ROYCE FUND, N-30D, 1997-03-06

ROYCE FUND
N-30D, 1997-03-06

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<PAGE>

<PAGE>
Value Investing in Small Companies For Over 20 Years

THE
ROYCE
FUNDS

PENNSYLVANIA MUTUAL FUND
PMF II
ROYCE VALUE FUND
ROYCE GIFTSHARES FUND

1996 Annual Report

www.roycefunds.com

<PAGE>

The Royce Funds

When we took over the management of Pennsylvania Mutual Fund in mid-1973,
small-cap stocks were those under $300 million in market capitalization, not
under $1 billion as they are now defined. This considerable capitalization drift
has permanently changed the small-cap landscape. Small-cap stocks are no longer
"small" by previous standards; no longer "unknown" given that the sector is now
regarded as a professional asset class; and no longer "under-owned" as the
number of small-cap mutual fund offerings has grown to well over 400.

Two Distinct Markets

Given the changes in the small-cap universe (most of which have occurred since
1991), we believe that the small-cap market should now be viewed as two markets
in one: small-cap at the upper end and micro-cap at the lower end of the
capitalization range.

<TABLE>
<S> <C> <C>
Different
performance
SMALL-CAP MICRO-CAP
$300 million - $1 billion $5 million - $300 million Different
1,400 companies 6,500 companies liquidity
$810 billion total capitalization $470 billion total capitalization
Different
institutional
acceptance
</TABLE>

Two Core Funds: Distinct Strategies For Distinct Markets

The Firm uses a two pronged approach, which incorporates both the small and
micro-cap investment universes. We believe that higher portfolio concentration
is necessary for delivering above average results at the upper end and that
diversification is both necessary and appropriate at the lower end. These two
Funds represent The Royce Funds' core investment strategies.

ROYCE PREMIER ROYCE MICRO-CAP The Royce Funds'
- Small-cap orientation - Micro-cap orientation two core
- Concentrated portfolio - Broadly diversified philosophies

</TABLE>

Combined Portfolios

Portfolios incorporate approximately equal weightings of each capitalization
(small and micro-cap) strategy.

<TABLE>
<S> <C> <C>
The Pennsylvania
Pennsylvania Mutual Mutual Fund
PMF II blended style of
Royce Value investing
Royce GiftShares remains our
flagship approach.
</TABLE>

Stock Selection - Company And Sector Specific Themes

Stock selection for The Royce Funds incorporates low valuation securities with
attractive risk/reward characteristics. These valuation principles are combined
with specific company attributes, such as assets, dividends, cash flow, markets
and price. The Royce Funds have introduced some of these opportunistic, company
specific, selection themes in funds. Virtually all securities used by these
funds are also found in the core portfolios.

Royce Low-Priced Royce Total Return Royce Global Services

'ch' Stocks under $15 Royce Equity Income 'ch' Globally oriented service
companies
'ch' Dividend-paying securities

<PAGE>

<PAGE>
[Logo]

Dear Fellow Shareholders:

We are pleased to present our 1996 investment results and
our new Annual Report format. Included in this Report are
Pennsylvania Mutual, Royce Value, PMF II and Royce
GiftShares Funds. This new, combined Annual Report
reflects specific capitalization strategies and selection
theme groupings, around which the individual fund
portfolios are managed (as displayed on the front inside
cover).

The second half of the year was a good one in terms of
absolute performance, and reflective of the portfolio
restructurings that were completed in our two older Funds,
Pennsylvania Mutual and Royce Value. Both Funds, as well
as PMF II and Royce GiftShares will continue to emphasize
risk management and consistency of application. We believe
that a system for rational decision making, whose basic
premise is that the price one pays for an investment makes
a significant difference in the returns one receives, is
more important than ever.

[Photo]

Charles M. Royce,
President and Chief
Investment Officer
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 PERFORMANCE RESULTS

THROUGH 12/31/96: PMF RVS RGF
------- ------ ------
<S> <C> <C> <C>
Last 3 months 6.8% 6.3% 8.5%
Last 6 months 6.8% 6.9% 9.4%
1996 12.8% 14.0% 25.6%
</TABLE>

We invite your comments.
Sincerely,
Charles M. Royce
President

ANNUAL REPORT REFERENCE GUIDE

Pennsylvania Mutual Fund has provided positive returns in 20 out of the last
22 calendar years and a 16.1% average annual total return over the
past 20 years...SEE PAGE 5.

Since its inception, Royce Value Fund has matched the Russell 2000 on an
average annual total return basis and exceeded it on a risk-adjusted basis
...SEE PAGE 7.

PMF II's assets top $17 million after its November 19, 1996 debut...SEE PAGE
9.

Royce GiftShares Fund outperformed its benchmark index in its first full year
of operation...SEE PAGE 10.

For Statements of Assets and Liabilities, Statements of Operations,
Statements of Changes in Net Assets, Financial Highlights and Notes to Financial
Statements...SEE PAGES 11-15.

See accompanying Schedules of Investments.

<PAGE>

The Royce Funds
Value Investing in Small Companies for Over 20 Years

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

Dear Shareholder:

SMALL-CAP SECURITIES WERE BULLIED IN 1996 FOR A THIRD [MAN]
STRAIGHT YEAR BY THEIR LARGE-CAP BRETHREN. After running
even in the first six months, small-cap stocks fell behind
in the more volatile second half. For the full year, the Russell 2000 Index of
small-cap stocks was up 16.5% versus a gain of 23.0% for the large-cap oriented
S&P 500 Index.

Perhaps the more interesting story in 1996 was the return of market
volatility. The Russell 2000 recorded four down months in 1996, twice as many as
in 1995. According to the independent mutual fund evaluation service
Morningstar, 361 mutual funds, or 16% of the 2,255 diversified funds that invest
primarily in domestic stocks, lost money in the fourth quarter, as did one of
every three small-cap funds. More funds were in the red for the fourth quarter
than in the previous three quarters combined. We believe that a higher level of
volatility often precedes a period of lower returns.

Combined with increased volatility was a change in market leadership among
small-cap stocks during the second half. The value style of investing, which was
the market laggard earlier in the year, became a market leader during the latter
half. From the first of the year through the Russell 2000 peak on May 22, the
Russell 2000 Value Index was up 10.3% while the Russell 2000 Growth Index was up
a robust 20.9%. However, from this peak in May through year-end, the Russell
2000 Value Index recorded a gain of 10.1% versus a decline of 8.0% for the
Russell 2000 Growth Index, quite a reversal of events and perhaps a harbinger
for the market in 1997.

