PRICE T ROWE OTC FUND INC, N-30D, 1997-02-20

PRICE T ROWE OTC FUND INC
N-30D, 1997-02-20

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<PAGE>

Annual Report

OTC FUND

DECEMBER 31, 1996

[LOGO OF T. ROWE PRICE APPEARS HERE]

<PAGE>

REPORT HIGHLIGHTS
--------------------------------------------------------------------------
. In another exuberant year, the stock market delivered strong, double-digit
gains, although small companies lagged their larger counterparts.

. The OTC Fund outperformed its small-company benchmark, returning 6.33% and
21.05% for the 6- and 12-month periods ended December 31, respectively.

. The fund benefited from its holdings in energy, real estate investment
trusts, and financial companies, the leading market sectors for the year.

. We continued to buy more shares of good companies at bargain prices,
including Outback Steakhouse and Toolex Alpha, a maker of compact-disk
manufacturing equipment.

. A stronger dollar and slowing economy should help small companies regain
leadership in 1997, but a correction in stock prices is possible.
<PAGE>

FELLOW SHAREHOLDERS

Your fund had another good year in 1996, chalking up its second straight gain of
more than 20%. Although small companies again trailed their larger counterparts,
the OTC Fund stayed within sight of the larger-company, unmanaged Nasdaq and
Standard & Poor's 500 stock indices. However, over the last six months,
following a summer correction, the S&P 500 surged ahead of the fund, fueled by
sustained corporate earnings growth and investors' ravenous appetite for bigger
companies.

<TABLE>
<CAPTION>
- -----------------------
PERFORMANCE COMPARISON
- --------------------------------------------------------
Periods Ended 12/31/96 6 Months 12 Months
- --------------------------------------------------------
<S> <C> <C>
OTC Fund 6.33% 21.05%
........................................................
Nasdaq Composite * 8.95 22.71
........................................................
Russell 2000 5.56 16.49
........................................................
S&P 500 11.68 22.96
........................................................
</TABLE>
*Principal only

Compared with its small-company benchmark (the unmanaged Russell 2000
Index), the fund did extremely well, outperforming it for the six-month
period ended December 31 and by a wide margin for the full year. Small-
capitalization stocks have now lagged large-caps for two years in a row.
Nevertheless, we remain optimistic that they will regain leadership in
1997, as discussed in the outlook section.

YEAR-END DISTRIBUTIONS

Your fund's Directors declared a fourth quarter dividend of $0.09 per share
and a capital gain distribution of $1.58 per share (including a short-term
capital gain of $0.68 and a long-term gain of $0.90). These distributions
were paid on December 30 to shareholders of record on December 26. In early
January, we mailed your check or statement reflecting these distributions,
and Form 1099-DIV, reporting them for tax purposes, was sent late in the
month.

INVESTMENT REVIEW

The leading small-company stock market sectors for the year were energy (up
67%), real estate investment trusts or REITs (up 32%), and

1
<PAGE>

financials (up 25%). Fortunately, your fund had significant exposure to all
of these areas. The fund has long held an overweighted position in energy
services stocks. We wrote at length in previous letters about our
enthusiasm for REITs and are pleased that they paid off so handsomely in
1996. Finally, our focus on quality, niche financial companies,
particularly insurance stocks, also benefited performance. What about the
losers? Two areas to avoid in 1996 were health care (down 4.5%) and
utilities (essentially flat). The OTC Fund was underweighted in both
sectors compared with the Russell 2000.

During the year, 10 of our holdings individually topped the $2 million mark
in value added to the fund, including longtime favorites Richfood Holdings,
Analogic, and Analysts International. We also made a few mistakes, but the
winners far exceeded the losers. Only three of our holdings lost more than
$1.5 million. The largest detractor to fund performance was cable service
provider Heartland Wireless, which lost $1.7 million in value as investors
reacted to disappointing third quarter earnings.

The fund's winners in the second half included Leasing Solutions, an
information technology firm, which rose on strong earnings and an exciting
new contract with Cisco Systems. The company's performance added 10 cents
to the fund's net asset value. Collective Bancorp added nine cents to NAV
on solid fundamentals and a surge in the financial sector. On the other
hand, losers included Shiva, which knocked 14 cents off NAV as orders
slowed for its principal local area network (LAN) remote access computer
server. Toolex Alpha, a maker of compact-disk manufacturing equipment, was
another detractor, hurt by the spillover of slower sales in the record
industry. Nevertheless, we believe Toolex Alpha is a fine company, boasting
excellent technology and good long-term prospects. In fact, it was one of
our largest purchases over the last six months. More on this stock in the
next section.

PORTFOLIO HIGHLIGHTS

Our major purchases in the second half included Outback Steakhouse, the
aforementioned Toolex Alpha, and Analogic. Outback operates and franchises
over 300 restaurants. The company possesses excellent, well-motivated
management and enjoys strong earnings growth and high profitability per
restaurant. We bought the stock late in the year after slowing same-store
sales drove its price down to a modest multiple

2
<PAGE>

of just 14.5 times projected 1997 earnings versus 18 times for the overall
market -- an excellent value.

