification codes
(SICs), Philip Morris has seven different business groups, Pepsi has six,
Johnson & Johnson has five and so on. In contrast, the vast major-

ity of our holdings have single lines of business.
When one adds up the numbers, there's really not much difference in terms of
diversification between our approach and that of 'focused' managers.

HOW IT WORKS
[GRAPHIC]
Our approach to investing in individual small-cap
companies has proven historical benefits, but can be both
unpredictable and frustrating in the near-term. We believe that the stock market
in the short-term is a polling place, and in the long-term, a highly efficient
weighing device. While our ultimate success will continue to be driven by the
process of 'weighing the true value' of the small companies in which we have
invested, the following provides a brief glimpse of some of this year's
'election results.'

FALLING IN LOVE
[GRAPHIC]
Despite a generally rising market, there were
numerous opportunities for us to either add new
positions or increase our investment in some old
favorites. The following companies represent our most
significant commitments in 1996's first half. More importantly, they represent
examples of works in progress which we hope will build future performance.

<TABLE>
<CAPTION>
SECURITY NET INVESTED
- ----------------------------------------- ------------
<S> <C>
Velcro Industries N.V. $ 1,931,052
American Filtrona Corporation 1,290,159
Oregon Steel Mills, Inc. 1,275,000
Electroglas, Inc. 1,215,901
Sevenson Environmental Services Inc. 1,207,050
</TABLE>

Velcro Industries invented, patented, and is the sole manufacturer of the
Velcro brand of fasteners. Besides possessing a uniquely powerful franchise and
brand name, this company achieves high internal rates of return and boasts solid
balance sheets. American Filtrona, which makes the filters that are used in
cigarettes, Hi-liters, and the tips of felt tip pens, among other things, has
managed to grow steadily during the past few years while generating healthy
amounts of free cash and maintaining a robust balance sheet. Oregon Steel Mills
came to us through a poorly received secondary offering, and we purchased the
stock below book value. This company has just completed a major capital
expenditure program and should grow quickly as a low cost producer. In
the meantime, Oregon Steel pays a generous dividend. We often shy away from
technology companies, but we could not resist Electroglas, an undisputed leader
in its niche of the semi-conductor capital equipment industry. With 70% world
market share, superb returns, a large stockpile of cash on the balance sheet,
and trading at one third of last year's valuations, this company looks like a
bargain. Finally, Sevenson Environmental Services stumbled into its
industry -- environmental remediation -- while working on a construction project
at Love Canal. Sevenson has remained highly profitable during a difficult
business cycle, and we purchased the stock for less than two-thirds of its 1989
offering price.
6

HARVEST SEASON

Selling stocks is always difficult for the value [GRAPHIC]
investor for it requires either parting with success or
admitting mistakes. So far this year we have done both. The following is a list
of our five largest divestitures during 1996's first half.

<TABLE>
<CAPTION>
SECURITY NET PROCEEDS
- ----------------------------------------- ------------
<S> <C>
Conso Products Co. $ 1,689,319
Charming Shoppes, Inc. 1,622,386
Tide West Oil Company 1,318,666
The Wet Seal, Inc. (Class A) 1,215,555
Tom Brown, Inc. 1,202,263
</TABLE>

Improving fortunes in energy and retailing resulted in full and fair
valuations for two of our retailing stocks, Charming Shoppes and The Wet Seal,
and two of our energy companies, Tide West Oil and Tom Brown. Having purchased
these companies when the conditions in their industries were more challenging,
we enjoyed some big winners. We reduced our position in Conso Products as other
investors discovered this rapidly growing manufacturer and distributor of
decorative trimmings, bidding the stock up to fair valuation.

VOLATILITY IS A FRIEND

Recently, stock market volatility has generated a great deal of attention
from the financial press. While large changes (100 point or greater moves) in
the Dow Jones Industrial Average make interesting reading in the morning papers,
their significance is exaggerated. The following table depicts the Russell
2000's yearly price variation using the index's annual range as a percentage of
the beginning year's price.

[GRAPHIC]

It's interesting to note how tame the markets have remained in the last four
and a half years relative to the prior thirteen. TO US, VOLATILITY IS A FRIEND
IN THAT IT CREATES IRRATIONAL PRICING OF SECURITIES AND, THEREFORE,
OPPORTUNITIES FOR US TO CAPITALIZE ON OUR RISK MANAGEMENT SKILLS.

ARE THERE ANY REAL INVESTORS LEFT?

The term 'investor' denotes
a long-term supplier of capital. [GRAPHIC]
In contrast, a 'speculator' is
one who takes opportunistic
risk in hopes of generating
quick profits. In essence,
investors expect to get paid by the correct assessment of underlying business
fundamentals, whereas speculators count on others (often referred to as greater
fools) to buy them out profitably.

In the current bull market, it has become very difficult to tell the
difference between investors and speculators. For example, what exactly is
'momentum investing?' The term seems oxymoronic. While equities represent a
permanent ownership position in an enterprise, in many fund portfolios, they are
reviewed and replaced more frequently than three month Treasury Bills. Wall
Street brokerage firms publish 'Buy' and 'Sell' recommendations based on a
company's quarterly progress down to the

<PAGE>
<PAGE>
penny per share; and the country's
largest equity mutual fund lost its star manager after a short period of
underperformance, which may have contributed to the decision by that fund's
investors to withdraw in excess of $1 billion.