Although Pennsylvania Mutual Fund and Royce Value Fund's full year results of
12.8% and 14.0%, respectively, were acceptable in an absolute sense, we were not
happy with their results when compared to the 16.5% total return of their
relevant benchmark, the Russell 2000. In an effort to improve performance in
both portfolios, we have now instituted a strategy which incorporates
approximate equal weightings of small and micro-cap companies, our two core
approaches. The lessons that we have learned from our focused small-cap
portfolio (Royce Premier) and our micro-cap portfolio (Royce Micro-Cap) are now
incorporated in both Pennsylvania Mutual and Royce Value, and early results in
both Funds are very encouraging.

Since implementing the portfolio changes throughout the first two quarters of
1996, both Funds were ahead of the Russell 2000 for the fourth quarter and for
the second half of the year. We are hopeful that these changes will continue to
yield such outperformance.

THE THRILL OF REWARD AND THE DENIAL OF RISK

Investment risk and reward are rarely discussed together, as investors
typically focus on one or the other at a time. When times are good, the return
portion of the equation dominates investors' conversations, and when times are
bad, the risk portion moves to center stage. Although the most recent small-cap
cycle clearly favored the 'return' component, the 'risk' segment is always
worthy of equal consideration because it impacts the path of long-term returns.
Risk involves both uncertainty and possibility of loss. Both aspects are
measurable, and both are paramount to the Funds' management philosophy.

To simplify matters, 'uncertainty' relates to fund volatility and is best
measured using two gauges, standard deviation and beta. As the following table
indicates, Pennsylvania Mutual Fund ('PMF') and Royce Value Fund ('RVF') were
among the 'lowest risk' small-cap funds tracked by Morningstar over the last
three years.

Morningstar Risk*

PMF RVF
Rank Rank
---- ----
Standard Deviation 8 10
Beta 16 14
Mstar Risk Ratio 22 24

* As of December 31, 1996. Ranking of the lowest to highest out of the 242 funds
in Morningstar's small-cap objective category with at least 3 years of history.
Please read the Prospectus for a more complete discussion of risk.

'Possibility of loss' is perhaps more important than statistical measures of
volatility because it takes into account a fund's actual down market results.
Morningstar Risk Ratio actually measures the concept of possibility of loss more
effectively because it considers a fund's underperformance (on a monthly basis)
relative to a safe and attainable return (3-month Treasury bills). As this risk
chart shows, both Funds can also be considered 'low risk' using this
methodology.

While we use various techniques to reduce risk, we cannot prevent the Funds'
net asset values from going down during market downdrafts. However, both Funds
typically have not decreased as much during difficult periods when compared to
their benchmark index, the Russell 2000. Over the last ten years, there have
been twelve down quarters for the Russell 2000. IN ALL CASES, PMF AND RVF
OUTPERFORMED THE INDEX. (Note: Since Royce GiftShares and PMF II's inceptions,
there have been no down quarters for the Index.)

Russell 2000 Down Quarter's Performance

QTR RUSSELL
ENDED: 2000 PMF RVF
- ------ ---- --- ---

12/31/94 -1.9% -1.1% -1.3%
6/30/94 -3.9 -2.2 -2.3
3/31/94 -2.7 -1.1 -1.4
6/30/92 -6.8 -2.6 -3.4
6/30/91 -1.6 +1.0 +0.5
9/30/90 -24.5 -16.6 -17.2
3/31/90 -2.2 -0.9 -1.3
12/31/89 -5.0 -1.2 -1.9
12/31/88 -0.6 +0.8 +0.5
9/30/87 -0.9 +1.4 +0.8
12/31/87 -29.2 -16.6 +18.2
6/30/87 -0.7 +1.3 +1.6

Both PMF and RVF outperformed the
Russell 2000 in ALL down quarters.

Our focus on risk management remains an important part of our investment
process. While individual market phases reward different risk profiles at
different times, central to the management of the Funds is a belief that PAYING
ATTENTION TO RISK DOES NOT DIMINISH LONG-TERM RETURNS. Although this flies in
the face of modern portfolio theory, it remains one of our principal tenets.

WITHIN THE SMALL-CAP UNION:
ONE COUNTRY, TWO COASTS AND MANY STATES

Many changes have taken place in the small-cap [MAP OF UNITED STATES]
investment universe over the last ten years, and we now
believe that small-cap stocks are no longer 'small' by
previous standards; no longer 'unknown' as this sector is now regarded as a
professional asset class; and no longer 'under-owned' as the number of small-cap
mutual fund portfolios has grown to well over 400. What were once deemed
small-cap stocks (under $300 million in market cap) ten years ago and beyond,
are now better defined as 'micro-cap' securities by today's standards. The
small-cap universe, which is presently defined as under $1 billion in market
cap, is both broad (over 7,900 issues) and substantial ($1.3 trillion in total
capitalization) and as different and diverse as California and Rhode Island.

THIS LEADS TO AN IMPORTANT, BUT UNRECOGNIZED, ASPECT OF THE SMALL-CAP MARKET
-- IT IS REALLY TWO MARKETS IN ONE: SMALL-CAP AT THE UPPER END AND MICRO-CAP AT
THE LOWER END OF THE CAPITALIZATION RANGE. On the surface, the distinction may
seem subtle but upon further investigation the differences are real and
quantifiable.

Given the substantial differences in performance, liquidity and institutional
acceptance within the two markets of the small-cap universe, we have developed
distinct approaches for each. (See diagram at the top of the next page.)

At the upper end of the small-cap range, from $300 million to $1 billion, we
employ a focused portfolio strategy which emphasizes companies with superior
financial characteristics and/or unusually attractive business prospects. At the
other end of the capitalization range, below $300 million, are micro-cap
securities, the antithesis of what most professional investors seek. A broadly
diversified portfolio strategy is employed to capture these inefficiencies.

These distinct portfolio strategies are integrated to form COMBINED
PORTFOLIOS -- funds with approximately equal weightings of both capitalization
themes. By investing in a combined portfolio, an investor is able to partcipate
in both upper and lower tiers of the small-cap universe within the same fund.