Speaking of bargains, let's get back to Toolex Alpha. Recently trading at
just 14 times estimated 1997 earnings, this company looks compellingly
priced. For that relatively cheap valuation, you can acquire a firm with
28% operating profit margins, significant free cash flow, and very high
market share in its industry.

Finally, we added significantly to our position in Analogic, elevating it
to the fund's second largest holding (as shown in the table following this
letter). The company makes crucial components for medical instruments such
as CAT scanners and magnetic resonance imaging machines. Analogic's sales
and earnings have been rejuvenated by its rollout of a rugged, portable CAT
scan machine that requires very little power to operate, making it ideal
for use in rural hospitals, clinics, underdeveloped countries, and by the
military. By comparison, a conventional CAT scanner requires a large amount
of high-quality, uninterrupted power and sophisticated environmental
controls, making it impractical in many parts of the world. Trading at a
recent 1.6 times book value, the stock looks like another bargain.

- ------------------------
Sector Diversification
- ------------------------

[PIE GRAPH APPEARS HERE]

Business and Services & Transportation 19%

Financial 17%

Technology 8%

Consumer Services/Cyclicals 16%

Reserves 8%

Consumer Nondurables 15%

Energy/Utilities/Misc. 7%

Capital Equipment/Process Industries/Basic Materials 10%

Based on net assets as of 12/31/96.

Two of our three largest sales involved acquisitions that eliminated these
companies from the portfolio. After the death of its founder, the board of
AMTROL decided a sale of the company was in shareholders' best interests.
The company, which makes plumbing products, fetched a high price and
contributed substantially during the year. Similarly, Sudbury, a maker of
automotive parts, was acquired in a deal that was profitable for your fund.
Keeping a vigilant eye on valuations, we also pared our positions in some
large holdings that had grown in value, including Richfood, Pacific
Sunwear, and Leasing Solutions.

3
<PAGE>

We should also admit our mistakes. During the second half, we eliminated Cadmus
Communications after it experienced unexpected weakness in its core business and
had difficulty integrating several recent acquisitions.

OUTLOOK

Small companies provided another strong absolute return in 1996. After rising
more than 28% in 1995, the Russell 2000 advanced 16.5% last year, and we are
pleased that your OTC Fund outperformed this benchmark in both years.

Although they trailed larger companies for the second year in a row, we believe
small-caps are the place to be invested in 1997. First, the economy, while
remaining strong, has slowed in recent months. When investors search for
sustainable earnings growth in a slowing economy, we believe small-cap stocks
will come to the fore. Second, recent strength in the dollar bodes well for this
area. A rising dollar tends to depress the earnings of big, multinational
companies that have significant overseas operations, making the earnings growth
of domestically oriented small firms look relatively more attractive.

We end with a word of caution. After two strong years, investors should remember
that trees do not grow to the sky and markets do not rise without interruption.
After a record-setting six years without a 10% correction in the S&P 500, we
would not be surprised to see such a dip sometime this year. On the other hand,
given the stable economy and a placid outlook for inflation and interest rates,
we do not expect a major disruption in stock prices. As always, we are confident
that our blend of value and growth will lead us to investment opportunities that
are attractive under any market conditions. Thanks for your continued support.

Respectfully submitted,

/s/ Greg A. McCrickard

Greg A. McCrickard
President and Chairman of the Investment Advisory Committee

January 20, 1997

4
<PAGE>

- --------------------------------------------------------------------------------
Sticking To Your Game Plan
- --------------------------------------------------------------------------------

TIME REDUCES VOLATILITY OF MARKET RETURNS
- --------------------------------------------------------------------------------
(Annualized Returns for Best and Worst Period: Rolling Periods From 1950 to
1996*)

[AN 8-BAR CHART SHOWING BEST AND WORST ANNUALIZED TOTAL RETURNS OF STOCKS FOR
VARIOUS ROLLING TIME PERIODS BETWEEN 1950 AND 1996.]

*From 1950-1996, there were 47 one-year periods; 42 five-year periods; 37
ten-year periods; and 27 twenty-year periods.
Source: T. Rowe Price Associates; data from Ibbotson Associates.
Chart is for illustrative purposes only and is not intended to represent the
past performance or future results of any specific securities.

In our report to you one year ago, we mentioned the possibility of a modest
decline in stock prices. In fact, from May to July 1996, the broad market (as
measured by the Standard & Poor's 500 Stock Index) fell around 7%. However, the
bull market resumed its charge to post a robust 23% gain for the year.

Some believe the market is poised for a significant downturn. We do not expect a
major drop in stock prices in 1997, although another modest pullback is
possible. On balance, we expect stocks to advance at a much slower pace.

How should you prepare for a potential market pullback? As always, our advice is
to diversify your investments and focus on the long term. If you've implemented
a sound investment strategy, stay the course. Stocks have historically overcome
periods of volatility to provide better returns than most other investments.
Market corrections can even have a silver lining because they result in good
buying opportunities.

