ROYCE OTC MICRO CAP FUND INC, N-30D, 1996-03-06

ROYCE OTC MICRO CAP FUND INC
N-30D, 1996-03-06

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<PAGE>

ROYCE
MICRO-CAP
TRUST

ANNUAL REPORT
December 31, 1995

<PAGE>

The Royce Funds, Inc.

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

Dear Stockholder:

Harold Geneen, former CEO of the giant conglomerate ITT Corp., once offered
the following advice: 'In the business world, everyone is paid in two coins:
cash and experience. Take the experience first; the cash will come later.' In
1995, however, the formula seemed to be reversed as investors were paid with
'cash' in the form of high stock market returns. One can only wonder when
investors will be paid with 'experience.'

'ABLE TO LEAP TALL BUILDINGS
IN A SINGLE BOUND'

[GRAPHIC] This familiar phrase describes popular superhero Superman,
but it could also reflect 1995's stock market performance.
1995, like Superman, was extraordinary by any standard of measurement. The
large-cap oriented S&P 500, which was up 37.5%, had its best calendar year
return since 1958. Propelled by strong performance in 1995's first two quarters,
the S&P 500 took a breather in the third quarter only to resume a leadership
role in the final quarter of the year. Small-cap securities emerged as
performance leaders in the middle of the year, but were unable to keep up with
the 'faster than a speeding bullet' S&P 500. For the year, the Russell 2000
index of small-cap companies was up 28.4%.

ROYCE MICRO-CAP TRUST, INC.'S ('OTCM') micro-cap value orientation, which has
served its stockholders well since its inception on December 14, 1993, was no
match for the performance of the raging bull market of 1995. Just as 'small and
micro-cap' under-performed large-cap, 'value' under-performed growth within the
investment category. Also, a low exposure to the market's best performing
sector, technology, and an above-average exposure to the industrial cyclical and
service sectors acted like kryptonite in holding back the Fund's relative
short-term performance. Nevertheless, OTCM's risk-averse style produced a 22.9%
return in 1995 on a net asset value basis, quite reasonable on an absolute
basis. OTCM's 1995 total return based on market value was 19.8%.

The Fund now has $100 million in net assets and two years of performance
history. NAV average annual total return performance for the Fund since
inception was 13.9%, in line with the returns of 13.9% and 13.0%, respectively,
for the Russell 2000 and S&P Small Cap 600, but trailing the 17.9% return of the
technology laden Nasdaq Composite. We believe that managing risk is critical to
delivering above average long-term returns in this dynamic sector.

THE RELEVANCE OF RELATIVE PERFORMANCE

At some point in every modern bull
market, generally at the later [GRAPHIC]
stages, the concept of relative
performance becomes dominant in any
discussion of investment results. As prospects of financial loss become distant
memories, investors shift their focus from absolute gains to relative rewards.
Investment strategies are changed, portfolio managers are replaced and solid
results are ignored in the quest for better relative performance. The problem
is . . . . you can't eat relative performance! The whole concept dies quickly in
a period of negative returns. When markets
turn south, new car purchases are deferred and vacation plans are canceled,
relative performance soon becomes irrelevant. While relative performance may
make a great conversation topic at the cocktail

<PAGE>

<PAGE>
party, it is positive absolute returns, compounded at reasonable rates, which
put dinner on the table.

THE VALUE IN VALUE INVESTING

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

Value investing, on the other hand, takes a contrary view to this highly
emotional process. By systematically reducing risk when others ignore it and
taking risk when it is feared, one can capitalize on valuation discrepancies
(opportunities) which develop from time to time. The greatest risk that the
value investor confronts is the loss of either patience or discipline when faced
with the prospect of being out-of-sync with the market. THE VALUE IN 'VALUE
INVESTING' IS TO PROVIDE A COHERENT SYSTEM FOR RATIONAL DECISION MAKING . . . .
THE PURPOSE OF WHICH IS TO COMPOUND WEALTH WHILE MINIMIZING RISK. ITS BASIC
PREMISE IS THAT THE PRICE ONE PAYS FOR AN INVESTMENT MAKES A SIGNIFICANT
DIFFERENCE IN THE RETURN ONE RECEIVES.

WHAT WE DO

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

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

NO OTHER PLACE WE WOULD RATHER BE

While the Fund focuses on companies with market caps below $300 million, our
weighted average and median market caps are actually much lower; $150 million
and $109 million, respectively, at December 31, 1995. Although our orientation
is micro-cap stocks, the capitalization of our picking universe is by no means
tiny. The micro-cap segment is huge in numbers, with over 6,000 companies valued
at more than $300 billion in total market capitalization. It is both robust and
perpetuating; IPO's, spin-offs and reorganizations create hundreds of new
prospects each year. The micro-cap sector is rich in opportunity and easily
accommodates our strategy given the size of the investable universe.

HOW IT WORKS

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

<PAGE>

IDEAS THAT WORKED

During calendar 1995, the usual
but somewhat arbitrary measurement [GRAPHIC]
period of choice, each of these companies made
meaningful positive contributions to our overall performance. More importantly,
they represent specific examples of our discipline at work. Royce Micro-Cap
Trust's BEST PERFORMERS, as measured by dollar impact to the portfolio, were:

<TABLE>
<CAPTION>
SECURITY % GAIN $ GAIN
- -------- ------ --------

<S> <C> <C>
Penn Eng. & Manufact. Corp. 130% $818,125
Conso Products Co. 86% $709,898
Dreco Energy Services, Ltd. 133% $704,062
MDL Information Systems, Inc. 175% $568,676
Chemfab Corporation 68% $566,050
</TABLE>

The most interesting insight to be found in last year's winners is the
variety of circumstances through which micro-cap opportunities present
themselves. Conso Products and MDL Information Systems were newly created public
companies that received a cool initial reception and fell below most investors'
radar screens. Later, after we had accumulated our position, they were
re-discovered to be rapid growth stocks. Penn Engineering & Manufacturing,
through the sheer strength of its long-term superior results, was discovered by
other small-cap investors in 1995. Dreco Energy Services and Chemfab are
examples of once successful small companies which had to take time out to
resolve growing pains, but now appear to be back on track for rapid expansion.