Only time and more difficult market conditions will separate the true
investors from disappointed speculators. GIVEN THAT WE BELIEVE THAT EQUITIES
REPRESENT LONG-TERM INTERESTS IN BUSINESSES, THE TERM 'INVESTOR' SUITS US JUST
FINE.

WHAT DO WE DO NOW?

Given our belief that the next phase of the market will include lower equity
returns and greater volatility -- the need for basic blocking and tackling, in
the form of commitment, focus and experience, is paramount. We remain committed
to investing in high quality, small-cap companies using absolute valuation
standards; our focus remains sharp, and exclusively on small and micro-cap
companies; and our 20+ years of investment experience ensures that our vigilance
and discipline remain constant. Your continued confidence is appreciated.

Yours faithfully,

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

August 1, 1996

P.S. Our 'new era' fund will wait for the 'new era.'

NOTE: In order to control asset growth, the Fund has committed to limit
cash inflows to $50 million in any calendar six month period. Once the $50
million limit is reached, the Fund will close to new investors and
advisors but will remain open to existing relationships.

Morningstar proprietary risk ratio, beta and standard deviation are measures of
a fund's relative risk and are calculated for the trailing 36-month period.
Morningstar risk ratio measures a fund's downside volatility relative to all
equity funds which have an average score of 1.00. Beta is a measure of
sensitivity to market movements compared to the unmanaged S&P 500 index, with
the beta of the S&P 500 equal to 1.00. Standard deviation is a statistical
measure within which a fund's total return falls. The average Morningstar risk
ratio, beta and standard deviation for the 194 small-cap funds with a three-year
history as of 6/30/96 were: 1.02, 0.84 & 11.87, respectively. The Morningstar
risk ratio, beta and standard deviation for Royce Micro-Cap Fund over the same
period were: 0.66, 0.43 & 7.84, respectively. Source: Morningstar, Inc.

The Russell 2000, Russell 2000 Growth, Russell 2000 Value and S&P 500 indices
are unmanaged and include the reinvestment of dividends. The Nasdaq Composite is
an unmanaged index. The Wilshire Target Small Company Value and Growth Funds
attempt to replicate the performance of the Wilshire Next 1750 Small Company
Value and Growth Indices, respectively.

<PAGE>
<PAGE>
FINANCIAL REVIEW

<TABLE>
<CAPTION>
PERIOD TOTAL RETURN
- ------------------------------- ------------
<S> <C>
1996 (through 6/30)............ 11.0%
1995........................... 19.1%
1994........................... 3.6%
1993........................... 23.7%
1992........................... 29.4%
</TABLE>

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
- ---------------------------------------
(THROUGH 6/30/96)
<S> <C>
1-Year......................... 18.6%
3-Year......................... 15.6%
Since Inception*............... 19.1%
</TABLE>

ROYCE MICRO-CAP FUND VERSUS S&P 500
VALUE OF $10,000 INVESTED ON 12/31/91

<TABLE>
<CAPTION>
Royce Micro-Cap S&P 500
<S> <C>
12/31/91 10,000 10,000
3/31/92 11,100 9,745
6/30/92 10,700.4 9,936.977
9/30/92 11,420.54 10,245.02
12/31/92 12,940.61 10,768.54
3/31/93 14,184.2 11,232.67
6/30/93 14,206.9 11,287.71
9/30/93 15,316.46 11,577.8
12/31/93 16,004.17 11,845.25
3/31/94 16,127.4 11,393.95
6/30/94 15,854.84 11,438.38
9/30/94 16,769.67 12,000.01
12/31/94 16,571.79 12,001.21
3/31/95 17,184.94 13,170.12
6/30/95 18,463.5 14,425.24
9/30/95 19,717.17 15,577.81
12/31/95 19,730.98 16,503.13
3/31/96 20,543.89 17,402.55
6/30/96 21,923 18,192.63

* Inception Date -- December 31, 1991
</TABLE>

The results presented in this report should not be considered
representative of the total return from an investment in the Fund today. They
are only provided to give an historical perspective of the Fund. The investment
return and principal value of Fund shares will fluctuate so that the shares may
be worth more or less than their original cost when redeemed. Redemption fees
are not included because they apply only to purchases held for less than one
year.

<PAGE>
<PAGE>
PORTFOLIO SUMMARY

The following information is provided as a 'bird's eye' view of the Royce
Micro-Cap Fund portfolio. For a more complete picture, the full portfolio and
accompanying financial statements should be read in their entirety.