Furthermore, the volatility of stock market returns has diminished significantly
over longer time frames. The chart shows the best and worst annualized returns
on stocks over various rolling time periods between 1950 and 1996. (For
instance, there were 37 rolling 10-year periods: 1950-1960, 1951-1961, etc.)
Investors who held stocks for only one year could have had as much as a 52.6%
gain, or as little as a 26.5% loss -- a spread of 79 percentage points. However,
investors who held stocks for 10-year periods or longer always overcame interim
volatility to post gains for the entire period.

In addition, a well-diversified portfolio can weather volatility better than a
more concentrated portfolio over the long term and particularly during market
corrections. For example, during last summer's correction, small-company stocks
fell nearly 16% while large-company issues dropped 7.3%. However, a portfolio
diversified among large U.S. companies (30% of assets), small U.S. companies
(15%), foreign companies (15%), intermediate-term Treasury bonds (30%), and
Treasury bills (10%) would have lost a smaller 5.2% of its value./1/

Above all, remember that investing is a long-distance race, not a sprint.

/1/ Ned Davis Research.

5
<PAGE>

T. ROWE PRICE OTC FUND
- --------------------------------------------------------------------------------

PORTFOLIO HIGHLIGHTS
- --------------------------------------------------------------------------------

TWENTY-FIVE LARGEST HOLDINGS

Percent of
Net Assets
12/31/96
- --------------------------------------------------------------------------------------------------
<S> <C>
Selective Insurance 2.8%
..................................................................................................
Analogic 2.4
..................................................................................................
Harleysville Group 2.0
..................................................................................................
JP Foodservice 1.9
..................................................................................................
Richfood Holdings 1.8
- --------------------------------------------------------------------------------------------------
Analysts International 1.7
..................................................................................................
UICI 1.4
..................................................................................................
Collective Bancorp 1.4
..................................................................................................
PartnerRe Holdings 1.3
..................................................................................................
Electro Rent 1.2
- --------------------------------------------------------------------------------------------------
Woodward Governor 1.2
..................................................................................................
Weatherford Enterra 1.2
..................................................................................................
Home Beneficial 1.2
..................................................................................................
Unitog 1.1
..................................................................................................
Petrolite 1.1
- --------------------------------------------------------------------------------------------------
Glacier Bancorp 1.1
..................................................................................................
Quorum Health Group 1.1
..................................................................................................
W.R. Berkley 1.0
..................................................................................................
Inphynet Medical Management 1.0
..................................................................................................
Tracor 1.0
- --------------------------------------------------------------------------------------------------
Rutherford-Moran Oil 1.0
..................................................................................................
Holophane 1.0
..................................................................................................
FelCor Suites Hotels 1.0
..................................................................................................
Renal Care Group 1.0
..................................................................................................
Culp 1.0
- --------------------------------------------------------------------------------------------------
Total 33.9%
</TABLE>

6
<PAGE>

T. ROWE PRICE OTC FUND
- -------------------------------------------------------------------------------

PORTFOLIO HIGHLIGHTS
- --------------------------------------------------------------------------------

MAJOR PORTFOLIO CHANGES
Listed in descending order of size

6 Months Ended 12/31/1996

Ten Largest Purchases Ten Largest Sales
-----------------------------------------------------------------------------

Outback Steakhouse * AMTROL **
................................. .................................
Tracor * Richfood Holdings
................................. .................................
Toolex Alpha Sudbury
................................. .................................
Source Services * Cadmus Communications**
................................. .................................
North Face * Pacific Sunwear
................................. .................................
Analogic Biogen
................................. .................................
Planar Systems * Oceaneering International**
................................. .................................
Coach USA * Leasing Solutions
................................. .................................
Alternative Resources * Continental Waste**
................................. .................................
Greenfield Industries SITEL
................................. .................................

* Position added
** Position eliminated

7
<PAGE>

T. ROWE PRICE OTC FUND
- --------------------------------------------------------------------------------

PERFORMANCE COMPARISON
- --------------------------------------------------------------------------------

This chart shows the value of a hypothetical $10,000 investment in the fund
over the past 10 fiscal year periods or since inception (for funds lacking
10-year records). The result is compared with a broad-based average or
index. The index return does not reflect expenses, which have been deducted
from the fund's return.

[LINE GRAPH APPEARS HERE]
OTC FUND
---------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nasdaq Russell
Composite 2000 OTC
Index Index Fund
<S> <C> <C> <C>
12/86 10,000 10,000 10,000
12/87 9,474 9,121 8,749
12/88 10,933 11,402 11,124
12/89 13,038 13,256 13,253
12/90 10,717 10,674 10,540
12/91 16,809 15,589 14,608
12/92 19,406 18,458 16,639
12/93 22,269 21,943 19,701
12/94 21,557 21,543 19,718
12/95 30,162 27,672 26,392
12/96 37,010 32,237 31,948

</TABLE>

AVERAGE ANNUAL COMPOUND TOTAL RETURN
- --------------------------------------------------------------------------------

This table shows how the fund would have performed each year if its actual
(or cumulative) returns for the periods shown had been earned at a constant
rate.

<S> <C> <C> <C> <C>
Periods Ended 12/31/96 1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------------------------------------------

OTC Fund 21.05% 17.49% 16.94% 12.32%
.........................................................................................
</TABLE>

Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original
purchase.