Two Distinct Markets

<TABLE>

<S> <C> <C>
Small-Cap Micro-Cap Different
$300 million - $1 million $5 million - $300 million performance
1,400 companies 6,500 companies
$810 billion total capitalization $470 billion total capitalization Different
liquidity

Different
institutional
acceptance
</TABLE>

As we indicated earlier, in 1996 bigger was better in the equity market. This
was also the case with the small-cap market, as the following table indicates:

WHY SIZE MATTERED IN
THE SMALL-CAP WORLD
'FROM CALIFORNIA TO RHODE ISLAND'

S&P 600 Performance Returns By Quintile

Size (by quintiles) 1996 Performance
------------------- ----------------

Largest 20% 46.0%
Next 20% 29.7%
Middle 20% 23.3%
Next 20% 7.5%
Smallest 20% -4.8%

A similar example of this phenomenon was supplied by Prudential Securities'
quantitative analyst, Claudia Mott. Upon examining year-to-date performance of
the broadly based Nasdaq Composite through November 30, she found that the top
10 contributors (most of which are large-cap oriented) produced more than half
of the index's total return. When factoring out the top 100 contributors, she
found that the remaining 4,000+ securities generated a net negative contribution
for the year.

STILLNESS IN THE WATER

Raymond Devoe, author of 'The Devoe Report,' recently [SHARK]
recounted a scuba-diving experience of some 30 years ago
which evoked eerie analogies to the current investment climate. After receiving
certification at his Caribbean beach hotel, Mr. Devoe swam off into the clear,
blue waters of St. Thomas for his first reef dive. Making his way along the
reef, he stopped near a large rock to enjoy an array of colorful plants and the
tropical fish swimming casually among them. After ten minutes, Mr. Devoe
realized something was terribly wrong -- the fish had disappeared as if they
were hiding from something. He was left alone with the sound of his beating
heart and escaping air bubbles. Not knowing the cause of the sudden 'stillness
in the water,' he experienced a sense of panic and returned to the beach
without incident, yet badly shaken.

Mr. Devoe discussed his sensation with many other divers and most responded with
curious looks. Years later he read Peter Mathiessen's 1971 book, Blue
Meridian -- The Search for the Great White Shark and discovered that 'stillness
in the water' takes place prior to great white shark attacks. The panic, or
sense that something is wrong, occurs when the brain receives too many
conflicting messages, leading to an eerie sensation that 'something's coming.'
Divers who have survived shark attacks know the sensation and respond to it
appropriately. They have developed instincts or intuition and have the
experience to rely on them.

Currently, Mr. Devoe and other experienced investors (ourselves included)
cite similar sensations of apprehension about the equity market. Although one
would hardly describe the current equity market as 'standing still' or
'stillness in the water' it does evoke a feeling of unease. In what has been the
longest and strongest bull market in history, with the Dow Jones Industrial
Average up over 4,000 points since October 1990, there is seemingly a universal
acceptance that continued prosperity is nearly guaranteed. Although there
haven't been any shark sightings in quite some time, our intuition tells us that
we should not be quick to rule out the possibility. Our own sense of order is
that markets are cyclical, volatility is to be expected, and performance
expectations should be lower.

We are not forecasting bad things for the market. However, our investment
experience may be helpful in recognizing when things seem out of place.

AN ESTABLISHED DECISION-MAKING FRAMEWORK (INVESTMENT PROCESS) HELPS US, LIKE ANY
GOOD DIVER, AVOID THE MISTAKES OR MISSTEPS CAUSED BY PANIC OR FEAR.

THE ROAD AHEAD

Charles Dow once observed, 'There is always a [TWO LANE ROAD WITH CLOUDS]
disposition in peoples' minds to think that existing
conditions will be permanent.' In the last several
shareholder reports, we have documented why we believe that the equity market
will be different over the next few years. These changes may already be
underway, when one considers that the rolling 3-year average annual total
returns for the Russell 2000, which peaked at 28.2% in September 1993, are now
13.7% as of December 1996. Furthermore, this Index is flat since its peak in
late May.

1996 gave us a higher level of market volatility and the shifting success of
investment styles. If these changes continue, 1997 could be a very interesting
year. We are excited about the recent results and remain enthused about the
long-term prospects of our risk-averse style of investing. Your continued
confidence is appreciated.

Sincerely,

<TABLE>
<C> <S> <C>
CHARLES M. ROYCE JACK E. FOCKLER, JR. W. WHITNEY GEORGE
Charles M. Royce Jack E. Fockler, Jr. W. Whitney George
President Vice President Vice President
</TABLE>

February 3, 1997

PERFORMANCE REVIEWS AND PORTFOLIO ANALYSES FOR PENNSYLVANIA MUTUAL, ROYCE VALUE,
PMF II AND ROYCE GIFTSHARES BEGIN ON PAGES 5, 7, 9 AND 10, RESPECTIVELY, OF THIS
REPORT.

All performance information in this Report is presented on a total return basis
and reflects the reinvestment of distributions. Past performance is no guarantee
of future results. Share prices will fluctuate, so that shares may be worth more
or less than their original cost when redeemed.

Morningstar risk ratio, beta and standard deviation are measures of a fund's
relative risk and are calculated for the trailing 36 month period. Morningstar
proprietary risk ratio measures a fund's downside volatility relative to all
equity funds which have an average score of 1.00. The average score for the 242
funds in the small-cap objective category with a three year history was 1.29 for
the three years ended 12/31/96. The lower the risk ratio, the lower a fund's
downside volatility has been. 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. A low beta means that a fund's market related volatility has been
low. Standard deviation is a statistical measure within which a fund's total
returns have varied over time. The greater the standard deviation, the greater a
fund's volatility.

The Russell 2000, Russell 2000 Growth, Russell 2000 Value, S&P 600 and S&P 500
are unmanaged indices of common stocks and include the reinvestment of
dividends.

<PAGE>
<PAGE>
PENNSYLVANIA MUTUAL FUND
PERFORMANCE REVIEW

WHAT WE DO

Pennsylvania Mutual Fund ('PMF') seeks long-term capital appreciation by
investing in small and micro-cap companies. The Fund 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.

HOW WE DID

PMF's returns surpassed its benchmark
index, the Russell 2000, for the second
half of 1996 as the value style emerged
as a market leader. PMF outperformed
the Russell 2000 in both the fourth
quarter (6.8% vs. 5.2%) and in the
second half (6.8% vs. 5.6%). However,
the Russell 2000, with a strong
performance in the first half, bested
PMF for the full year (16.5% vs.
12.8%). PMF has provided positive
returns in 20 out of the last 22
calendar years.

TOTAL RETURNS THROUGH 12/31/96

4th Quarter 1996: +6.8%
1-Year: +12.8%
5-Year Average Annual: +11.5%
10-Year Average Annual: +11.4%
15-Year Average Annual: +14.9%
20-Year Average Annual: +16.1%

PMF VERSUS RUSSELL 2000
VALUE OF $10,000 INVESTED
ON 12/31/81

[LINE GRAPH]

PMF divides its portfolio into approximate equal weightings of
small and micro-cap companies, which represent the Firm's
core/capitalization strategies.