<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION VALUE % OF NET ASSETS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks $ 122,431,589 90.1%
Corporate Bond/Preferred Stock 302,225 0.3
Cash & Other Net Assets 13,095,767 9.6
--------------- -------
Total Net Assets $ 135,829,581 100.0%
--------------- -------
--------------- -------
PORTFOLIO DIAGNOSTICS
- ----------------------------------------------------------------------------------------------------------
Weighted Average Market Capitalization $166 Million
Median Market Capitalization $137 Million
Weighted Average P/E Ratio 14.2x
Weighted Average P/B Ratio 1.4x
Weighted Average Portfolio Yield 1.4%
COMMON STOCK SECTORS % OF NET ASSETS
- ----------------------------------------------------------------------------------------------------------
Industrial Cyclicals 21.8%
Services 15.6
Consumer Durables 12.9
Financial 11.5
Technology 7.5
Retail 6.5
Miscellaneous 4.6
Consumer Staples 4.4
Energy 3.9
Health 0.9
Utilities 0.5
TOP TWENTY POSITIONS VALUE % OF NET ASSETS
- ----------------------------------------------------------------------------------------------------------
1. Velcro Industries N.V. $2,081,250 1.5%
2. Lilly Industries, Inc. Cl. A 1,693,200 1.2
3. Lifetime Hoan Corporation 1,623,057 1.2
4. Fab Industries, Inc. 1,572,325 1.2
5. Penn Engineering and Manufacturing Inc. 1,553,862 1.1
6. DUFF & PHELPS CREDIT RATING CO. 1,540,625 1.1
7. Simpson Manufacturing Co., Inc. 1,476,000 1.1
8. Florida Rock Industries, Inc. 1,420,537 1.0
9. Dreco Energy Services Ltd. Cl. A 1,416,250 1.0
10. Jenny Craig, Inc. 1,413,913 1.0
11. Pennsylvania Manufacturers Corporation 1,385,500 1.0
12. Oregon Steel Mills, Inc. 1,375,000 1.0
13. American Filtrona Corporation 1,331,200 1.0
14. Vallen Corporation 1,314,250 1.0
15. CATHERINES STORES CORPORATION 1,290,663 1.0
16. Matthews International Corporation Cl. A 1,278,750 0.9
17. New England Business Service, Inc. 1,275,300 0.9
18. Thor Industries, Inc. 1,246,400 0.9
19. Thomaston Mills, Inc. Cl. A 1,203,750 0.9
20. Trenwick Group Inc. 1,190,000 0.9
</TABLE>

<PAGE>
<PAGE>
ROYCE MICRO-CAP FUND
SCHEDULE OF INVESTMENTS AT JUNE 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
COMMON STOCKS - 90.1%

<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
CONSUMER DURABLES - 12.9%
202,300 *Aldila, Inc. ........... $ 847,131
27,100 Allen Organ Company Cl.
B...................... 1,060,288
35,250 *Conso Products Co. ..... 572,812
32,400 First Years Inc. ........ 445,500
49,300 Garan Incorporated....... 838,100
51,100 Haggar Corp. ............ 689,850
8,333 *Jim Hjelm's Private
Collection, Ltd. ...... 21,874
65,300 Juno Lighting, Inc. ..... 1,110,100
70,000 Justin Industries,
Inc. .................. 918,750
29,500 K-Swiss Inc. Cl. A....... 320,812
32,200 *Kit Manufacturing
Co. ................... 394,450
150,982 *Lifetime Hoan
Corporation............ 1,623,057
30,800 *Marisa Christina,
Incorporated........... 616,000
46,500 Matthews International
Corporation Cl. A...... 1,278,750
34,000 *Maxwell Shoe Company
Inc. .................. 263,500
119,500 *Mity-Lite, Inc. ........ 926,125
15,500 National Presto
Industries, Inc. ...... 589,000
33,900 The Rival Company........ 779,700
94,200 *River Oaks Furniture ... 565,200
64,100 *The Sirena Apparel
Group, Inc. ........... 200,312
107,000 Thomaston Mills, Inc. Cl.
A...................... 1,203,750
60,800 Thor Industries, Inc. ... 1,246,400
50,000 *The Topps Company,
Inc. .................. 281,250
18,400 Weyco Group, Inc. ....... 745,200
------------
17,537,911
------------
CONSUMER STAPLES - 4.4%
34,700 Alico, Inc. ............. 676,650
<CAPTION>
Shares Value
<S> <C> <C>
66,000 *J & J Snack Foods
Corp. ................. $ 759,000
89,100 *Midwest Grain Products,
Inc. .................. 1,158,300
210,600 *Pentech International,
Inc. .................. 368,550
43,800 The Smithfield Companies,
Inc. .................. 492,750
37,500 Velcro Industries N.V. .. 2,081,250
30,000 WLR Foods, Inc. ......... 420,000
------------
5,956,500
------------
ENERGY - 3.9%
62,500 *American Oilfield
Divers, Inc. .......... 562,500
30,000 *Belden & Blake
Corporation............ 622,500
43,200 *Carbo Ceramics, Inc. ... 950,400
51,500 *Dreco Energy Services
Ltd. Cl. A............. 1,416,250
65,900 *Equity Oil Company...... 317,144
30,500 Lufkin Industries,
Inc. .................. 625,250
48,800 *Offshore Logistics,
Inc. .................. 677,100
5,500 Penn Virginia
Corporation............ 192,500
------------
5,363,644
------------

FINANCIAL - 11.5%
50,600 ALLIED Life Financial
Corporation............ 1,012,000
42,000 BHI Corporation.......... 614,250
15,000 E.W. Blanch Holdings,
Inc. .................. 298,125
6,300 CMAC Investment
Corporation............ 362,250
11,000 Capitol Transamerica
Corporation............ 211,750
21,200 *Desert Community Bank... 323,300
15,000 Eaton Vance Corp. ....... 543,750
2,600 *Gryphon Holdings
Inc. .................. 39,000
</TABLE>

The accompanying notes are an integral part of the financial statements.