GOOD IDEAS AT THE TIME

Our greatest opportunities often occur when we identify good
[GRAPHIC] businesses which have fallen from favor due to some sort of
short-term, but correctable, problem. Even the best micro-cap
companies are not immune to the flu. Usually, if their balance sheets are strong
and they have a solid history of high internal returns, these companies will
rebound. Although recoveries can take longer than we anticipate, we are
generally rewarded for our persistence. Unfortunately, a few of our investments
never recover. The five WORST PERFORMERS in 1995, as measured by dollar impact,
were:

<TABLE>
<CAPTION>
SECURITY % LOSS $ LOSS
- -------- ------ --------

<S> <C> <C>
Midwest Grain Products, Inc. 53% $402,874
K-Swiss, Inc. 45% $305,232
Suzy Shier, Ltd. 40% $214,043
Int'l Imaging Materials, Inc. 20% $208,125
Thomaston Mills, Inc., 20% $204,500
</TABLE>

Of these five losers, Midwest Grain Products appears to have the best
prospects for a quick and full recovery. Its problems and therefore performance
stem from a difficult year in the prices and quantities of the grains it
processes. After selling the position to realize our loss, we have since
reestablished our position. While the weatherman may have a better feel for
Midwest's short-term outlook, we remain confident about the long run. K-Swiss
(sneakers), Suzy Shier (apparel retailing) and Thomaston Mills (textiles) were
all victims of the difficult retailing environment in 1995. While their small
size has rendered these companies vulnerable to ever changing consumer habits,
strong balance sheets should allow these 'performance challenged' holdings to
recover down the road. Finally, International Imaging Materials, one of our very
few forays into technology, got caught in the 'tech-wreck' of 1995's fourth
quarter. The good news is that in aggregate, our five worst investments combined
had less than a 1.5% negative impact on the Fund's performance in 1995.

ANYTHING BUT TYPICAL

What do you get when interest rates fall precipitously, inflation is low,
demand for equities is strong and corporate earnings outpace analysts'
estimates? Answer: the LAST FIVE YEARS (actually the last 5 1/4 years)! The last
five years have been an exceptional period for equity investing, one in which
all the 'right stuff' was in place. Consider the following:

There has not been a correction of 10% or more for the S&P 500 or 15% or

<PAGE>

<PAGE>
more for the Russell 2000 since October of 1990, the longest stretch ever for
both indices.

The last five years were an anomaly in that a full market cycle did not take
place, but rather a trough (bottom) to peak (top) experience only.

It was the best (in terms of return and duration) trough to peak period in
the 17 year history of the Russell 2000.

It was only the 8th time out of 49 quarterly trailing five year return
periods that the Russell 2000 generated a 20%+ average annual return.

Within this market cycle, short-term interest rates had one of their most
significant declines -- three month T-bills went from 8.2% in September 1989
to 2.7% in September 1992.

It was one of the least volatile periods on record, and especially so in the
years 1993, 1994 and 1995.

Very simply, the last five years were a period in which risk and reward were
synonymous and one in which risk management provided virtually no benefit. It's
highly likely that we have completed the best five year performance period for
this decade.

CAUSE OR EFFECT

An interesting aspect of this five year rise in both stocks
[GRAPHIC] and bonds is the ever increasing participation of individual
investors. Demand for liquid securities has grown to
proportions that now cloud our understanding as to whether it is the cause or
the effect of this bull market. While it seemed clear several years ago that
repeated and uninterrupted gains in stocks and bonds would heighten mass appeal,
few predicted the growing appetite we have today. Now, armed with demographic
studies and a healthy dose of 20-20 hindsight, it is the consensus belief that
our population has become a nation of savers and that demand for stocks will
remain steady, if not grow. In fact, it is that very same demand which is
believed to ensure future success and prevent any major reversal in market
fortunes.

We are a bit uncomfortable with this widely held assumption of continuous
prosperity. Just as rising markets initially created greater demand for
equities, corrections could dampen enthusiasm. We think there may be limits as
to how long individuals will forgo consumption in pursuit of savings.
Furthermore, we know there are alternative investments, like real estate or
natural resources, at times more attractive, for individuals to pursue. Finally,
we are certain, particularly in a global economy, that an ample supply of
securities can be created to meet and even exceed investors' demands. The
suggestion that continued success is nearly guaranteed by demand is an absurd
proposition. WE REMAIN MOST ASTONISHED, NOT WITH THE MAGNITUDE OF INVESTOR
APPETITE FOR STOCKS, BUT THE NEARLY UNIVERSAL ASSUMPTION OF ITS PERMANENCE.
THE REAL WORLD IS CYCLICAL AND SO ARE ITS MARKETS.

A NEW ERA ?

As the bull market enters its sixth year
uninterrupted by normal corrections, we find [GRAPHIC]
ourselves asking (and more to the
point, others asking us) is this a new era in investing? Have changes in
national demographics and attitudes and, therefore, investing patterns evolved
to the point where traditional assumptions are obsolete? By sticking to our own
time tested and cycle proven discipline, have we become the 'Clark Kent' of the
investment world, permanently nerdy within the new order?

<PAGE>

We believe fundamental economic principles and human nature remain unchanged
in the '90s. Our national economy has not entered a new era of accelerated
growth. In fact, we would argue the opposite. American corporations, despite
restructuring and down-sizing, are not measurably more profitable if cumulative
retained earnings are any gauge. We still believe that individual investors are
motivated by fear and greed. In the current environment, greed has driven fear
from the investment dictionary.

Before long, we expect some normal balance in people's spending habits to
resume. Appetites for mutual fund investing may moderate in favor of consumption
or debt repayments. Weak sectors of our economy like apparel retailing and
infrastructure construction will recover. Basic commodity prices could rise and
equities would once again represent long-term interests in business, as opposed
to trading vehicles. Absolute return goals, previously forgotten, will regain
the spotlight.

THE NEXT FIVE YEARS WILL BE DIFFERENT

'It is not the going out of port, but the coming in, that determines the
success of a journey.' Henry Ward Beecher

It's not likely that the next five years will rival the previous five in
terms of 'ideal wind conditions' or 'spectacular performance.' History tells us
that periods of high valuation and high return are usually followed by periods
of lower, less dynamic returns. Historical performance returns are built with
periods of over-performance and periods of under-performance and, over the
long-term, small-cap stocks have averaged approximately 12.5% per annum, not the
20% provided by the last five years. (1926 - 1995; source: Ibbotson and
Associates). We see no reason why performance should not revert to the mean and,
thus, a period of lower five year returns is likely.

The primary driver behind the most recent rally (and almost 15 years of a
strong market) has been interest rates. Although short-term rates remain at the
lower end of their trading range, it's the change in interest rates and not the
absolute level, which drives price earnings multiples and stock prices. The
magnitude of the decline in interest rates is virtually not repeatable.
Consequently, a further decline in interest rates will not have the same
favorable impact on stock prices, no matter how bullish one is on rates.

IMPACT OF INTEREST RATES ON STOCK MARKET PERFORMANCE

[GRAPH]

LONG-TERM GOVERNMENT BOND YIELDS AND DOW JONES INDUSTRIAL AVERAGE

The last five years were also unique in that never in our nation's history
have so many traditional bank savers become stock market investors. The primary
reason for the massive level of CD conversions has been the high returns
afforded stock market investors compared to the declining returns available in
traditional bank products. A strong contributing factor has been the stock
market's lack of volatility. Volatility has been so low that new investors have
been lulled by the apparent 'safety' of equity investing. Volatility, which has
always been a part of the investment equation, is likely to resurface and resume
a more normal course as background conditions change.