8
<PAGE>

T. ROWE PRICE OTC FUND
- --------------------------------------------------------------------------------

FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

Year
Ended
12/31/96 12/31/95 12/31/94 12/31/93 12/31/92
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE

Beginning of period $ 16.32 $ 13.80 $ 15.39 $ 14.37 $ 16.86
.............................................................
Investment activities
Net investment income 0.09 0.12 0.04 - 0.02
Net realized and
unrealized gain (loss) 3.33 4.53 (0.04) 2.60 2.20
.............................................................
Total from
investment activities 3.42 4.65 0.00 2.60 2.22
.............................................................
Distributions
Net investment income (0.09) (0.12) (0.03) - (0.07)
Net realized gain (1.58) (2.01) (1.56) (1.58) (4.64)
.............................................................

Total distributions (1.67) (2.13) (1.59) (1.58) (4.71)
.............................................................

NET ASSET VALUE
End of period $ 18.07 $ 16.32 $ 13.80 $ 15.39 $ 14.37
-------------------------------------------------------------

Ratios/Supplemental Data

Total return 21.05% 33.85% 0.08% 18.40% 13.91%
.............................................................
Ratio of expenses to
average net assets 1.07% 1.11% 1.11% 1.20% 1.32%
.............................................................
Ratio of net investment
income to average
net assets 0.56% 0.74% 0.24% (0.01)% 0.03%
.............................................................
Portfolio turnover rate 31.1% 57.8% 41.9% 40.8% 30.7%
.............................................................
Average commission rate paid $ 0.1402 - - - -
.............................................................
Net assets, end of period
(in thousands) $ 415,604 $ 278,613 $196,726 $204,609 $186,838
.............................................................
</TABLE>
The accompanying notes are an integral part of these financial statements.

9
<PAGE>

T. ROWE PRICE OTC FUND
- --------------------------------------------------------------------------------
December 31, 1996

STATEMENT OF NET ASSETS Shares/Par Value
- --------------------------------------------------------------------------------
In thousands

<S> <C> <C>
COMMON STOCKS AND WARRANTS 90.7%

FINANCIAL 17.2%

Bank and Trust 5.6%
Albank Financial 50,000 $ 1,578
........................................................................
Collective Bancorp 160,000 5,620
........................................................................
First Bell Bancorp 100,000 1,337
........................................................................
First Mariner Bancorp * 40,000 535
........................................................................
First Security 75,000 2,541
........................................................................
Frankfort First 120,000 1,327
........................................................................
Glacier Bancorp + 193,600 4,622
........................................................................
Marshall & Ilsley 30,000 1,043
........................................................................
Mercantile Bancorporation 61,500 3,160
........................................................................
Security First Network Bank * 50,000 531
........................................................................
ValliCorp Holdings 52,500 1,080
........................................................................
23,374
..............
Insurance 11.3%

Foremost 35,000 2,100
........................................................................
Harleysville Group 270,500 8,183
........................................................................
Home Beneficial (Class B) 125,000 4,797
........................................................................
PartnerRe Holdings 160,000 5,440
........................................................................
Poe & Brown 125,000 3,359
........................................................................
Selective Insurance 300,000 11,437
........................................................................
UICI * 175,000 5,655
........................................................................
United Dental Care * 60,000 1,834
........................................................................
W.R. Berkley 85,000 4,340
........................................................................
47,145
...............
Financial Services 0.3%

ITLA Capital * 70,000 1,033
........................................................................
1,033
...............
Total Financial 71,552
...............

UTILITIES 1.4%

Telephone Services 1.3%

Aerial Communications * 232,500 1,860
........................................................................
Aliant Communications 118,500 2,000
........................................................................

</TABLE>

10
<PAGE>

T. ROWE PRICE OTC FUND
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>

Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Western Wireless * 100,000 $ 1,381
..........................................................................
5,241
..............
Electric Utilities 0.1%
Public Service of New Mexico 30,000 589
..........................................................................
589
..............
Total Utilities 5,830
..............

CONSUMER NONDURABLES 14.6%

Food Processing 1.0%

Makepeace * 164 1,656
..........................................................................
Seneca Foods (Class A) * 82,200 1,295
..........................................................................
Seneca Foods (Class B) * 65,200 1,035
..........................................................................
3,986
.............
Hospital Supplies/Hospital Management 3.7%

Allied Healthcare Products 163,500 1,206
..........................................................................
Medical Alliance * 50,000 575
..........................................................................
OccuSystems * 100,000 2,688
..........................................................................
Quorum Health Group * 155,000 4,592
..........................................................................
Renal Care Group * 125,000 3,992
..........................................................................
St. Jude Medical * 40,000 1,705
..........................................................................
Tecnol Medical Products * 41,000 612
..........................................................................
15,370
..............
Pharmaceuticals 0.6%

Biogen * 20,000 772
..........................................................................
Perrigo * 200,000 1,800
..........................................................................
2,572
.............
Biotechnology 0.3%

Cell Genesys * 150,000 1,359
..........................................................................
1,359
.............