INDUSTRIAL CYCLICALS - 21.8%
41,600 American Filtrona
Corporation............ 1,331,200
<CAPTION>
Shares Value
<S> <C> <C>
87,700 *Guy F. Atkinson Company
of California.......... $ 1,183,950
69,790 BHA Group, Inc. Cl. A.... 924,725
54,700 Blessings Corporation.... 560,675
56,400 *Chemfab Corporation..... 789,600
18,000 Culp, Inc. .............. 243,000
21,900 Curtiss-Wright
Corporation............ 1,182,600
22,400 *Devcon International
Corp. ................. 207,200
178,000 *DeVlieg-Bullard, Inc. .. 417,188
57,700 Fab Industries, Inc. .... 1,572,325
54,900 Florida Rock Industries,
Inc. .................. 1,420,537
6,100 Haskel International,
Inc. Cl. A............. 45,750
75,209 Hawkins Chemical,
Inc. .................. 582,870
36,000 *C. H. Heist Corp. ...... 243,000
19,425 *Hirsh International
Corp. Cl. A............ 371,503
15,600 *Insituform Technologies,
Inc. .................. 120,900
42,100 International Aluminum
Corporation............ 1,063,025
16,900 Knape & Vogt
Manufacturing
Company................ 266,175
99,600 Lilly Industries, Inc.
Cl. A.................. 1,693,200
282,900 *MK Gold Company......... 424,350
5,000 *Moore Products Co. ..... 93,750
27,400 Paul Mueller Company..... 931,600
26,800 Myers Industries, Inc. .. 499,150
1,900 The Oilgear Company...... 28,025
72,600 *Open Plan Systems,
Inc. .................. 871,200
100,000 Oregon Steel Mills,
Inc. .................. 1,375,000
</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>
<PAGE>
ROYCE MICRO-CAP FUND
SCHEDULE OF INVESTMENTS AT JUNE 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value
INDUSTRIAL CYCLICALS - (continued)
<S> <C> <C>
75,300 Oshkosh Truck Corporation
Cl. B.................. $ 1,063,613
31,500 Peerless Mfg. Co. ....... 338,625
64,300 Penn Engineering and
Manufacturing Inc. .... 1,213,662
14,400 Penn Engineering and
Manufacturing Corp. Cl.
A...................... 340,200
27,900 *Perini Corporation...... 334,800
5,000 Puerto Rican Cement
Company, Inc. ......... 155,625
57,450 Quaker Chemical
Corporation............ 732,488
74,700 *Shorewood Packaging
Corporation............ 1,148,512
73,800 *Simpson Manufacturing
Co., Inc. ............. 1,476,000
83,700 *Steel of West Virginia,
Inc. .................. 753,300
50,800 Synalloy Corporation..... 825,500
41,400 *Thermal Industries,
Inc. .................. 370,013
64,400 *Todd Shipyards
Corporation............ 483,000
13,500 Versa Technologies,
Inc. .................. 182,250
100,000 *Washington Construction
Group, Inc. ........... 1,025,000
55,000 *Webco Industries, Inc... 330,000
17,000 Zero Corporation......... 363,375
------------
29,578,461
------------
RETAIL - 6.5%
24,500 J. Baker, Inc. .......... 183,750
10,000 *The Bombay Company,
Inc. .................. 62,500
10,000 *Brookstone, Inc. ....... 112,500
10,900 *The Buckle, Inc. ....... 373,325
25,000 *Carson Pirie Scott
Co. ................... 668,750
<CAPTION>
Shares Value
<S> <C> <C>
130,700 *CATHERINES STORES
CORPORATION............ $ 1,290,663
101,500 Cato Corporation Cl. A... 609,000
28,000 *The Clothestime, Inc. .. 28,000
31,000 *Crown Books
Corporation............ 418,500
52,100 Deb Shops Inc. .......... 260,500
65,000 *Designs, Inc. .......... 390,000
106,400 *The Dress Barn, Inc. ... 1,117,200
24,999 Frederick's of Hollywood,
Inc. Cl. A............. 124,995
2,500 *Garden Ridge
Corporation............ 126,250
45,000 *InterTAN Inc. .......... 258,750
97,500 *Mikasa, Inc. ........... 1,072,500
6,981 *Monro Muffler Brake,
Inc. .................. 128,291
10,000 Oshkosh B'Gosh, Inc. Cl.
A...................... 180,000
29,000 *Shoe Carnival, Inc. .... 159,500
16,900 *Stein Mart, Inc. ....... 308,425
13,000 Strawbridge & Clothier
Cl. A.................. 211,250
140,000 *Suzy Shier Ltd. ........ 763,756
------------
8,848,405
------------