<PAGE>

TIME FOR CHANGE . . WE THINK NOT

We have been discussing what has
happened. Now it's time to [GRAPHIC]
talk about what has not happened.

First, we have not changed our investment time horizon even though it seems
the rest of the world has. We view companies and investment performance with the
same long-term horizon because attractive valuations and returns, like the
planting and harvesting seasons, are never one and the same. Although our risk-
averse approach has worked against us in the most recent performance period, it
has provided very decent returns in the context of history.

Second, we have not changed our underlying investment premise, that a
disciplined approach to investing in high quality, micro-cap companies using
absolute valuation standards can provide attractive long-term returns.
Experience tells us that failure to 'stay the course' results in failure.

Third, the natural laws of gravity and market cycles have not been rescinded.

And finally, our confidence in the ultimate outcome of our approach has not
changed. We expect our approach to micro-cap investing to have both an absolute
and relative pay-off as it has in the past. Your continued confidence is
appreciated.

Yours faithfully,

<TABLE>
<C> <S>
CHARLES M. ROYCE Jack E. Fockler, Jr.
Charles M. Royce W. Whitney George
President Vice Presidents
</TABLE>

February 15, 1996

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

NOTE: S&P 500 and Russell 2000 are unmanaged indices and include the
reinvestment of dividends.

<PAGE>

<TABLE>
<CAPTION>
FUND HIGHLIGHTS December 31, 1995
------------------
<S> <C> <C>
Net Assets $100,065,366
Net Asset Value Per Share $8.89
Market Price Per Share $8.00
Shares Outstanding 11,258,010
</TABLE>

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

FINANCIAL REVIEW

The table below represents the total returns of the Fund on two separate bases.
NAV total return is the compound rate of return, using net asset values, on an
amount invested in the Fund throughout the stated period and assumes the
reinvestment of dividend and capital gain distributions and primary
participation in rights offerings. Stockholders are able to reinvest
distributions, and purchase shares through rights offerings, at prices which
have historically been below NAV, and without commission costs. NAV return is
the most meaningful measurement of a continuous stockholder's progress. Market
Value total return presents similar information, but values the Fund at market
rather than NAV and therefore reflects the actual experience of a stockholder,
before commission costs, who bought and sold shares of the Fund at the beginning
and ending dates.

<TABLE>
<CAPTION>
Period Ended NAV Market Value S&P Russell S&P Nasdaq
December 31, 1995 Total Return Total Return 500 2000`D' SmallCap 600`D' Composite`D'
- ----------------- ------------ ------------ ---- ------- -------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
3 Months 0.5% 0.1% 5.9% 2.2% 0.4% 0.8%
6 Months 9.1 13.7 14.4 12.3 13.3 12.7
1 Year 22.9 19.8 37.5 28.4 30.0 39.9
Average Annual Total
Return From Inception* 13.9 6.4 18.0 13.9 13.0 17.9
</TABLE>

`D' The S&P 500, Russell 2000 and S&P SmallCap 600 are unmanaged indices and
include the reinvestment of dividends. The Nasdaq Composite is unmanaged.
Source: Frank Russell Co.

* Inception date - December 14, 1993

The results presented in this Report represent past performance and should not
be considered representative of the 'total return' from an investment in the
Fund today. They are provided only to give an historical perspective of the
Fund. The investment return and net asset and market values of Fund shares will
fluctuate, so that the shares may be worth more or less than their original cost
when sold.

<PAGE>

HISTORY SINCE INCEPTION

The following table details the share accumulation history of an initial
investor in the Fund who reinvested all distributions and participated fully in
the rights offering. By reinvesting all distributions and fully participating in
the rights offering, an investor maximizes his returns. This table should be
read in conjunction with the Financial Review of the Fund (see page 8).

<TABLE>
<CAPTION>
Amount Purchase NAV MKT
History Invested Price Shares Value Value
------- -------- -------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
12/14/93 Initial Purchase $7,500 $7.500 1,000 $ 7,250 $ 7,500

10/28/94 Rights Offering 1,400 7.000 200

12/19/94 Distribution $.05 6.750 9 $ 9,163* $ 8,462*

12/07/95 Distribution $.36 7.500 58
- --------------------------------------------------------------------------------------------
12/31/95 $8,900 1,267 $11,264 $10,136
- --------------------------------------------------------------------------------------------
</TABLE>

* Value as of December 31, 1994.

The Board of Directors has given the Fund's management the discretionary
authority to cause the Fund to repurchase up to 300,000 shares of its common
stock in transactions through December 31, 1996. Such repurchases would be
effected at a price per share less than the then current net asset value, but
not in excess of the then prevailing market price.

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

The Board of Directors of the Fund is authorized to offer stockholders an
opportunity to subscribe for additional shares of common stock of the Fund
through rights offerings at a price per share that may be less than the then
current net asset value of the Fund's common stock. The timing and terms of any
such offerings are left to the Board's discretion.

<PAGE>

DISTRIBUTION REINVESTMENT AND CASH PURCHASE PLAN

WHAT IS THE DISTRIBUTION REINVESTMENT AND CASH PURCHASE PLAN?

Distributions of net investment income, if any, and capital gains are
normally made in December. The Fund's Distribution Reinvestment and Cash
Purchase Plan (the 'Plan') offers you an automatic way to reinvest your
dividends and capital gains distributions in additional shares of the Fund,
increasing your holdings in the Fund. Reinvestment of the annual distribution is
done at market price, without commissions. The number of shares to be issued to
a stockholder will be determined by dividing the amount of the distribution
payable to the stockholder by the last reported sale price of a share of the
Fund's common stock on the valuation date, which follows the record date.

The Plan also allows registered stockholders to make optional cash
investments in shares of the Fund's common stock through the Plan Agent and to
deposit certificates representing Fund shares with the Plan Agent for
safekeeping. Registered stockholders should refer to the Plan document for
information on these options.

HOW DO REGISTERED STOCKHOLDERS PARTICIPATE IN THE PLAN?

If your shares are registered directly with the Fund, you are automatically
a participant in the Plan unless you have instructed the Plan Agent in writing
otherwise. The Plan Agent must receive the instructions not less than 10 days
prior to the record date for a distribution in order to be effective for that
distribution. A registered stockholder may also receive the distribution in the
form of a stock certificate for the full shares and a check for the fractional
share if the Plan Agent is properly notified. Stockholders who elect to not
participate in the Plan will receive all distributions in cash, paid by check
and mailed directly to the stockholder by State Street Bank and Trust Company,
dividend paying agent and Plan Agent.

WHAT IF MY SHARES ARE HELD BY A BROKERAGE FIRM, BANK OR OTHER NOMINEE?