SMALL-CAP COMPANIES MICRO-CAP COMPANIES

Companies between $300 mil and
$1 bil in market capitalization Smallest of small companies
which generate free cash flow, with market capitalizations
provide high internal rates of below $300 mil.
return, and have little or no debt.

A concentrated portfolio of A broadly diversified portfolio of
approximately 50-75 stocks. approximately 150 stocks.

In terms of the portfolio, we believe it is well positioned for whatever 1997
may bring. PMF's risk profile remained low, and its price-to-book ratio of 1.7X
and price-to-earnings ratio of 14.4X are significantly lower than the
Morningstar averages of 2.6x and 20.3x for the small-cap value investment
category.

RISK/RETURN COMPARISON
FOR THE 15 YEARS ENDED 12/31/96

AVG. ANNUAL STANDARD
TOTAL RETURN DEVIATION RUR
------------ --------- ---

PMF 14.9% 12.2 1.22
Russell 2000 13.5% 17.9 0.75

RUR = Return Per Unit of Risk: Average annual total return divided
by the annualized standard deviation over a designated time period.
Please read the Prospectus for a more complete discussion of risk.

OVER THE LAST 15 YEARS, PMF HAS OUTPERFORMED THE
RUSSELL 2000 INDEX WITH 1/3RD LESS RISK.

PMF's value-oriented approach has enabled the Fund to outperform its benchmark
index, the Russell 2000,
on both an absolute and a risk-adjusted basis over the last fifteen years.

The Russell 2000 is an unmanaged index of domestic small-cap stocks.
The S&P 500, an unmanaged index of large company stocks, was up 23.0% in 1996.

<PAGE>
<PAGE>
PENNSYLVANIA MUTUAL FUND
PORTFOLIO REVIEW
MARKET CAP EXPOSURE
PORTFOLIO DIAGNOSTICS
Median Mkt Cap: $304 mil
Wtd. Avg. P/E: 14.4x
Wtd. Avg. P/B: 1.7x [BAR GRAPH]
Wtd. Avg. Yield: 1.9%
Fund Assets: $457 mil
Turnover Rate: 29%
Symbol: PENNX

<TABLE>
<CAPTION>
PORTFOLIO INDUSTRY BREAKDOWN*
% OF
TOP TEN POSITIONS NET ASSETS
----------------- ----------
<S> <C> <C>
[PIE CHART] 1. The Standard Register Co. 1.5%
2. Lilly Industries 1.3%
3. Zenith National Insurance 1.3%
4. Florida Rock Industries 1.2%
5. American Filtrona 1.2%
6. Marshall Industries 1.2%
7. Crawford & Company 1.1%
8. Woodward Governor Co. 1.1%
9. New England Business Services 1.0%
10. Arthur J. Gallagher 1.0%

* Excludes cash and cash equivalents.

</TABLE>

IDEAS THAT WORKED

During calendar 1996, each of the following companies made meaningful
positive contributions to our overall performance. Among these winners, there
were no examples of hot new issues, high-priced takeovers or momentum miracles.
Rather, our top five performers emerged from a series of long-term investment
decisions, carefully considered and executed in prior years. We built our
positions when business conditions were difficult and other investors had voted
negatively on future prospects.

<TABLE>
<CAPTION>
REALIZED AND
SECURITY UNREALIZED GAIN
- -------------------------- ---------------
<S> <C>
Claire's Stores. $ 4,136,753
The Standard Register Co. 3,076,813
Kimball International 2,776,853
Ethan Allen Interiors 2,727,979
Woodward Governor Co. 2,394,986
</TABLE>

GOOD IDEAS AT THE TIME

Even the best small-cap companies are not immune to the business flu.
Usually, if their balance sheets are strong and they have a history of high
internal returns, these companies will recover. We are generally well rewarded
for our persistence, although rebounds can take longer than we anticipate.
Unfortunately, a few of our investments never recover. Our five worst performers
of 1996 were:

<TABLE>
<CAPTION>
REALIZED AND
UNREALIZED
SECURITY LOSS
- ------------------------------ ------------
<S> <C>
Ag-Chem Equipment $1,358,375
Scitex Corporation 1,232,752
Johnson Worldwide Associates 1,058,748
Penn. Manufacturers 879,912
Gryphon Holdings 855,475
</TABLE>

ROYCE VALUE FUND
PERFORMANCE REVIEW

WHAT WE DO

Royce Value Fund ('RVF') seeks long-term capital appreciation by investing in
small and micro-cap companies. The Fund 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.

HOW WE DID

RVF's returns surpassed its benchmark
index, the Russell 2000, in the second
half as the value style emerged as a
market leader. RVF outperformed the
Russell 2000 in both the fourth quarter
(6.3% vs. 5.2%) and in the second half
(6.9% vs. 5.6%). For the full year, the
Fund was up 14.0%, unable to catch the
Russell 2000 (+16.5%) after the Index's
strong first half start. Since its
inception on 12/31/82, RVF has provided
a Russell 2000 like return, but with
less risk (see table below).

TOTAL RETURNS THROUGH 12/31/96

4th Quarter 1996: +6.3%
1-Year: +14.0%
5-Year Average Annual: +11.3%
10-Year Average Annual: +10.8%
Since Inception* Average Annual: +12.8%
* Inception date=12/13/82.

RVF VERSUS RUSSELL 2000
VALUE OF $10,000 INVESTED ON 12/31/82

[LINE GRAPH]

RVF divides its portfolio into approximate equal weightings
of small & micro-cap companies, which represent the Firm's
core/capitalization strategies.

SMALL-CAP COMPANIES MICRO-CAP COMPANIES

Companies between $300 mil and $1 bil in Smallest of small companies
market capitalization which generate free with market capitalizations
cash flow, provide high internal rates of below $300 mil.
return, and have little or no debt.

A concentrated portfolio of approximately A broadly diversified portfolio of
50-75 stocks. approximately 150-200 stocks.

RVF's risk profile, like that of its sibling, Pennsylvania Mutual Fund, remained
low for the three years ended 12/31/96. Price-to-book and price-to-earnings
ratios of 1.6X and 14.3X for RVF were significantly lower than the Morningstar
averages of 2.6x and 20.3x for the small-cap value style category.

RISK/RETURN COMPARISON
FROM INCEPTION* THROUGH 12/31/96

AVG. ANNUAL STANDARD
TOTAL RETURN DEVIATION RUR
------------ --------- ---

RVF 12.8% 12.0 1.07
Russell 2000 12.7% 17.7 0.72

RUR=Return Per Unit of Risk: Average annual total return divided by the
annualized standard deviation over a designated time period. Please read the
Prospectus for a more complete discussion of risk.