SERVICES - 15.6%
29,700 Aceto Corporation........ 467,775
10,000 Air Transportation
Holding Company,
Inc. .................. 43,750
30,765 *Bell Industries,
Inc. .................. 515,314
15,000 *Bertucci's, Inc. ....... 80,625
79,100 *Jenny Craig, Inc. ...... 1,413,913
36,200 Dames & Moore............ 438,925
72,500 DUFF & PHELPS CREDIT
RATING CO. ............ 1,540,625
20,900 Ecology and Environment,
Inc. Cl. A............. 172,425
</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>
<PAGE>
ROYCE MICRO-CAP FUND
SCHEDULE OF INVESTMENTS AT JUNE 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value
SERVICES - (continued)
<S> <C> <C>
47,000 Ennis Business Forms,
Inc. .................. $ 534,625
188,300 *FCA International
Ltd. .................. 319,896
101,750 Frozen Food Express
Industries, Inc. ...... 1,144,688
51,300 The Harper Group......... 1,000,350
20,000 Heidemij N.V. ........... 205,000
41,700 Jackpot Enterprises,
Inc. .................. 531,675
18,530 Kenan Transport
Company................ 384,497
36,800 Merrill Corporation...... 920,000
65,400 New England Business
Service, Inc. ......... 1,275,300
21,900 *Nichols Research
Corporation............ 684,375
23,400 PCA International,
Inc. .................. 391,950
18,500 Plenum Publishing
Corporation............ 647,500
16,000 *RENO AIR, INC. ......... 182,000
114,400 Richardson Electronics,
Ltd. .................. 1,144,000
84,300 *Rush Enterprises,
Inc. .................. 1,043,213
45,600 Rykoff-Sexton, Inc. ..... 655,500
12,500 *SOS Staffing Services,
Inc. .................. 150,000
65,400 Sevenson Environmental
Services Inc. ......... 1,136,325
40,000 The Standard Register
Company................ 985,000
49,500 *Steck-Vaughn Publishing
Corporation............ 618,750
90,200 *TBC Corporation......... 777,975
39,900 Treadco, Inc. ........... 339,150
7,500 Uniforce Temporary
Personnel, Inc. ....... 142,500
75,100 *Vallen Corporation...... 1,314,250
------------
21,201,871
------------
<CAPTION>
Shares Value
<S> <C> <C>
TECHNOLOGY - 7.5%
87,100 *American Software, Inc.
Cl. A.................. $ 402,838
14,800 BEI Electronics, Inc. ... 151,700
30,300 BGS Systems, Inc. ....... 1,181,700
28,000 *CEM Corporation......... 371,000
21,900 *CSP Inc. ............... 180,675
3,800 *Dionex Corporation...... 122,550
80,700 *Electroglas, Inc. ...... 1,149,975
58,400 *Exar Corporation........ 759,200
40,900 *Giga-tronics
Incorporated........... 460,125
75,720 *ILC Technology, Inc. ... 880,245
36,200 Landauer Inc............. 764,725
20,400 *M-Wave, Inc. ........... 93,075
46,400 MacNeal-Schwendler
Corporation............ 348,000
91,800 Newport Corporation...... 906,525
34,400 Numerex Corp. Cl. A...... 184,900
83,000 *PCD Inc. ............... 1,099,750
16,000 *Phoenix Technologies
Ltd. .................. 268,000
800 *Programming & Systems,
Inc. .................. 200
51,400 *Technical Communications
Corporation............ 815,975
------------
10,141,158
------------
UTILITIES - 0.5%
31,500 *Southern Union
Company................ 693,000
3,780 Southwest Water
Company................ 43,470
------------
736,470
------------
MISCELLANEOUS - 4.6%................... 6,211,263
------------
Total Common Stocks
(Cost $110,441,896).... 122,431,589
------------
PREFERRED STOCK - 0.1%
4,900 Bird Corp. $1.85 Conv.
(Cost $82,002)......... 74,725
------------
</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>
<PAGE>
ROYCE MICRO-CAP FUND
SCHEDULE OF INVESTMENTS AT JUNE 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Value
CORPORATE BOND - 0.2%
<S> <C> <C>
$ 500,000 Shoney's, Inc. 0% Sub.
Conv. Deb. due 4/11/04
(Cost $191,250)........ $ 227,500
------------
U.S. GOVERNMENT OBLIGATION - 7.0%
10,000,000 U.S. Treasury Note, 5.25%
due 1/31/01 (Cost
$10,010,937) 9,545,300
------------
</TABLE>

<TABLE>
<CAPTION>
REPURCHASE AGREEMENT - 0.4% Value
<C> <S> <C>
State Street Bank and Trust Company,
4.90% due 7/01/96, collateralized by
U.S. Treasury Notes, 5.25% due
12/31/97, valued at $613,520 (Cost
$600,000)........................... $ 600,000
------------
TOTAL INVESTMENTS - 97.8%
(COST $121,326,085)................. 132,879,114
CASH AND OTHER ASSETS LESS
LIABILITIES - 2.2%.................. 2,950,467
------------
NET ASSETS - 100.0%................... $135,829,581
------------
------------
</TABLE>

* Non-income producing.
INCOME TAX INFORMATION - The cost of total investments for federal income tax
purposes was $121,362,095. At June 30, 1996, net unrealized appreciation for all
securities was $11,517,019, consisting of aggregate gross unrealized
appreciation of $17,143,984 and aggregate gross unrealized depreciation of
$5,626,965.