If your shares are held in the name of a brokerage firm, bank, or other
nominee as the stockholder of record, we still expect them to automatically
reinvest distributions on your behalf. Please consult with your brokerage firm,
bank or other nominee to be certain that it is reinvesting distributions on your
behalf. If your nominee is unable to reinvest distributions on your behalf, you
should instruct your nominee to have your shares registered in your name in
order to participate.

HOW WILL I KNOW HOW MANY SHARES I HAVE?

The Plan Agent maintains the account for registered stockholders in the
Plan and sends written confirmation of all transactions in the account,
including information needed by participants for personal and tax records.
Shares in the account of each participant will be held by the Plan Agent in
non-certificated form in the name of the participant, and each participant will
be able to vote those shares at a shareholder meeting or by proxy. A participant
may also send other stock certificates held by them to the Plan Agent to be held
in non-certificated form. There is no service fee charged to participants for
reinvesting distributions. The Plan Agent's fees for the processing of the
distribution reinvestment are paid for by the Fund. A participant may terminate
his account under the Plan by written notice to the Plan Agent. Termination will
be effective as described in the Plan. If a participant elects to sell his
shares before the Plan is terminated, the Plan Agent will deduct a $2.50 fee
plus brokerage commissions from the sale transaction. If a nominee is the
registered owner of your shares, the nominee will maintain the accounts on your
behalf.

WHAT IF I NEED MORE INFORMATION?

You may obtain more detailed information by requesting a copy of the Plan
from the Plan Agent. All correspondence (including notifications) should be
directed to: Royce Micro-Cap Trust, Inc. Distribution Reinvestment and Cash
Purchase Plan, c/o State Street Bank and Trust Company, PO Box 8200, Boston MA
02266-8200, (800) 426-5523.

<PAGE>

<PAGE>
PORTFOLIO SUMMARY

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

PORTFOLIO COMPOSITION

<TABLE>
<CAPTION>
Value % of Net Assets
--------------- ---------------
<S> <C> <C>
Common Stocks..................................................... $ 94,530,786 94.5%
Preferred Stocks.................................................. 598,375 0.6
Cash & Other Net Assets........................................... 4,936,205 4.9
--------------- -------
Total Net Assets.................................................. $ 100,065,366 100.0%
--------------- -------
--------------- -------
</TABLE>

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

PORTFOLIO DIAGNOSTICS

<TABLE>
<CAPTION>
<S> <C>
Weighted Average Market Capitalization (Total Portfolio)........... $150 Million
Median Market Capitalization (Total Portfolio)..................... $109 Million
Weighted Average P/E Ratio (100 Largest Positions)................. 13.2x
Weighted Average P/B Ratio (100 Largest Positions)................. 1.6x
Weighted Average Portfolio Yield (100 Largest Positions)........... 1.3%
</TABLE>

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

COMMON STOCK SECTORS

<TABLE>
<CAPTION>
% of Net Assets
---------------
<S> <C>
Industrial Cyclicals............................................... 23.3%
Financial.......................................................... 16.1
Services........................................................... 12.7
Consumer Durables.................................................. 11.9
Energy............................................................. 10.1
Retail............................................................. 8.0
Technology......................................................... 7.6
Consumer Staples................................................... 2.8
Health............................................................. 1.5
Utilities.......................................................... 0.5
</TABLE>

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

TOP TWENTY POSITIONS

<TABLE>
<CAPTION>
Value % of Net Assets
--------------- ---------------
<C> <S> <C> <C>
1 Conso Products Co. ........................................... $ 1,535,738 1.5%
2 The Dress Barn Inc. .......................................... 1,401,263 1.4
3 Trenwick Group Inc. .......................................... 1,383,750 1.4
4 Tide West Oil Company......................................... 1,270,625 1.3
5 Tom Brown, Inc. .............................................. 1,216,800 1.2
6 Florida Rock Industries, Inc. ................................ 1,216,800 1.2
7 Juno Lighting, Inc. .......................................... 1,184,000 1.2
8 The Rival Company............................................. 1,174,838 1.2
9 Ash Grove Cement Company...................................... 1,150,000 1.1
10 Richardson Electronics, Ltd. ................................. 1,130,900 1.1
11 Chemfab Corporation........................................... 1,129,800 1.1
12 DUFF & PHELPS CREDIT RATING CO. .............................. 1,101,125 1.1
13 Frozen Food Express Industries, Inc. ......................... 1,093,750 1.1
14 Life Technologies, Inc. ...................................... 1,051,850 1.1
15 Dreco Energy Services Ltd. Cl. A.............................. 1,047,250 1.0
16 Matthews International Corporation Cl. A ..................... 1,033,500 1.0
17 Landauer, Inc. ............................................... 1,022,250 1.0
18 Vallen Corporation............................................ 981,250 1.0
19 Penn Engineering and Manufacturing Corp. ..................... 970,000 1.0
20 Oshkosh Truck Corporation Cl. B............................... 943,975 0.9
</TABLE>

<PAGE>

<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

<PAGE>
ROYCE
MICRO-CAP
TRUST, INC.

FINANCIAL STATEMENTS

<PAGE>

<PAGE>
ROYCE MICRO-CAP TRUST, INC.
SCHEDULE OF INVESTMENTS AT DECEMBER 31, 1995
- --------------------------------------------------------------------------------
COMMON STOCKS -- 94.5%
<TABLE>
<CAPTION>
Value
Shares (Note 1)
<C> <S> <C>
CONSUMER DURABLES -- 11.9%
153,300 *Aldila, Inc. ................. $ 651,525
21,625 Allen Organ Company Cl. B..... 910,953
23,107 *Bell Industries, Inc. ........ 519,908
28,400 First Years Inc. ............. 617,700
53,200 Garan Incorporated............ 897,750
6,200 Johnson Worldwide Associates,
Inc. Cl. A.................. 139,500
74,000 Juno Lighting, Inc. .......... 1,184,000
34,100 Justin Industries, Inc. ...... 375,100
15,000 K-Swiss Inc. Cl. A............ 163,125
42,000 *Kit Manufacturing Co. ........ 588,000
96,140 *Lifetime Hoan Corporation..... 889,295
15,700 *Marisa Christina,
Incorporated................ 266,900
53,000 Matthews International
Corporation Cl. A........... 1,033,500
10,000 *Maxwell Shoe Company Inc. Cl.
A........................... 55,000
11,900 McRae Industries, Inc. Cl.
A........................... 92,225
1,000 *Piercing Pagoda, Inc. ........ 18,000
22,200 Rauch Industries, Inc. ....... 280,275
53,100 The Rival Company............. 1,174,838
61,500 *River Oaks Furniture.......... 384,375
28,200 *The Sirena Apparel Group,
Inc. ....................... 176,250
4,100 Skyline Corporation........... 85,075
10,000 Thomaston Mills, Inc. Cl. A... 126,250
9,500 Thor Industries, Inc. ........ 184,063
25,000 *The Topps Company, Inc. ...... 128,125
10,000 Wellco Enterprises, Inc. ..... 150,000
19,600 Weyco Group, Inc. ............ 769,300
------------
11,861,032
------------
CONSUMER STAPLES -- 2.8%
5,200 Alico, Inc. .................. 136,500
2,000 Farmer Bros. Co. ............. 273,000
80,600 Golden Enterprises, Inc. ..... 654,875
22,500 *Jean-Philippe Fragrances,
Inc. ....................... 182,813
5,000 Kleinert's Inc. .............. 87,500
37,100 The Smithfield Companies,
Inc. ....................... 435,925
11,000 Velcro Industries N.V. ....... 673,750
20,000 WLR Foods, Inc. .............. 330,000
------------
2,774,363
------------
ENERGY -- 10.1%
60,500 *Alamco, Inc. ................. 487,781
28,500 *American Oilfield Divers,
Inc. ....................... 203,063
50,000 *Belden & Blake Corporation.... 875,000
30,000 Berry Petroleum Company Cl.
A........................... 303,750
83,200 *Tom Brown, Inc. .............. 1,216,800
62,800 *Cliffs Drilling Company....... 934,150
59,000 *Dreco Energy Services Ltd.
Cl. A ...................... 1,047,250
128,000 *Equity Oil Company............ 752,000
20,100 *Global Industries, Ltd. ...... 603,000
36,000 *Gulfmark International
Inc. ....................... 891,000