SINCE ITS INCEPTION, RVF HAS MATCHED
THE RUSSELL 2000 WITH 1/3RD LESS RISK.

The Russell 2000 is an unmanaged index of domestic small-cap stocks.
The S&P 500, an unmanaged index of large company stocks, was up 23.0% in 1996.

ROYCE VALUE FUND
PORTFOLIO REVIEW

MARKET CAP EXPOSURE

PORTFOLIO DIAGNOSTICS [BAR GRAPH]

Median Mkt Cap: $351 mil
Wtd. Avg. P/E: 14.3x
Wtd. Avg. P/B: 1.6x
Wtd. Avg. Yield: 1.7%
Fund Assets: $145 mil
Turnover Rate: 30%
Symbol: RYVFX

PORTFOLIO INDUSTRY BREAKDOWN*

[PIE CHART]

* Excludes cash and cash equivalents.

% OF
TOP TEN POSITIONS NET ASSETS
----------------- ---------
1. The Standard Register Co. 1.5%
2. Alleghany Corporation 1.2%
3. Family Dollar Stores 1.1%
4. Florida Rock Industries 1.1%
5. Marshall Industries 1.1%
6. Kimball International 1.0%
7. New England Business Services 1.0%
8. Air Express International 1.0%
9. Lilly Industries 1.0%
10. Crawford & Company 1.0%

IDEAS THAT WORKED

REALIZED AND
SECURITY UNREALIZED GAIN
- -------------------------- ---------------
Claire's Stores $ 1,234,625
The Standard Register Co. 842,120
Kimball International 762,046
Family Dollar Stores 727,915
Ethan Allen Interiors 718,100

GOOD IDEAS AT THE TIME

REALIZED AND
SECURITY UNREALIZED LOSS
- ----------------------------- ---------------
Scitex Corporation $ 489,780
Blair Corporation 253,688
Johnson Worldwide Associates 248,825
Ag-Chem Equipment Co. 240,525
Alico 230,070

<PAGE>
<PAGE>
PMF II
PERFORMANCE AND PORTFOLIO REVIEW

WHAT WE DO

PMF II, in the tradition of its older sibling, Pennsylvania Mutual Fund, shares
the same long-term appreciation policies and risk-averse attitude. The Fund,
which draws from both of the Firm's core capitalization strategies, invests in
both small and micro-cap companies using a disciplined value approach. The Fund
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.

HOW WE DID

PMF II was launched on November 19,
1996 and does not yet have a full
year's performance history. During its
short tenure, the Fund was up 5.2%.
Total net assets for PMF II reached
$17.9 million at year-end and its daily
NAV can be found in the newspaper under
THE ROYCE FUNDS listing. Above average
long-term absolute and risk-adjusted
returns are a worthy goal for PMF II.

WE ARE BOTH EXCITED AND HOPEFUL ABOUT
THE NEW FUND, AS WE WERE SOME 20+ YEARS
AGO WHEN WE BEGAN THE PENNSYLVANIA
MUTUAL FUND JOURNEY.

PORTFOLIO DIAGNOSTICS

Median Mkt Cap: $355 mil
Wtd. Avg. P/E: 14.2x
Wtd. Avg. P/B: 1.7x
Wtd. Avg. Yield: 1.9%
Fund Assets: $17.9 mil
Symbol: RYPNX

MARKET CAP EXPOSURE

[BAR GRAPH]

TOTAL RETURNS
FROM INCEPTION* THROUGH 12/31/96

November 1996*: +2.6%
December 1996: +2.5%
Inception thru 12/31/96: +5.2%

*Fund inception date = 11/19/96

PORTFOLIO INDUSTRY BREAKDOWN*

[PIE CHART]

*Excludes cash and cash equivalents.

% OF
TOP TEN POSITIONS NET ASSETS
-------------------------------------------- ----------

1. Standard Commercial 2.8%
2. Arnold Industries 2.7%
3. Stanhome 2.6%
4. Buffets 2.5%
5. Trenwick Group 2.4%
6. Fab Industries 2.4%
7. Rush Enterprises 2.4%
8. Zenith National Insurance 2.3%
9. Florida Rock Industries 2.2%
10. Bassett Furniture Industries 2.2%

<PAGE>
<PAGE>
ROYCE GIFTSHARES FUND
PERFORMANCE AND PORTFOLIO REVIEW

WHAT WE DO

Royce GiftShares Fund ('RGF') is a mutual fund portfolio for investors who want
to make long-term gifts for estate planning, college funding or long-term
security. Gift options within the Fund allow the investment to qualify for the
federal annual gift tax exclusion and can be designated to help fund a
beneficiary's college and post-graduate education. The Fund uses a disciplined
value approach to invest in a limited portfolio of small and micro-cap
companies. Like other Royce Fund portfolios, the Fund 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.

HOW WE DID
Royce GiftShares' first full year of
operation was a success on both an
absolute and a relative basis. The Fund
outperformed its relevant benchmark,
the Russell 2000, in the fourth quarter
(8.5% vs. 5.2%), in the second half
(9.4% vs. 5.6%) and for the full year
(25.6% vs. 16.5%). The Fund's value
orientation and long-term outlook were
especially helpful in preserving
capital during the volatile second half
and enhancing the full year's total
return. Average annual total return
since inception on December 27, 1995
was 25.4%.

WE ARE PLEASED WITH RGF'S INITIAL
PERFORMANCE AND REMAIN CONFIDENT THAT
AN APPROACH WHICH COMBINES BOTH OF OUR
CORE STRATEGIES IS CAPABLE OF ABOVE
AVERAGE LONG-TERM RETURNS.

PORTFOLIO DIAGNOSTICS

Median Mkt Cap: $411 mil
Wtd. Avg. P/E: 16.5x
Wtd. Avg. P/B: 1.8x
Wtd. Avg. Yield: 2.0%
Fund Assets: $1.1 mil

MARKET CAP EXPOSURE

[BAR GRAPH]

TOTAL RETURNS
FROM INCEPTION* THROUGH 12/31/96

Last 3 months: +8.5%
Last 6 months: +9.4%
1-Year: +25.6%
Since Inception Avg. Annual: +25.4%
* Fund inception date: 12/27/95

PORTFOLIO INDUSTRY BREAKDOWN*

[PIE CHART]

*Excludes cash and cash equivalents.