The accompanying notes are an integral part of the financial statements.

At the Special Meeting of Shareholders held on June 26, 1996, Trust
shareholders approved a conversion of the Trust to a Delaware business trust,
elected Trustees and ratified the Board's selection of the Trust's independent
public accountants, and the Fund shareholders approved proposals to permit
securities lending and investment in warrants, rights and options.

<TABLE>
<CAPTION>
Proposal/ Votes Cast Votes Votes Cast Votes
Name of Trustee For Withheld Against Abstained
- -------------------------------------------------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Convert the Trust to a Delaware business trust.... 37,472,360 N/A 845,090 3,121,147
Proposal to permit loans of portfolio
securities...................................... 6,831,449 N/A 546,569 1,192,073
Proposal to change the Fund's investment policy
concerning warrants, rights and options......... 6,992,054 N/A 442,710 1,135,327
Ratification of independent public accountants.... 51,370,026 N/A 442,499 2,816,187
Charles M. Royce.................................. 52,309,497 2,319,215 N/A N/A
Thomas R. Ebright................................. 52,314,207 2,314,505 N/A N/A
Hubert L. Cafritz................................. 52,219,769 2,408,943 N/A N/A
Richard M. Galkin................................. 52,305,456 2,323,256 N/A N/A
Stephen L. Isaacs................................. 52,258,406 2,370,306 N/A N/A
William L. Koke................................... 52,300,723 2,327,989 N/A N/A
David L. Meister.................................. 52,282,477 2,346,235 N/A N/A
</TABLE>

<PAGE>
<PAGE>
ROYCE MICRO-CAP FUND
STATEMENT OF ASSETS AND LIABILITIES AT JUNE 30, 1996 (unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS:
Investments at value (identified cost $121,326,085)............................................. $132,879,114
Cash............................................................................................ 121,640
Receivable for investments sold................................................................. 1,825,567
Receivable for shares of beneficial interest sold............................................... 2,175,775
Receivable for dividends and interest........................................................... 336,884
Prepaid expenses and other assets............................................................... 20,213
------------
TOTAL ASSETS.................................................................................. 137,359,193
------------
LIABILITIES:
Payable for investments purchased............................................................... 1,267,336
Payable for shares of beneficial interest redeemed.............................................. 70,864
Payable for investment advisory fees............................................................ 125,521
Accrued expenses................................................................................ 65,891
------------
TOTAL LIABILITIES............................................................................. 1,529,612
------------
NET ASSETS.................................................................................... $135,829,581
------------
------------
ANALYSIS OF NET ASSETS:
Undistributed net investment income............................................................. $ 17,599
Accumulated net realized gain on investments.................................................... 7,795,170
Net unrealized appreciation on investments...................................................... 11,553,029
Shares of beneficial interest................................................................... 16,252
Additional paid-in capital...................................................................... 116,447,531
------------
NET ASSETS.................................................................................... $135,829,581
------------
------------
PRICING OF SHARES:
Net asset value, offering and redemption price per share
($135,829,581[div]16,252,476 shares outstanding).............................................. $8.36
-----
-----
</TABLE>

STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

Six Months ended Year ended
June 30, 1996 December 31,
(unaudited) 1995
---------------- -----------
<S> <C> <C>
INVESTMENT OPERATIONS:
Net investment income (loss)................................................ $ (38,140) $ 55,739
Net realized gain on investments............................................ 7,653,072 2,372,160
Net change in unrealized appreciation on investments........................ 4,736,729 6,249,422
---------------- -----------
Net increase in net assets resulting from investment operations.......... 12,351,661 8,677,321
DIVIDENDS AND DISTRIBUTIONS:
Net realized gain on investments............................................ -- (2,163,270)
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets from capital share transactions.................. 25,748,685 64,441,461
---------------- -----------
NET INCREASE IN NET ASSETS.................................................... 38,100,346 70,955,512
NET ASSETS:
Beginning of period......................................................... 97,729,235 26,773,723
---------------- -----------
End of period (including undistributed net investment income of $17,599 and
$55,739, respectively)................................................... $135,829,581 $97,729,235
---------------- -----------
---------------- -----------
</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>
<PAGE>
ROYCE MICRO-CAP FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends....................................................................................... $ 602,870
Interest........................................................................................ 402,229
-----------
Total Income............................................................................ 1,005,099
-----------
Expenses:
Investment advisory fees........................................................................ 875,288
Custodian and transfer agent fees............................................................... 71,107
Administrative and office facilities expense.................................................... 31,170
Professional fees............................................................................... 6,227
Trustees' fees.................................................................................. 6,053
Other expenses.................................................................................. 93,430
-----------
Total Expenses.......................................................................... 1,083,275
Fees waived by investment adviser....................................................... (40,036)
-----------
Net Expenses............................................................................ 1,043,239
-----------
Net Investment Loss..................................................................... (38,140)
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments.................................................................... 7,653,072
Net change in unrealized appreciation on investments................................................ 4,736,729
-----------
Net realized and unrealized gain on investments..................................................... 12,389,801
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................................ $12,351,661
-----------
-----------
</TABLE>

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

This table is presented to show selected data for a share outstanding
throughout each period, and to assist shareholders in evaluating the Fund's
performance over the periods presented.