<CAPTION>
Value
Shares (Note 1)
<C> <S> <C>
40,000 Lufkin Industries, Inc. ...... $ 905,000
15,400 *McFarland Energy, Inc. ....... 117,425
95,000 *Tide West Oil Company......... 1,270,625
58,600 *Tucker Drilling Co., Inc. .... 483,450
------------
10,090,294
------------
FINANCIAL -- 16.1%
10,000 *Allied Capital Advisers,
Inc. ....................... 53,125
42,300 ALLIED Life Financial
Corporation................. 766,688
29,400 BHI Corporation............... 463,050
53,024 Baldwin & Lyons, Inc. Cl. B... 861,640
20,000 *Benson Financial
Corporation................. 375,000
25,800 E.W. Blanch Holdings, Inc. ... 603,075
34,210 Capitol Transamerica
Corporation................. 692,753
10,000 *Danielson Holding
Corporation................. 68,750
26,300 *Desert Community Bank......... 381,350
21,600 Eaton Vance Corp. ............ 610,200
41,300 *Gryphon Holdings Inc. ........ 795,025
25,200 *Hanmi Bank.................... 207,900
60,300 Hilb, Rogal & Hamilton
Company..................... 806,513
40,000 Independence Holding
Company..................... 150,000
46,200 Intercargo Corporation........ 462,000
11,045 Investors Financial Services
Corp. ...................... 229,184
1,162 Investors Financial Services
Corp. Cl. A................. 24,113
22,000 Iron and Glass Bancorp,
Inc. ....................... 803,000
12,900 Lawyers Title Corporation..... 246,713
24,350 *MAIC Holdings, Inc. .......... 827,900
82,900 Nobel Insurance Limited....... 942,988
35,375 Oriental Federal Savings
Bank........................ 583,688
18,000 PXRE Corporation.............. 477,000
46,500 Pennsylvania Manufacturers
Corporation Cl. A........... 848,624
5,000 *Philadelphia Consolidated
Holding Corp. .............. 81,250
30,200 Piper Jaffray Companies
Inc. ....................... 415,250
9,000 Poe & Brown, Inc. ............ 223,875
81,250 *Rand Capital Corporation...... 284,375
45,000 Southwest Securities Group,
Inc. ....................... 500,625
6,510 Titan Holdings, Inc. ......... 93,581
35,900 Transnational Re Corporation
Cl. A....................... 879,550
24,600 Trenwick Group Inc. .......... 1,383,750
------------
16,142,535
------------
HEALTH -- 1.5%
11,600 Diagnostic Products
Corporation................. 439,350
38,600 Life Technologies, Inc. ...... 1,051,850
------------
1,491,200
------------
INDUSTRIAL CYCLICALS -- 23.3%
25,300 Aceto Corporation............. 404,800
2,000 *Ag-Chem Equipment Co.,
Inc. ....................... 54,000
</TABLE>