% OF
TOP TEN POSITIONS NET ASSETS
----------------- ---------
1. Sevenson Environmental Services 3.1%
2. Dimon Incorporated 2.6%
3. Buffets 2.6%
4. E.W. Blanch Holdings 2.3%
5. Kaydon Corporation 2.2%
6. Zenith National Insurance 2.1%
7. BGS Systems 2.1%
8. New England Business Services 2.0%
9. Catherines Stores 2.0%
10. Stanhome 2.0%

<PAGE>
<PAGE>
FINANCIAL STATEMENTS
The Schedules of Investments as of December 31, 1996, integral parts of the
Financial Statements for Pennsylvania Mutual Fund, PMF II, Royce Value Fund and
Royce GiftShares Fund, are accompanying this Report.
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES AT DECEMBER 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Pennsylvania Royce Royce
Mutual Fund PMF II Value Fund GiftShares Fund
------------ ----------- ------------ ---------------
<S> <C> <C> <C> <C>
ASSETS:
Investments at value (identified cost
$284,944,886, $15,494,520,
$96,621,809, and $574,988,
respectively)......................... $432,069,127 $15,966,022 $135,746,068 $ 651,944
Repurchase agreements (at cost and
value)................................ 17,900,000 4,000,000 8,800,000 300,000
Cash.................................... 28,570 2,911,121 5,546 85,313
Receivable for investments sold......... 5,318,434 -- 1,315,535 --
Receivable for capital shares sold...... 1,743,250 87,244 18,317 25,500
Receivable for dividends and interest... 828,171 17,667 230,036 1,316
Prepaid expenses and other assets....... 70,614 24,407 3,423 29,301
------------ ----------- ------------ ---------------
TOTAL ASSETS.......................... 457,958,166 23,006,461 146,118,925 1,093,374
------------ ----------- ------------ ---------------
LIABILITIES:
Payable for investments purchased....... 201,616 5,138,587 288,120 22,255
Payable for capital shares redeemed..... 380,147 -- 226,682 --
Payable for investment advisory fees.... 316,229 -- 110,401 --
Accrued expenses........................ 192,224 10,693 83,042 7,530
------------ ----------- ------------ ---------------
TOTAL LIABILITIES..................... 1,090,216 5,149,280 708,245 29,785
------------ ----------- ------------ ---------------
NET ASSETS............................ $456,867,950 $17,857,181 $145,410,680 $ 1,063,589
------------ ----------- ------------ ---------------
------------ ----------- ------------ ---------------
ANALYSIS OF NET ASSETS:
Undistributed net investment income..... $ -- $ 10,978 $ -- $ --
Accumulated net realized gain (loss) on
investments........................... 24,562,529 (2,872) 3,238,913 13,993
Net unrealized appreciation on
investments........................... 147,124,241 471,502 39,124,259 76,956
Capital shares.......................... 64,250 3,394 15,153 183
Additional paid-in capital.............. 285,116,930 17,374,179 103,032,355 972,457
------------ ----------- ------------ ---------------
NET ASSETS............................ $456,867,950 $17,857,181 $145,410,680 $ 1,063,589
------------ ----------- ------------ ---------------
------------ ----------- ------------ ---------------
SHARES OUTSTANDING:
(unlimited number of $.001 par value
shares authorized for each Fund)...... 64,250,277 3,393,899 15,152,732 182,505
------------ ----------- ------------ ---------------
------------ ----------- ------------ ---------------
NET ASSET VALUE:
(offering and redemption price per
share)................................ $7.11 $5.26 $9.60 $5.83
------------ ----------- ------------ ---------------
------------ ----------- ------------ ---------------
</TABLE>

The accompanying notes are an integral part of the financial statements.
11

<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

Pennsylvania Mutual Fund PMF II Royce Value Fund
------------------------------- ------------ -----------------------------
Years ended December 31, Period ended Years ended December 31,
------------------------------- December 31, -----------------------------
1996 1995 1996(a) 1996 1995
------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT OPERATIONS:
Net investment income
(loss)................... $ 5,687,395 $ 8,281,365 $ 10,136 $ 209,880 $ 769,183
Net realized gain (loss) on
investments.............. 107,094,818 95,221,780 (2,872) 26,488,833 12,863,372
Net change in unrealized
appreciation on
investments.............. (50,091,647) 17,417,882 471,502 (6,780,188) 14,831,715
------------- ------------- ------------ ------------ ------------
Net increase in net assets
from investment
operations............... 62,690,566 120,921,027 478,766 19,918,525 28,464,270
------------- ------------- ------------ ------------ ------------
DIVIDENDS AND DISTRIBUTIONS:
Net investment income...... (5,996,455) (8,285,016) -- (259,239) (781,023)
Net realized gain on
investments.............. (78,458,463) (73,143,226) -- (22,870,548) (11,521,019)
------------- ------------- ------------ ------------ ------------
Total dividends and
distributions............ (84,454,918) (81,428,242) -- (23,129,787) (12,302,042)
------------- ------------- ------------ ------------ ------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from shares
sold..................... 42,163,541 39,278,575 17,511,040 3,630,516 5,233,818
Dividends reinvested....... 75,355,767 74,600,820 -- 22,106,141 11,764,560
Cost of shares redeemed.... (269,005,617) (294,670,193) (133,625) (43,873,860) (33,282,011)
------------- ------------- ------------ ------------ ------------
Net increase (decrease) in
net assets from capital
share transactions....... (151,486,309) (180,790,798) 17,377,415 (18,137,203) (16,283,633)
------------- ------------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN
NET ASSETS................. (173,250,661) (141,298,013) 17,856,181 (21,348,465) (121,405)
NET ASSETS:
Beginning of period........ 630,118,611 771,416,624 1,000 166,759,145 166,880,550
------------- ------------- ------------ ------------ ------------
End of period.............. $ 456,867,950(b) $ 630,118,611(b) $17,857,181(c) $145,410,680(d) $166,759,145(d)
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------

CAPITAL SHARE TRANSACTIONS:
Shares sold................ 5,372,907 4,913,877 3,419,221 352,063 525,172
Shares issued for
reinvestment of dividends
and distributions........ 10,873,360 9,739,008 -- 2,349,209 1,179,996
Shares redeemed (f)........ (33,697,985) (37,019,497) (25,522) (4,197,489) (3,368,817)
------------- ------------- ------------ ------------ ------------
Net increase (decrease) in
shares outstanding....... (17,451,718) (22,366,612) 3,393,699 (1,496,217) (1,663,649)
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------