Health Care Services 4.2%

Apria Healthcare * 140,000 2,625
..........................................................................
EmCare Holdings * 102,500 2,351
..........................................................................
Inphynet Medical Management * 245,000 4,318
..........................................................................
NeoPath * 104,000 1,911
..........................................................................
Northfield Laboratories * 120,000 1,275
..........................................................................
Orthodontic Centers of America * 120,000 1,890
..........................................................................
</TABLE>

<PAGE>

CONSUMER SERVICES 10.7%

General Merchandisers 1.0%
Carson Pirie Scott * 75,000 1,894
................................................................................
Caseys General Stores 120,000 2,257
................................................................................
4,151
..............
Specialty Merchandisers 1.8%
CSS Industries * 88,200 2,293
................................................................................
GT Bicycles * 270,000 3,442
................................................................................
Norton McNaughton * 20,000 168
................................................................................
Pacific Sunwear * 40,000 1,027
................................................................................
Performance Food Group * 50,000 769
................................................................................
7,699
..............
Entertainment and Leisure 2.9%
FelCor Suites Hotels, REIT 115,000 4,068
................................................................................
Heartland Wireless * 155,000 2,025
................................................................................
North Face * 120,000 2,295
................................................................................
Outback Steakhouse * 135,000 3,594
................................................................................
11,982
..............
Media and Communications 5.0%
American Radio Systems (Class A) * 60,000 1,635
................................................................................
Centennial Cellular (Class A) * 125,000 1,508
................................................................................
Chancellor (Class A) * 50,000 1,181
................................................................................
Comnet Cellular * 72,398 2,009
................................................................................
Cowles Media 110,578 2,841
...............................................................................
</TABLE>

12
<PAGE>

CONSUMER CYCLICALS 5.0%

Automobiles and Related 1.6%
Adrian Steel 7,756 1,225
.........................................................................
Littelfuse * 75,000 3,619
.........................................................................
TBC * 255,000 1,944
.........................................................................
6,788
..............
Building and Real Estate 2.7%
Apartment Investment & Management (Class A),
REIT 140,000 3,955
.........................................................................
Arden Realty, REIT 50,000 1,388
.........................................................................
Prime Retail, REIT 150,000 1,847
.........................................................................
Starwood Lodging, REIT 50,000 2,756
.........................................................................
Storage Trust Realty, REIT 50,000 1,350
.........................................................................
11,296
..............
Miscellaneous Consumer Durables 0.7%
Craftmatic Contour, warrants, 12/31/02 * 20,970 0
.........................................................................
Ellett Brothers 200,000 1,050
.........................................................................
Juno Lighting 55,000 873
.........................................................................
York Group 38,100 729
.........................................................................
2,652
..............
Total Consumer Cyclicals 20,736
..............

TECHNOLOGY 8.4%

Electronic Components 4.1%
American Superconductor * 25,000 269
.........................................................................
Analogic 296,300 9,815
.........................................................................
Linear Technology 35,000 1,535
.........................................................................
Maxim Integrated Products * 60,000 2,599
.........................................................................
</TABLE>

13
<PAGE>

CAPITAL EQUIPMENT 3.2%

Electrical Equipment 1.7%
Advanced Lighting * 100,000 2,475
.........................................................................
ANADIGICS * 10,000 395
.........................................................................
Holophane * 215,000 4,139
.........................................................................
7,009
..............
Machinery 1.5%
Greenfield Industries 100,000 3,056
.........................................................................
Laser Alignment * 16,450 237
.........................................................................
Toolex Alpha * 275,000 2,870
.........................................................................
6,163
..............
Total Capital Equipment 13,172
..............

BUSINESS SERVICES AND
TRANSPORTATION 19.2%

Computer Service and Software 4.6%
Adobe Systems 15,000 562
.........................................................................
Analysts International 250,000 6,937
.........................................................................
</TABLE>

14
<PAGE>

T. ROWE PRICE OTC FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares/Par Value
- -------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Cybermedia * 30,000 $ 463
.........................................................................
Documentum * 10,000 341
.........................................................................
Electronic Arts * 50,000 1,497
.........................................................................
Expert Software * 45,000 155
.........................................................................
Macromedia * 30,000 544
.........................................................................
OpenVision Technologies * 70,000 809
.........................................................................
PLATINUM Technology * 50,000 678
.........................................................................
Premenos Technology * 30,000 255
.........................................................................
Red Brick Systems * 20,000 455
.........................................................................
Rogue Wave Software * 6,000 96
.........................................................................
Secure Computing * 35,000 311
.........................................................................
SunGard Data Systems * 30,000 1,196
.........................................................................
Sync Research * 20,000 271
.........................................................................
Synopsys * 50,000 2,300
.........................................................................
Verity * 46,100 703
.........................................................................
Visio * 30,000 1,470
.........................................................................
19,043
..............
Distribution Services 2.6%
JP Foodservice * 285,000 7,944
.........................................................................
Primesource + 350,000 2,724
.........................................................................
10,668
..............
Environmental 0.2%
TRC * 200,000 900
.........................................................................
900
..............
Transportation Services 3.1%
Coach USA * 100,000 2,937
.........................................................................
Expeditors International of Washington 120,000 2,745
.........................................................................
Frozen Food Express 150,000 1,350
.........................................................................
Heartland Express * 80,827 1,960
.........................................................................
International Shipholding 101,562 1,879
.........................................................................
M.S. Carriers * 70,000 1,142
.........................................................................
Midwest Express Holdings * 20,000 720
.........................................................................
12,733
..............
Miscellaneous Business Services 8.5%
Alternative Resources * 135,000 2,320
.........................................................................
Billing Information Concepts * 75,000 2,170
.........................................................................
Copart * 135,000 1,755
.........................................................................
</TABLE>