The accompanying notes are an integral part of the financial statements.
14

<PAGE>

<PAGE>
ROYCE MICRO-CAP TRUST, INC.
SCHEDULE OF INVESTMENTS AT DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Shares (Note 1)
<C> <S> <C>
INDUSTRIAL CYCLICALS-(CONT'D)
24,600 American Filtrona
Corporation................. $ 848,700
23,200 *Art's-Way Manufacturing Co.,
Inc. ....................... 121,800
10,000 Ash Grove Cement Company...... 1,150,000
41,200 Guy F. Atkinson Company of
California.................. 412,000
42,100 BHA Group, Inc. Cl. A......... 557,825
19,300 *Bird Corp. ................... 89,263
57,100 Blessings Corporation......... 592,413
53,800 *Chemfab Corporation........... 1,129,800
84,150 *Conso Products Co. ........... 1,535,738
6,400 Curtiss-Wright Corporation.... 344,000
30,000 *Detection Systems, Inc. ...... 176,250
40,100 *Devcon International
Corp. ...................... 320,800
239,900 *DeVlieg-Bullard, Inc. ........ 539,775
41,600 Florida Rock Industries,
Inc. ....................... 1,216,800
22,600 Gilbert Associates, Inc. Cl.
A........................... 282,500
67,100 Hawkins Chemical, Inc. ....... 620,675
42,000 *C. H. Heist Corp. ............ 294,000
30,625 *Hirsch International Corp.
Cl. A....................... 390,469
35,800 *Insituform Technologies,
Inc. ....................... 416,175
27,900 International Aluminum
Corporation................. 802,125
5,000 *International Imaging
Materials, Inc. ............ 126,250
57,100 Lilly Industries, Inc. Cl.
A........................... 728,025
170,000 *MK Gold Company............... 425,000
12,359 MacDermid, Incorporated....... 735,361
2,700 Paul Mueller Company.......... 92,475
27,000 NN Ball and Roller, Inc. ..... 472,500
61,900 Oshkosh Truck Corporation Cl.
B........................... 943,975
21,600 Peerless Mfg. Co. ............ 202,500
15,000 *Pegasus Gold Inc. ............ 208,125
10,000 Penn Engineering and
Manufacturing Corp. ........ 970,000
31,100 *Perini Corporation............ 256,575
470 *Pioneer Metals, Inc. ......... 94,000
20,700 Puerto Rican Cement Company,
Inc. ....................... 685,688
1,000 Roto-Rooter, Inc. ............ 33,000
26,000 *Shiloh Industries, Inc. ...... 323,375
60,300 *Simpson Manufacturing Co.,
Inc. ....................... 814,050
5,000 The L. S. Starrett Company Cl.
A........................... 129,375
98,500 *Steel of West Virginia,
Inc. ....................... 911,125
65,000 *Thermal Industries, Inc. ..... 585,000
17,700 *Todd Shipyards Corporation.... 103,988
31,000 Treadco, Inc. ................ 178,250
16,000 *The Turner Corporation........ 134,000
4,700 Tuscarora Incorporated........ 113,975
17,900 *UNC, Inc. .................... 107,400
50,000 *Vallen Corporation........... 981,250
37,900 Versa Technologies, Inc. ..... 577,975
<CAPTION>
Value
Shares (Note 1)
<C> <S> <C>
10,030 *Wedco Technology, Inc. ....... $ 131,644
------------
23,364,789
------------
SERVICES -- 12.7%
7,000 ABM Industries Incorporated... 194,250
53,400 *Ag Services Of America,
Inc. ....................... 507,300
18,350 Air Express International
Corporation................. 422,050
56,500 *Allwaste, Inc. ............... 268,375
17,900 AMRESCO Holdings, Inc. ....... 228,225
59,200 *Jenny Craig, Inc. ........... 584,600
24,100 Dames & Moore................. 292,213
76,600 DUFF & PHELPS CREDIT RATING
CO. ........................ 1,101,125
42,900 Ennis Business Forms, Inc. ... 525,525
10,000 Expediters International of
Washington, Inc. ........... 261,250
22,700 *FRP Properties, Inc. ......... 465,350
180,900 *FCA International Ltd. ....... 411,184
125,000 Frozen Food Express
Industries, Inc. ........... 1,093,750
3,000 Grey Advertising Inc. ........ 600,000
7,200 *Hornbeck Offshore Services,
Inc. ....................... 141,300
22,500 *IHOP Corp. ................... 585,000
12,300 Jackpot Enterprises, Inc. .... 142,988
11,000 Kenan Transport Company....... 236,500
10,000 Lawson Products, Inc. ........ 245,000
44,900 Merrill Corporation........... 718,400
35,500 *Nichols Research
Corporation................. 914,125
53,000 *Offshore Logistics, Inc. ..... 669,125
18,500 Plenum Publishing
Corporation................. 721,500
2,000 REFAC Technology Development
Corporation................. 13,250
105,200 Richardson Electronics,
Ltd. ....................... 1,130,900
34,300 *Steck-Vaughn Publishing
Corporation................. 252,963
------------
12,726,248
------------
TECHNOLOGY -- 7.6%
21,500 BGS Systems, Inc. ............ 795,500
21,000 *CSP Inc. ..................... 189,000
29,300 *Comptek Research, Inc. ....... 247,219
11,600 *Continental Circuits
Corp. ...................... 188,500
10,800 *Dionex Corporation............ 612,900
45,100 *Exar Corporation.............. 665,225
19,300 *Figgie International Inc. Cl.
A........................... 200,238
21,300 *Figgie International Inc. Cl.
B........................... 218,325
40,482 *Giga-tronics Incorporated..... 318,796
18,750 Hach Company.................. 323,438
56,000 *ILC Technology, Inc. ......... 518,000
15,400 *Integral Systems, Inc. ....... 392,700
19,400 Kaman Corporation Cl. A....... 215,825
47,000 Landauer Inc. ................ 1,022,250
10,000 *Liberty Technologies,
Inc. ....................... 50,000
</TABLE>

The accompanying notes are an integral part of the financial statements.
15

<PAGE>

PREFERRED STOCKS -- 0.6%
12,250 Bird Corp. $1.85 Conv. ....... $ 232,750
12,500 Sterling Financial Corporation
$1.8125 Conv. Cum. ......... 365,625
------------
Total Preferred Stocks
(Cost $514,977)............. 598,375
------------
REPURCHASE AGREEMENT -- 6.0%
State Street Bank and Trust Company, 5.25%
due 1/02/96, collateralized by U.S.
Treasury Bond, 7.25% due 5/15/16, valued
at $6,144,936 (Cost $6,024,000)......... 6,024,000
------------
TOTAL INVESTMENTS -- 101.1%
(COST $82,869,826)...................... 101,153,161
LIABILITIES LESS CASH AND OTHER
ASSETS -- (1.1%)........................ (1,087,795)
------------
NET ASSETS -- 100.0%...................... $100,065,366
------------
------------
</TABLE>

* Non-income producing security.

INCOME TAX INFORMATION -- The cost of total investments for federal income tax
purposes was $82,990,854. At December 31, 1995, net unrealized appreciation for
all securities was $18,162,307, consisting of aggregate gross unrealized
appreciation of $20,018,111 and aggregate gross unrealized depreciation of
$1,855,804.

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

<PAGE>

<PAGE>
ROYCE MICRO-CAP TRUST, INC.
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
December 31, 1995
-----------------
<S> <C>
ASSETS:
Investments in securities, at value (identified cost $82,869,826)...................... $ 101,153,161
Receivable for dividends and interest.................................................. 149,717
Receivable for investments sold........................................................ 17,972
Deferred organizational costs and other assets......................................... 45,406
-----------------
Total Assets...................................................................... 101,366,256
-----------------
LIABILITIES:
Payable for investments purchased...................................................... 1,140,777
Payable for investment advisory fees................................................... 38,080
Payable for administration fees........................................................ 16,476
Accrued expenses....................................................................... 105,557
-----------------
Total Liabilities................................................................. 1,300,890
-----------------
Net Assets........................................................................ $ 100,065,366
-----------------
-----------------
ANALYSIS OF NET ASSETS:
Undistributed net investment income.................................................... $ 25,441
Accumulated net realized gain on investments........................................... 461,617
Net unrealized appreciation on investments............................................. 18,283,335
Capital stock.......................................................................... 11,258
Additional paid-in capital............................................................. 81,283,715
-----------------
Net Assets........................................................................ $ 100,065,366
-----------------
-----------------
PRICING OF SHARES:
Net asset value per share
($100,065,366[div]11,258,010 shares outstanding)..................................... $8.89
-----
-----
</TABLE>