<CAPTION>
Royce GiftShares Fund
--------------------------------
Periods ended December 31,
--------------------------------
1996 1995(a)
---- ------
<S> <C> <C>
INVESTMENT OPERATIONS:
Net investment income
(loss)................... $ (289) $ --
Net realized gain (loss) on
investments.............. 68,063 --
Net change in unrealized
appreciation on
investments.............. 76,117 839
----------- --------
Net increase in net assets
from investment
operations............... 143,891 839
----------- --------
DIVIDENDS AND DISTRIBUTIONS:
Net investment income...... -- --
Net realized gain on
investments.............. (53,781) --
----------- --------
Total dividends and
distributions............ (53,781) --
----------- --------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from shares
sold..................... 418,047 500,000
Dividends reinvested....... 53,593 --
Cost of shares redeemed.... (28) --
----------- --------
Net increase (decrease) in
net assets from capital
share transactions....... 471,640 500,000
----------- --------
NET INCREASE (DECREASE) IN
NET ASSETS................. 561,750 500,839
NET ASSETS:
Beginning of period........ 501,839 1,000
----------- --------
End of period.............. $1,063,589(e) $501,839(e)
----------- --------
----------- --------
CAPITAL SHARE TRANSACTIONS:
Shares sold................ 72,903 100,000
Shares issued for
reinvestment of dividends
and distributions........ 9,402 --
Shares redeemed (f)........ (5) --
----------- --------
Net increase (decrease) in
shares outstanding....... 82,305 100,000
----------- --------
----------- --------
</TABLE>

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

(a) PMF II and Royce GiftShares Fund commenced operations on November 19, 1996
and December 27, 1995, respectively.

(b) Includes undistributed net investment income of $0 in 1996 and $2,681 in
1995.

(d) Includes undistributed net investment income of $0 in 1996 and $62,471 in
1995.

(e) Includes undistributed net investment income of $0 for 1996 and 1995.

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

The accompanying notes are an integral part of the financial statements.
12

<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS FOR THE PERIOD DECEMBER 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Pennsylvania Royce Royce
Mutual Fund PMF II Value Fund GiftShares Fund
------------ -------- ----------- ---------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Income:
Dividends........................... $ 9,911,040 $ 21,471 $ 2,703,864 $ 9,073
Interest............................ 1,174,006 545 332,511 43
------------ -------- ----------- ---------------
Total Income................... 11,085,046 22,016 3,036,375 9,116
------------ -------- ----------- ---------------
Expenses:
Investment advisory fees............ 4,302,768 12,215 1,322,009 7,866
Distribution fees................... -- -- 1,518,249 --
Custodian and shareholder servicing
fees.............................. 403,801 7,014 178,780 13,247
Administrative and office facilities
expenses.......................... 255,425 55 100,305 352
Professional fees................... 132,077 2,500 31,674 6,069
Trustees' fees...................... 68,529 750 18,210 68
Other expenses...................... 433,125 1,561 162,302 13,515
------------ -------- ----------- ---------------
Total Expenses................. 5,595,725 24,095 3,331,529 41,117
Fees Waived by Investment
Adviser and Distributor...... (198,074) (12,215) (505,034) (7,866)
Expenses Reimbursed by
Investment Adviser........... -- -- -- (23,846)
------------ -------- ----------- ---------------
Net Expenses................... 5,397,651 11,880 2,826,495 9,405
------------ -------- ----------- ---------------
Net Investment Income (Loss)... 5,687,395 10,136 209,880 (289)
------------ -------- ----------- ---------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS:
Net realized gain (loss) on
investments........................... 107,094,818 (2,872) 26,488,833 68,063
Net change in unrealized appreciation on
investments........................... (50,091,647) 471,502 (6,780,188) 76,117
------------ -------- ----------- ---------------
Net realized and unrealized gain on
investments........................... 57,003,171 468,630 19,708,645 144,180
------------ -------- ----------- ---------------
NET INCREASE IN NET ASSETS FROM
INVESTMENT OPERATIONS................. $ 62,690,566 $478,766 $19,918,525 $ 143,891
------------ -------- ----------- ---------------
------------ -------- ----------- ---------------
</TABLE>

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

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

This table is presented to show selected data for a share outstanding
throughout each period, and to assist shareholders in evaluating the Funds'
performance for the periods presented.
<TABLE>
<CAPTION>
Net
Realized
and Distributions
Net Asset Unrealized Distributions from Net Net Asset
Value, Net Gain (Loss) from Net Realized Gain Value,
Beginning Investment on Investment on End of Total
of Period Income Investments Income Investments Period Return
--------- ---------- ----------- ------------- ------------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
PENNSYLVANIA MUTUAL FUND (a)
1996....................... $ 7.71 $ 0.11 $ 0.84 $ (0.11) $ (1.44) $ 7.11 12.8%
1995....................... 7.41 0.11 1.27 (0.11) (0.97) 7.71 18.7%
1994....................... 8.31 0.12 (0.18) (0.11) (0.73) 7.41 (0.7)%
1993....................... 8.00 0.11 0.79 (0.11) (0.48) 8.31 11.3%
1992....................... 7.29 0.11 1.07 (0.10) (0.37) 8.00 16.2%
PMF II (b)
1996....................... $ 5.00 $-- $ 0.26 $-- $-- $ 5.26 5.2%
ROYCE VALUE FUND (c)
1996....................... $ 10.02 $ 0.02 $ 1.35 $ (0.02) $ (1.77) $ 9.60 14.0%
1995....................... 9.11 0.05 1.65 (0.05) (0.74) 10.02 18.7%
1994....................... 9.73 0.07 (0.23) (0.05) (0.41) 9.11 (1.6)%
1993....................... 9.51 0.05 0.97 (0.05) (0.75) 9.73 10.7%
1992....................... 8.83 0.04 1.37 (0.04) (0.69) 9.51 16.0%
ROYCE GIFTSHARES FUND (d)
1996....................... $ 5.01 $-- $ 1.27 $-- $ (0.45) $ 5.83 25.6%
1995....................... 5.00 -- 0.01 -- -- 5.01 0.2%

<CAPTION>
Ratio of
Net
Ratio of Investment
Expenses Income Average
Net Assets, to (Loss) to Portfolio Commission
End of Period Average Average Turnover Rate
(in thousands) Net Assets Net Assets Rate Paid`D'
-------------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
PENNSYLVANIA MUTUAL FUND (a)
1996...................... $ 456,868 0.99% 1.05% 29% $ 0.0588
1995...................... 630,119 0.98% 1.18% 10% --
1994...................... 771,417 0.98% 1.33% 17% --
1993...................... 1,022,161 0.98% 1.23% 24% --
1992...................... 1,102,224 0.91% 1.48% 22% --
PMF II (b)
1996...................... $ 17,857 0.97%* 0.83%* 1% $ 0.0586
ROYCE VALUE FUND (c)
1996...................... $ 145,411 1.86% 0.14% 30% $ 0.0626
1995...................... 166,759 1.76% 0.46% 14% --
1994...................... 166,881 1.80% 0.67% 22% --
1993...................... 185,776 1.84% 0.43% 31% --
1992...................... 178,128 1.88% 0.42% 28% --
ROYCE GIFTSHARES FUND (d)
1996...................... $ 1,064 1.49% (0.05)% 93% $ 0.0566
1995...................... 502 0.70%* 0.00%* 0% --
</TABLE>