<TABLE>
<CAPTION>
Six Months
ended Years ended December 31,
June 30, 1996 ------------------------------------------
(unaudited) 1995 1994 1993 1992
------------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD...................... $7.53 $6.48 $6.47 $5.83 $5.00
----- ----- ----- ----- -----
INVESTMENT OPERATIONS:
Net investment income (loss)(a)......................... -- -- -- -- (0.01)
Net realized and unrealized gain on investments......... 0.83 1.24 0.23 1.38 1.48
----- ----- ----- ----- -----
Total from investment operations...................... 0.83 1.24 0.23 1.38 1.47
----- ----- ----- ----- -----
DIVIDENDS AND DISTRIBUTIONS:
Net realized gain on investments........................ -- (0.19) (0.22) (0.74) (0.64)
----- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD............................ $8.36 $7.53 $6.48 $6.47 $5.83
----- ----- ----- ----- -----
----- ----- ----- ----- -----
TOTAL RETURN.............................................. 11.0% 19.1% 3.6% 23.7% 29.4%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in thousands)................ $ 135,830 $97,729 $26,774 $10,261 $3,373
Ratio of Expenses to Average Net Assets(b).............. 1.78% * 1.94% 1.99% 1.99% 1.69%
Ratio of Net Investment Income to Average Net Assets.... (0.07%)* 0.10% 0.02% (0.09)% (0.21)%
Portfolio Turnover Rate................................. 17% 25% 54% 116% 171%
Average Commission Rate Paid`D'......................... $ 0.0466 -- -- -- --
</TABLE>

- ------------
(a) Net investment income is shown after fee waivers by the investment adviser
and distributor. For the years ended December 31, 1994, 1993 and 1992, the
per share effect of these waivers is $0.01, $0.03 and $0.12, respectively.
(b) Expense ratios are shown after fee waivers by the investment adviser and
distributor. For the period ended June 30, 1996 and for the years ended
December 31, 1995, 1994, 1993 and 1992, expense ratios before the waivers
would have been 1.85%, 1.97%, 2.34%, 2.49% and 3.77%, respectively.
* Annualized.
`D' For fiscal years beginning on or after October 1, 1995, the Fund is
required to disclose its average commission rate paid per share for
purchases and sales of investments.

The accompanying notes are an integral part of the financial statements.

<PAGE>
<PAGE>
ROYCE MICRO-CAP FUND
NOTES TO FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Royce Micro-Cap Fund (the 'Fund') is a series of The Royce Fund (the
'Trust'), a diversified open-end management investment company. The Trust,
originally established as a business trust under the laws of Massachusetts,
converted to a Delaware business trust at the close of business on June 28,
1996. The Fund commenced operations on December 31, 1991.

The preparation of financial statements in conformity with generally
accepted accounting principles 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 income and expenses during the reporting
period. Actual results could differ from those estimates.

a. Valuation of investments:

Securities listed on an exchange or on the Nasdaq National Market System
are valued on the basis of the last reported sale prior to the time the
valuation is made or, if no sale is reported for such day, at their bid price
for exchange-listed securities and at the average of their bid and asked prices
for Nasdaq securities. Quotations are taken from the market where the security
is primarily traded. Other over-the-counter securities for which market
quotations are readily available are valued at their bid price. Securities for
which market quotations are not readily available are valued at their fair value
under procedures established and supervised by the Board of Trustees. Bonds and
other fixed income securities may be valued by reference to other securities
with comparable ratings, interest rates and maturities, using established
independent pricing services.

b. Investment transactions and related investment income:

Investment transactions are accounted for on the trade date and dividend
income is recorded on the ex-dividend date. Interest income is recorded on the
accrual basis. Realized gains and losses from investment transactions and
unrealized appreciation and depreciation of investments are determined on the
basis of identified cost for book and tax purposes.

c. Taxes:

As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the extent
that it distributes substantially all of its taxable income for its fiscal year.
The Schedule of Investments includes information regarding income taxes under
the caption 'Income Tax Information'.

d. Distributions:

Any dividend and capital gain distributions are recorded on the ex-dividend
date and paid annually in December. These distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. Permanent book and tax basis differences relating to
shareholder distributions will result in reclassification to paid-in capital and
may affect net investment income per share. Undistributed net investment income
may include temporary book and tax basis differences which will reverse in a
subsequent period. Any taxable income or gain remaining at fiscal year end is
distributed in the following year.