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

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

<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1995 December 31, 1994
----------------- -----------------
<S> <C> <C>
INVESTMENT ACTIVITIES:
Net investment income........................................ $ 243,167 $ 156,686
Net realized gain on investments............................. 4,317,779 229,922
Net change in unrealized appreciation on investments......... 14,101,960 3,785,535
----------------- -----------------
Total from investment activities........................ 18,662,906 4,172,143
----------------- -----------------
DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income........................................ (217,726) (216,571)
Net realized gain on investments............................. (3,701,343) (324,856)
----------------- -----------------
Total from dividends and distributions.................. (3,919,069) (541,427)
----------------- -----------------
CAPITAL STOCK TRANSACTIONS:
Adjustments to additional paid-in capital.................... -- 30,315
Proceeds from rights offering................................ -- 7,356,629
Dividend and distribution reinvestment....................... 2,787,701 389,916
----------------- -----------------
Total capital stock transactions........................ 2,787,701 7,776,860
----------------- -----------------
NET INCREASE IN NET ASSETS........................................ 17,531,538 11,407,576
NET ASSETS:
Beginning of year............................................ 82,533,828 71,126,252
----------------- -----------------
End of year (including undistributed net investment income of
$25,441 at December 31, 1995).............................. $ 100,065,366 $82,533,828
----------------- -----------------
----------------- -----------------
</TABLE>

The accompanying notes are an integral part of the financial statements.
17

<PAGE>

<PAGE>
ROYCE MICRO-CAP TRUST, INC.
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended
December 31, 1995
-----------------
<S> <C>
INVESTMENT INCOME:
Dividends......................................................................... $ 1,224,719
Interest.......................................................................... 269,778
-----------------
Total Income................................................................. 1,494,497
-----------------
EXPENSES:
Investment advisory fees.......................................................... 715,911
Administration fees............................................................... 186,625
Custodian and transfer agent fees................................................. 75,612
Shareholder reports............................................................... 65,725
Legal and auditing fees........................................................... 60,036
Postage and supplies.............................................................. 55,733
Administrative and clerical services.............................................. 39,225
Directors' fees................................................................... 30,140
Organizational expenses........................................................... 13,860
Facilities and office space....................................................... 11,341
Fee waived by investment adviser.................................................. (2,878)
-----------------
Total Expenses............................................................... 1,251,330
-----------------
Net Investment Income........................................................ 243,167
-----------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments.................................................. 4,317,779
Net change in unrealized appreciation on investments.............................. 14,101,960
-----------------
Net realized and unrealized gain on investments................................... 18,419,739
-----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... $18,662,906
-----------------
-----------------
</TABLE>

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

<PAGE>

<PAGE>
ROYCE MICRO-CAP TRUST, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
Year Ended For the Period
December 31, December 14, 1993*
------------------- through
1995 1994 December 31, 1993
-------- ------- ------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......................... $ 7.58 $ 7.27 $ 7.25
-------- ------- -------
FROM INVESTMENT ACTIVITIES:
Net investment income...................................... 0.02 0.01 --
Net realized and unrealized gain on investments............ 1.69 0.41 0.02
-------- ------- -------
Total from investment activities........................ 1.71 0.42 0.02
-------- ------- -------
DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income...................................... (0.02) (0.02) --
Net realized gain on investments........................... (0.34) (0.03) --
-------- ------- -------
Total dividends and distributions....................... (0.36) (0.05) --
-------- ------- -------
CAPITAL STOCK TRANSACTIONS:
Effect of reinvestment of distributions.................... (0.04) -- --
Effect of rights offering.................................. -- (0.06) --
-------- ------- -------
Total capital stock transactions........................ (0.04) (0.06) --
-------- ------- -------
NET ASSET VALUE, END OF PERIOD............................... $ 8.89 $ 7.58 $ 7.27
-------- ------- -------
-------- ------- -------
MARKET VALUE, END OF PERIOD.................................. $ 8.00 $ 7.00 $ 7.50
-------- ------- -------
-------- ------- -------
TOTAL RETURN:(a)
Net Asset Value............................................ 22.9% 6.0% 0.3%
Market Value............................................... 19.8% (5.1)% 0.0%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period in thousands....................... $100,065 $82,534 $71,126
Ratio of Expenses to Average Net Assets (including management
fee)....................................................... 1.36% 1.88% 1.92%(b)**
Ratio of Management Fee to Average Net Assets................ 0.77% 1.20% 0.0%
Ratio of Net Investment Income (Loss) to Average Net
Assets..................................................... 0.26% 0.21% (0.06)%(b)**
Portfolio Turnover Rate...................................... 51% 23% 0%
</TABLE>

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

* Commencement of operations.
** Annualized.
(a) The Net Asset Value and Market Value Total Returns assume a continuous
stockholder who reinvested all net investment income dividends and capital
gain distributions and fully participated in primary rights offerings.
(b) Presented after waiver by the Investment Adviser and Administrator. For the
period ended December 31, 1993, the ratios of expenses and net investment
loss to average net assets would have been 2.12% and (.26)%, respectively,
absent such waivers.

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

<PAGE>

<PAGE>
ROYCE MICRO-CAP TRUST, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Royce Micro-Cap Trust, Inc. (the 'Fund'), formerly named Royce OTC
Micro-Cap Fund, Inc., is a closed-end, diversified management investment company
registered under the Investment Company Act of 1940 and was incorporated under
the laws of the State of Maryland on September 9, 1993. The Fund commenced
operations on December 14, 1993.

Valuation of Investments:

Securities listed on an exchange or on the Nasdaq National Market System
are valued on the basis of 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 Fund's Board of Directors. 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.

Investment Transactions and Related Investment Income:

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

Taxes:

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

Dividends and Distributions:

Dividends and capital gains 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 reclassifications to additional paid-in
capital and may affect net investment income per share. Undistributed net
investment income may include temporary book and tax basis differences which
will reverse in a subsequent period. Any taxable income or gain remaining at
fiscal year end will be distributed in the following year.

Repurchase Agreements:

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

<PAGE>

<PAGE>
ROYCE MICRO-CAP TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------

Organizational Expenses:

Costs of $70,000 incurred by the Fund in connection with its organization
have been deferred and are being amortized on a straight line basis over a five
year period from the date the Fund commenced operations.

NOTE 2. INVESTMENT ADVISORY AGREEMENT:

Under the Investment Advisory Agreement between Quest Advisory Corp.
('Quest') and the Fund, the Basic Fee is a monthly fee equal to 1/12 of 1% (1%
on an annualized basis) of the average of the net assets of the Fund at the end
of each month included in the applicable performance period, which is a rolling
period of up to 36 months, beginning January 1, 1994 and ending with the most
recent calendar month.

The Basic Fee for such monthly period may be increased or decreased,
depending on the extent, if any, by which the investment performance of the Fund
exceeds by more than 2 percentage points, or is exceeded by more than 2
percentage points, by the percentage change in the investment record of the
Nasdaq Composite Index (the 'Index') for the performance period.

The maximum increase or decrease in the Basic Fee for any month may not
exceed 1/12 of 0.5%. Accordingly, for each month, the maximum fee rate as
adjusted for performance is 1/12 of 1.5% and would be payable if the investment
performance of the Fund exceeds the percentage change in the investment record
of the Index by 12 or more percentage points for the performance period. The
minimum fee rate as adjusted for performance is 1/12 of 0.5% and would be
payable if the percentage change in the investment record of the Index exceeds
the investment performance of the Fund by 12 or more percentage points for the
performance period.