15
<PAGE>

ENERGY 4.4%

Energy Services 2.3%
Carbo Ceramics 130,000 2,681
.........................................................................
Cooper Cameron * 50,000 3,825
.........................................................................
Petroleum Helicopters 28,200 493
.........................................................................
Petroleum Helicopters (non-voting) 18,000 297
.........................................................................
Smith International * 50,000 2,244
.........................................................................
9,540
..............
Exploration and Production 2.1%
Rutherford-Moran Oil * 150,000 4,163
.........................................................................
Weatherford Enterra * 160,000 4,800
.........................................................................
8,963
..............
Total Energy 18,503
..............

PROCESS INDUSTRIES 3.3%

Specialty Chemicals 2.5%
A. Schulman 55,000 1,355
.........................................................................
Furon 27,300 580
.........................................................................
Hauser * 360,000 2,081
.........................................................................
Petrolite 100,000 4,700
.........................................................................
</TABLE>

16
<PAGE>

T. ROWE PRICE OTC FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

Shares/Par Value
- --------------------------------------------------------------------------------
In thousands

<S> <C> <C>
Sybron Chemical * 100,000 $ 1,600
...........................................................................
10,316
.............
Paper and Paper Products 0.8%

Jefferson Smurfit * 220,000 3,534
...........................................................................
3,534
.............
Total Process Industries 13,850
.............

-------------------------------------
BASIC MATERIALS 3.1%
-------------------------------------

Metals 1.9%

Free State Consolidated Gold Mines ADR 150,000 1,078
...........................................................................
Gibraltar Steel * 110,000 2,860
...........................................................................
Matthews International 132,300 3,804
...........................................................................
7,742
.............
Mining 1.2%

Coal Creek + 9,295 990
...........................................................................
Prime Resources Group * 250,000 1,771
...........................................................................
Rochester & Pittsburgh 15,728 440
...........................................................................
TVX Gold * 164,000 1,271
...........................................................................
Western Water * 40,000 570
...........................................................................
5,042
.............
Total Basic Materials 12,784
.............
Miscellaneous Common Stocks 0.2% 808
.............
-----------------------------------------------------
Total Common Stocks and Warrants (Cost $282,399) 377,021
----------------------------------------------------- .............

-----------------------------------------------------
PREFERRED STOCKS 0.2%
-----------------------------------------------------

Prime Retail, REIT, Cum., 10.50%, Series A 30,000 735
...........................................................................
-----------------------------------------------------
Total Preferred Stocks (Cost $570) 735
----------------------------------------------------- .............

-----------------------------------------------------
CONVERTIBLE PREFERRED STOCKS 0.4%
-----------------------------------------------------

ICO, $1.687 51,000 1,147
...........................................................................
Prime Retail, REIT, 8.50%, Series B 25,000 550
...........................................................................
-----------------------------------------------------
Total Convertible Preferred Stocks (Cost $1,504) 1,697
----------------------------------------------------- .............
</TABLE>
17
<PAGE>

T. ROWE PRICE OTC FUND
- --------------------------------------------------------------------------------

Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
-----------------------------------------
CONVERTIBLE BONDS 0.7%
-----------------------------------------

Arch Communications (144a), 6.75%, 12/1/03 $1,000,000 $ 855
...........................................................................
Offshore Logistics (144a), 6.00%, 12/15/03 2,000,000 2,102
...........................................................................

-----------------------------------------
Total Convertible Bonds (Cost $3,123) 2,957
----------------------------------------- .............

-----------------------------------------
SHORT-TERM INVESTMENTS 8.3%
-----------------------------------------

Certificates of Deposit 3.6%

Bayerische Hypotheken und Wechsel, (London)
5.375%, 2/18/97 5,000,000 5,000
...........................................................................
Deutsche Bank, 5.50%, 1/6/97 5,000,000 5,000
...........................................................................
National Westminster Bank, 5.41%, 2/10/97 5,000,000 5,000
...........................................................................
15,000
.............
Commercial Paper 4.2%

BHF Finance (Delaware), 5.30%, 4/11/97 4,031,000 3,972
...........................................................................
Caterpillar Financial Services, 5.42%, 2/20/97 3,000,000 2,978
...........................................................................
Falcon Asset Securitization, 4(2), 5.40%, 1/22/97 5,000,000 4,984
...........................................................................
Investments in Commercial Paper through a joint
account 6.75-7.10%, 1/2/97 5,664,504 5,663
...........................................................................
17,597
.............
Medium-Term Notes 0.5%