<PAGE>
<PAGE>
ROYCE MICRO-CAP FUND
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
- --------------------------------------------------------------------------------

e. Repurchase agreements:

The Fund enters into repurchase agreements with respect to its portfolio
securities solely with State Street Bank and Trust Company ('SSB&T'), the
custodian of its assets. The Fund restricts repurchase agreements to maturities
of no more than seven days. Securities pledged as collateral for repurchase
agreements are held by SSB&T until maturity of the repurchase agreements.
Repurchase agreements could involve certain risks in the event of default or
insolvency of SSB&T, including possible delays or restrictions upon the ability
of the Fund to dispose of the underlying securities.

2. INVESTMENT ADVISER:

Under the Trust's investment advisory agreement with Quest Advisory Corp.
('Quest'), the Fund accrued and paid Quest fees totaling $835,252 (net of
$40,036 voluntarily waived by Quest) for the six months ended June 30, 1996. The
agreement provides for fees equal to 1.50% per annum of the Fund's average net
assets. Such fees are computed daily and are payable monthly to Quest.

3. FUND SHARES:

The Board of Trustees has authority to issue an unlimited number of shares
of beneficial interest of the Fund, with a par value of $.001. Share
transactions were as follows:

<TABLE>
<CAPTION>
Six Months ended
June 30,1996 Year ended
(unaudited) December 31, 1995
-------------------------- --------------------------
Shares Amount Shares Amount
---------- ------------ ---------- ------------

<S> <C> <C> <C> <C>
Sold............................................ 5,586,211 $ 43,845,940 10,880,987 $ 78,958,661
Issued as reinvested dividends and
distributions................................. -- -- 246,326 1,847,447
Redeemed........................................ (2,304,601) (18,097,255) (2,291,276) (16,364,647)
</TABLE>

Shares redeemed within one year of purchase are subject to a 1% redemption
fee, payable to the Fund, which is used to offset costs associated with the
redemption.

4. PURCHASES AND SALES OF INVESTMENT SECURITIES:

For the six months ended June 30, 1996, the cost of purchases and the
proceeds from sales of investment securities, other than short-term securities,
amounted to $62,769,699 and $26,502,277, respectively.

<PAGE>
<PAGE>
POSTSCRIPT: NEW ERA DEFINITIONS

A by-product of any new era is a change in its language. The use of new
words and definitions typically signifies the emergence of a new culture. For
example, the acceptance of popular slang words 'cool' and 'hip' in the '60s
ushered in an era known as 'pop culture.'

The protracted bull market of the last five years has many believing that
we have entered into a new age of investing. Just as 'bad' came to mean 'good'
in the slang of the '70s, Steve Leuthold, stock market researcher and money
manager, with further corroboration from USA Today 'Money Talk' columnist,
Daniel Kadlec, has suggested, with tongue firmly in cheek, that the following
'new definitions for a new era' have replaced those established by Mr. Webster:

BEAR MARKET: When stocks decline for a week.

MAJOR CORRECTION: When stocks decline for a day.

OLD-TIMER: A person who knows someone who lost money in the stock market.

CYNIC: Anyone reminding you stocks can go down.

CONSERVATIVE: Anyone without a margin account.

RISK: How much you can lose being out of the market.

INFLATION: Historical phenomena that used to adversely affect stocks.

CONTRARIAN: Someone with nothing to talk about at parties.

IPO: Instant profit opportunity.

SHORT SALE: Temporary condition associated with memory failure.

GRAHAM & DODD: Ancient philosophers who believed the book value of a
company was too much to pay. It's widely assumed they also believed the world
was flat.

MUTUAL FUND: A pool of money guaranteed to grow because it has lots of
contributors, and you just know that many people can't be wrong.

As conservative cynics, we can only hope that when the current market is no
longer 'hip,' it will not find too many people feeling 'bad,' as it was
originally defined.

--------------------------

THE ROYCE FUNDS

General Information and Telephone Purchases ....... 1 (800) 221-4268
Shareholder Account Services ...................... 1 (800) 841-1180
Investment Advisor Services ....................... 1 (800) 33-ROYCE
The Royce Funds InfoLine .......................... 1 (800) 78-ROYCE
E-mail Address ................................ [email protected]
Internet Homepage .......................... http://www.roycefunds.com

1414 Avenue of the Americas, New York, New York 10019
This report must be accompanied by or preceded by a current prospectus of the
Fund.

STATEMENT OF DIFFERENCES
-------------------------

The dagger symbol shall be expressed as.... 'D'
The division sign shall be expressed as.... [div]

GRAPHIC APPENDIX

On page 2 of the paper format Royce Micro-Cap Fund report:
Picture of firecracker exploding

On page 4 of the paper format Royce Micro-Cap Fund report:
A picture of a Prospectus cover of Berkshire Hathaway Inc.

On page 5 of the paper format Royce Micro-Cap Fund report:
A picture of a scale balancing a dollar sign and a factory.

On page 6 of the paper format Royce Micro-Cap Fund report:
A picture of a man in long white coat pointing with a pointer.
A picture of Cupid shooting an arrow with two hearts around him.

On page 7 of the paper format Royce Micro-Cap Fund report:
A picture of a basket of fruit at harvest time.
A bar graph of the Russell 2000 price variations from 1979 to 1996.
A picture of a ticker tape machine.