- ------------
(a) Expense ratios are shown after fee waivers by the investment adviser. For
the years ended December 31, 1996 and 1995, the expense ratios before the
waivers would have been 1.03% and .99%, respectively.
(b) Expense ratio is shown after fee waivers by the investment adviser. For the
period ended December 31, 1996, the expense ratio before the waiver would
have been 1.97%. The Fund commenced operations on November 19, 1996.
(c) Expense ratios are shown after fee waivers by the investment adviser and
distributor. For the years ended December 31, 1996, 1995, 1994, 1993 and
1992, the expense ratios before the waivers would have been 2.19%, 2.14%,
2.16%, 2.15%, and 2.15%, respectively.
(d) Expense ratios are shown after fee waivers and expense reimbursements by the
investment adviser. For the periods ended December 31, 1996 and 1995, the
expense ratios before the waivers and reimbursements would have been 6.53%
and 1.95%, respectively. The Fund commenced operations on December 27, 1995.
* 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.

<PAGE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Pennsylvania Mutual Fund, PMF II, Royce Value Fund, and Royce GiftShares
Fund ('Fund' or 'Funds') are four 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. Immediately
thereafter, Pennsylvania Mutual Fund was merged into the Trust. PMF II and Royce
GiftShares Fund commenced operations on November 19, 1996 and December 27, 1995,
respectively.

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 are determined on the basis of
identified cost for book and tax purposes.

c. Expenses:

Expenses directly attributable to each Fund are charged to that Fund's
operations while expenses applicable to all Funds are allocated in an equitable
manner.

d. Taxes:

As qualified regulated investment companies under Subchapter M of the
Internal Revenue Code, the Funds are not subject to income taxes to the extent
that each Fund distributes substantially all of its taxable income for its
fiscal year. The accompanying Schedules of Investments contain information
regarding income taxes under the caption 'Income Tax Information.'

e. 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 and distributions in
excess of 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 years.

f. Repurchase agreements:

The Funds enter into repurchase agreements with respect to portfolio
securities solely with State Street Bank and Trust Company ('SSB&T'), the
custodian of the Funds' assets. Each 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 each Fund to dispose of its underlying securities.

g. Organizational expenses:

Costs incurred by PMF II in connection with its organization and initial
registration of shares of $25,000 have been deferred and are being amortized on
a straight line basis over a five-year period from the date of commencement of
operations.

h. Security lending:

Pennsylvania Mutual Fund loans securities to qualified institutional
investors for the purpose of realizing additional income. This income is
included in interest income. Loans of securities of Pennsylvania Mutual Fund are
collateralized by cash and/or securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities. The collateral is equal to at
least 100% of the current market value of the loaned securities.

2. INVESTMENT ADVISER AND DISTRIBUTOR:

Under the Trust's investment advisory agreement with Quest Advisory Corp.
('Quest'), Quest is entitled to receive management fees which are computed daily
and payable monthly. For the periods ended Decem-

<PAGE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
ber 31, 1996, Pennsylvania Mutual Fund and Royce Value Fund recorded advisory
fees of $4,104,694 (net of voluntary waivers of $198,074) and $1,322,009,
respectively. Quest voluntarily waived advisory fees of $12,215 and $7,866 for
PMF II and Royce GiftShares Fund, respectively. The agreements provide for
advisory fees equal to 1.0% per annum of the first $50 million of the Fund's
average net assets, 0.875% per annum of the next $50 million of such net
assets and 0.75% per annum of additional amounts of average net assets for
Pennsylvania Mutual Fund and Royce Value Fund and 1.0% and 1.25% per annum
of average net assets for PMF II and Royce GiftShares Fund, respectively.

Quest Distributors, Inc. ('QDI'), the distributor of Royce Value Fund's
shares, is an affiliate of Quest. QDI received 12b-1 distribution fees from
Royce Value Fund totaling $1,013,215 for the year ended December 31, 1996. This
amount is net of $505,034 of fees which were voluntarily waived by QDI. The
distribution agreement provides for maximum fees of 1.0% per annum of Royce
Value Fund's average net assets.

3. PURCHASES AND SALES OF INVESTMENT SECURITIES:

For the year ended December 31, 1996, the cost of purchases and the
proceeds from sales of investment securities, other than short-term securities,
were as follows:
<TABLE>
<CAPTION>
Pennsylvania
Mutual Fund PMF II
------------ ---------------
<S> <C> <C>
Purchases...................... $148,918,905 $15,616,583
Sales.......................... $380,223,030 $ 119,191

Royce Royce
Value Fund GiftShares Fund
------------ ---------------
<S> <C> <C>
Purchases...................... $ 43,358,293 $ 731,330
Sales.......................... $ 91,079,836 $ 436,811
</TABLE>

<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------

To the Board of Trustees of The Royce Fund and the Shareholders of Pennsylvania
Mutual Fund, PMF II, Royce Value Fund and Royce GiftShares Fund:

We have audited the accompanying statements of assets and liabilities of
Pennsylvania Mutual Fund, PMF II, Royce Value Fund and Royce GiftShares Fund,
including the schedules of investments accompanying the Annual Report, as of
December 31, 1996, the related statements of operations for the year or period
then ended, the statements of changes in net assets for each of the two years in
the periods then ended for Pennsylvania Mutual Fund and Royce Value Fund and for
the year ended December 31, 1996, and for the period ended December 27, 1995
(commencement of operations) to December 31, 1995 for Royce GiftShares Fund and
for the period November 19, 1996 (commencement of operations) to December 31,
1996 for PMF II, and the financial highlights for each of the periods indicated
therein. These financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Pennsylvania Mutual Fund, PMF II, Royce Value Fund, and Royce GiftShares Fund as
of December 31, 1996, the results of their operations for the year or period
then ended, the changes in their net assets for the periods reported therein,
and the financial highlights for the periods indicated therein, in conformity
with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Boston, Massachusetts
February 14, 1997

STATEMENT OF DIFFERENCES

The dagger symbol shall be expressed as...............................'D'
The checkmark shall be expressed as..................................'ch'