Morgan Stanley Group, VR, 5.656%, 1/31/97 2,000,000 2,000
...........................................................................
2,000
.............
-------------------------------------------
Total Short-Term Investments (Cost $34,597) 34,597
------------------------------------------- .............
</TABLE>
18
<PAGE>

T. ROWE PRICE OTC FUND
- --------------------------------------------------------------------------------

Shares/Par Value
- -------------------------------------------------------------------------------
In thousands

<S> <C>
-------------------------------------
Total Investments in Securities
-------------------------------------
100.3% of Net Assets (Cost $322,193) $ 417,007

-------------------------------------
Other Assets Less Liabilities (1,403)
-------------------------------------
.............

NET ASSETS $ 415,604
-------------
Net Assets Consist of:

Accumulated net investment income - net of distributions $ 23

Accumulated net realized gain/loss - net of distributions 9,648

Net unrealized gain (loss) 94,814

Paid-in-capital applicable to 23,002,712 shares of $0.50
par value capital stock outstanding; 200,000,000 shares
authorized 311,119
.............

NET ASSETS $ 415,604
-------------

NET ASSET VALUE PER SHARE $ 18.07
-------------

</TABLE>

* Non-income producing
+ Affiliated company
REIT Real Estate Investment Trust
VR Variable rate
4(2) Commercial paper sold within terms of a private placement memorandum,
exempt from registration under section 4.2 of the Securities Act of
1933, as amended, and may be sold only to dealers in that program or
other "accredited investors."
144a Security was purchased pursuant to Rule 144a under the Securities Act
of 1933 and may not be resold subject to that rule except to
qualified institutional buyers -- total of such securities at year-
end amounts to 0.7% of net assets.

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

19
<PAGE>

T. ROWE PRICE OTC FUND
- --------------------------------------------------------------------------------

- -----------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
In thousands
Year
Ended
12/31/96

---------------------------------------
Investment Income
---------------------------------------

<S> <C>
Income
Dividend $ 3,633
Interest 1,823
............
Total income 5,456
............
Expenses
Investment management 2,619
Shareholder servicing 683
Custody and accounting 146
Prospectus and shareholder reports 53
Registration 51
Legal and audit 15
Directors 10
Miscellaneous 8
............
Total expenses 3,585
............
Net investment income 1,871
............
---------------------------------------
Realized and Unrealized Gain (Loss)
---------------------------------------
Net realized gain (loss) on
Securities 36,942
Foreign currency transactions 1
............
Net realized gain (loss) 36,943
............
Change in net unrealized gain or loss on securities 23,595
............
Net realized and unrealized gain (loss) 60,538
............

INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 62,409
------------

</TABLE>

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

20
<PAGE>

T. ROWE PRICE OTC FUND
- --------------------------------------------------------------------------------

- ----------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
In thousands

Year
Ended
12/31/96 12/31/95

Increase (Decrease) in Net Assets

Operations
Net investment income $ 1,871 $ 1,774
Net realized gain (loss) 36,943 30,377
Change in net unrealized gain or loss 23,595 37,772
.............................
Increase (decrease) in net assets from
operations 62,409 69,923
.............................

Distributions to shareholders
Net investment income (1,898) (1,809)
Net realized gain (33,112) (30,304)
.............................
Decrease in net assets from distributions (35,010) (32,113)
.............................

Capital share transactions*
Shares sold 175,932 69,748
Distributions reinvested 33,047 30,002
Shares redeemed (99,387) (55,673)
.............................
Increase (decrease) in net assets from
capital share transactions 109,592 44,077
.............................

Net Assets

Increase (decrease) during period 136,991 81,887
Beginning of period 278,613 196,726
.............................

End of period $ 415,604 $ 278,613
-----------------------------

* Share information

Shares sold 9,548 4,412
Distributions reinvested 1,846 1,857
Shares redeemed (5,466) (3,448)
.............................
Increase (decrease) in shares outstanding 5,928 2,821

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

21
<PAGE>

T. ROWE PRICE OTC FUND
- --------------------------------------------------------------------------------
December 31, 1996

NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

T. Rowe Price OTC Fund, Inc. (the fund) is registered under the
Investment Company Act of 1940 as a diversified, open-end management
investment company and commenced operations on June 1, 1956.

Valuation Equity securities listed or regularly traded on a securities
exchange are valued at the last quoted sales price at the time the
valuations are made. A security which is listed or traded on more than
one exchange is valued at the quotation on the exchange determined to be
the primary market for such security. Listed securities not traded on a
particular day and securities regularly traded in the over-the-counter
market are valued at the mean of the latest bid and asked prices. Other
equity securities are valued at a price within the limits of the latest
bid and asked prices deemed by the Board of Directors, or by persons
delegated by the Board, best to reflect fair value.

Debt securities are generally traded in the over-the-counter market and
are valued at a price deemed best to reflect fair value as quoted by
dealers who make markets in these securities or by an independent pricing
service. Short-term debt securities are valued at their amortized cost
which, when combined with accrued interest, approximates fair value.

For purposes of determining the fund's net asset value per share, the
U.S. dollar value of all assets and liabilities initially expressed in
foreign currencies is determined by using the mean of the bid and offer
prices of such currencies against U.S. dollars quoted by a major bank.

Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair
value as determined in good faith by or under the supervision of the
officers of the fund, as authorized by the Board of Directors.

Affiliated Companies Investments in companies 5% or more of whose
outstanding voting securities are held by the fund are defined as
"Affiliated Companies" in Section 2(a)(3) of the Investment Company Act
of 1940.

Currency Translation Assets and liabilities are translated into U.S.
dollars at the prevailing exchange rate at the end of the reporting
period. Purchases and sales of securities and income and expenses are
translated into U.S. dollars at the prevailing exchange rate on the dates
of such transactions. The effect of changes in foreign exchange rates on
realized and unrealized security gains and losses is reflected as a
component of such gains and losses.

22
<PAGE>

T. ROWE PRICE OTC FUND
- --------------------------------------------------------------------------------

Premiums and Discounts Premiums and discounts on debt securities are
amortized for both financial reporting and tax purposes.

Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and
losses are reported on the identified cost basis. Dividend income and
distributions to shareholders are recorded by the fund on the ex-dividend
date. Income and capital gain distributions are determined in accordance
with federal income tax regulations and may differ from those determined
in accordance with generally accepted accounting principles.

NOTE 2 - INVESTMENT TRANSACTIONS

Commercial Paper Joint Account The fund, and other affiliated funds, may
transfer uninvested cash into a commercial paper joint account, the daily
aggregate balance of which is invested in high-grade commercial paper.
All securities purchased by the joint account satisfy the fund's criteria
as to quality, yield, and liquidity.

Other Purchases and sales of portfolio securities, other than short-term
securities, aggregated $163,771,000 and $95,028,000, respectively, for
the year ended December 31, 1996.

NOTE 3 - FEDERAL INCOME TAXES

No provision for federal income taxes is required since the fund intends
to continue to qualify as a regulated investment company and distribute
all of its taxable income.

At December 31, 1996, the aggregate cost of investments for federal
income tax and financial reporting purposes was $322,193,000 and net
unrealized gain aggregated $94,814,000, of which $114,781,000 related to
appreciated investments and $19,967,000 to depreciated investments.

NOTE 4 - RELATED PARTY TRANSACTIONS

The investment management agreement between the fund and T. Rowe Price
Associates, Inc. (the manager) provides for an annual investment
management fee, of which $269,000 was payable at December 31, 1996. The
fee is

23
<PAGE>

T. ROWE PRICE OTC FUND
- --------------------------------------------------------------------------------

computed daily and paid monthly, and consists of an individual fund fee
equal to 0.45% of average daily net assets and a group fee. The group fee
is based on the combined assets of certain mutual funds sponsored by the
manager or Rowe Price-Fleming International, Inc. (the group). The group
fee rate ranges from 0.48% for the first $1 billion of assets to 0.305%
for assets in excess of $50 billion. At December 31, 1996, and for the
year then ended, the effective annual group fee rate was 0.33%. The fund
pays a pro-rata share of the group fee based on the ratio of its net
assets to those of the group.

In addition, the fund has entered into agreements with the manager and
two wholly owned subsidiaries of the manager, pursuant to which the fund
receives certain other services. The manager computes the daily share
price and maintains the financial records of the fund. T. Rowe Price
Services, Inc. (TRPS) is the fund's transfer and dividend disbursing
agent and provides shareholder and administrative services to the fund.
T. Rowe Price Retirement Plan Services, Inc., provides subaccounting and
recordkeeping services for certain retirement accounts invested in the
fund. The fund incurred expenses pursuant to these related party
agreements totaling approximately $611,000 for the year ended December
31, 1996, of which $68,000 was payable at period-end.

24
<PAGE>

T. ROWE PRICE OTC FUND
- --------------------------------------------------------------------------------

REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------

To the Shareholders and Board of Directors of
T. Rowe Price OTC Fund, Inc.

We have audited the accompanying statement of net assets of T. Rowe Price
OTC Fund, Inc. as of December 31, 1996, and the related statement of
operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the
responsibility of the Fund's 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 audit 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 investments owned as of December 31, 1996, by
correspondence with the custodian. 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 T. Rowe Price OTC Fund, Inc. as of December 31, 1996, the
results of its operations, the changes in its net assets and financial
highlights for each of the respective periods stated in the first
paragraph, in conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
January 20, 1997

25
<PAGE>

For yield, price, last transaction,
current balance or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(R):
1-800-638-2587 toll free

For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area

To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free

Internet address:
http://www.troweprice.com

T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202

This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus of the
T. Rowe Price OTC Fund.

Investor Centers:
101 East Lombard St.
Baltimore, MD 21202

T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117

Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006

ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071

4200 West Cypress St.
10th Floor
Tampa, FL 33607

[LOGO OF T. ROWE PRICE APPEARS HERE]

T. Rowe Price Investment Services, Inc., Distributor RPRTOTC 12/31/96