For the year ended December 31, 1995, the Fund paid Quest advisory fees
totaling $713,033, which is net of $2,878 voluntarily waived by Quest.

NOTE 3. ADMINISTRATION AGREEMENT:

Under the Administration Agreement with the Fund, Mitchell Hutchins Asset
Management Inc. (the 'Administrator') serves as the Fund's Administrator. The
Administrator performs or assists in certain aspects of the Fund's operations.
Under the terms of the Administration Agreement, a monthly administration fee is
paid to the Administrator at an annual rate of 0.20% of the Fund's average net
assets.

NOTE 4. CAPITAL STOCK:

At December 31, 1995, there were 150,000,000 shares of common stock, $0.001
par value, authorized. Capital stock transactions for the years ended December
31, 1995 and 1994 were as follows:

<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1995 December 31, 1994
--------------------- -----------------------
Shares Amount Shares Amount
------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Adjustments to additional paid-in capital.......... -- -- -- $ 30,315
Proceeds from rights offering...................... -- -- 1,039,756 7,356,629
Dividend and distribution reinvestment............. 371,693 $2,787,701 57,765 389,916
</TABLE>

<PAGE>

<PAGE>
ROYCE MICRO-CAP TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------

During the quarter ended December 31, 1994, the Fund completed a rights
offering of 1,039,756 shares to its stockholders at the rate of one share for
each five rights held by stockholders of record on September 28, 1994. These
shares were priced at $7.00, which was $.125 below the highest reported bid
price for a share of the Fund's Common Stock on the Nasdaq National Market on
October 31, 1994. Thirty-eight percent of the offering was subscribed for
through primary subscription. The remaining shares were purchased by those
stockholders who subscribed with their primary rights and who also elected to
purchase additional shares using over-subscription rights.

NOTE 5. PURCHASES AND SALES OF SECURITIES:

For the year ended December 31, 1995, the cost of purchases and the
proceeds from the sales of investment securities, excluding short-term
securities, amounted to $44,015,753 and $45,206,915, respectively.

NOTE 6. QUARTERLY RESULTS OF OPERATIONS: (UNAUDITED)

<TABLE>
<CAPTION>
Net Realized Net Increase
and Unrealized (Decrease) in Net
Net Investment Gain (Loss) on Assets Resulting
Income (Loss) Investments from Operations
--------------- ----------------- -----------------
Total Per Total Per Total Per
Quarter Ended (000) Share (000) Share (000) Share
- ---------------------------------------------- ----- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1995............................. $ 159 $ 0.01 $ 137 $ 0.01 $ 296 0.02
September 30, 1995............................ 122 0.01 7,825 0.72 7,947 0.73
June 30, 1995................................. (22) (0.00) 6,541 0.60 6,519 0.60
March 31, 1995................................ (16) (0.00) 3,917 0.36 3,901 0.36
----- ------ ------- ------ ------- ------
Totals................................... $ 243 $ 0.02 $18,420 $ 1.69 $18,663 1.71
----- ------ ------- ------ ------- ------
----- ------ ------- ------ ------- ------

December 31, 1994............................. $ (6) $(0.00) $ (125) $(0.01) $ (131) $(0.01)
September 30, 1994............................ (57) (0.01) 3,640 0.37 3,583 0.36
June 30, 1994................................. 23 0.00 80 0.01 103 0.01
March 31, 1994................................ 197 0.02 420 0.04 617 0.06
----- ------ ------- ------ ------- ------
Totals................................... $ 157 $ 0.01 $ 4,015 $ 0.41 $ 4,172 $ 0.42
----- ------ ------- ------ ------- ------
----- ------ ------- ------ ------- ------
</TABLE>

At the Special Meeting of Stockholders held on November 28, 1995, Fund
stockholders approved changes in the Fund's fundamental investment policies
concerning the issuance of senior securities and the borrowing of money and in
its fundamental investment policy concerning loans to permit the Fund to lend
its portfolio securities, as follows:

<TABLE>
<CAPTION>
VOTES VOTES CAST VOTES
PROPOSALS CAST FOR AGAINST ABSTAINED
- ---------------------------------------------------- --------- ---------- ---------
<S> <C> <C> <C>
Change in investment policy concerning senior
securities and borrowing 4,877,651 570,886 235,880

Change in investment policy concerning portfolio
securities lending 5,100,759 390,614 193,043
</TABLE>

<PAGE>

<PAGE>
ROYCE MICRO-CAP TRUST, INC.
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ROYCE MICRO-CAP TRUST, INC.

We have audited the accompanying statement of assets and liabilities of
Royce Micro-Cap Trust, Inc. as of December 31, 1995, including the schedule of
investments and the related statement of operations and changes in net assets
and the financial highlights for the year 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 audit. The financial statements of Royce
Micro-Cap Trust, Inc. for the year ended December 31, 1994 and the financial
highlights for the year ended December 31, 1994 and the period ended December
31, 1993, were audited by other auditors whose report dated February 13, 1995,
expressed an unqualified opinion on those statements.

We conducted our audit 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 securities owned as of
December 31, 1995, by correspondence with 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 audit provides a reasonable basis for our
opinion.

In our opinion, the 1995 financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Royce Micro-Cap Trust, Inc. as of December 31, 1995, the results of
its operations, changes in its net assets, and the financial highlights for the
year then ended, in conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

New York, New York
February 12, 1996

<PAGE>

OFFICERS
Charles M. Royce, President and Treasurer
Jack E. Fockler, Jr., Vice President
W. Whitney George, Vice President
Daniel A. O'Byrne, Vice President and
Assistant Secretary
Susan I. Grant, Secretary

INVESTMENT ADVISER
Quest Advisory Corp.
1414 Avenue of the Americas
New York, NY 10019

ADMINISTRATOR
Mitchell Hutchins Asset Management
1285 Avenue of the Americas
New York, NY 10019

INDEPENDENT ACCOUNTANTS
Ernst & Young LLP

CUSTODIAN, TRANSFER AGENT
AND REGISTRAR
State Street Bank and Trust Company

DIRECTORS
Thomas R. Ebright
Quest Advisory Corp., Vice President
Royce, Ebright & Associates, Inc., President

Richard M. Galkin
Richard M. Galkin Associates Inc.,
President

Stephen L. Isaacs
Columbia University Development Law and
Policy Program, Director; Attorney

David L. Meister
Communications Industry, Consultant

Charles M. Royce
Quest Advisory Corp., President

Royce Micro-Cap Trust, Inc.
Annual Report 1995
1414 Avenue of the Americas
New York, New York 10019
(800) 221-4268

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

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

GRAPHIC APPENDIX

On page 2 of the paper format Royce Micro-Cap Trust report:
Picture of a man in a cape flying
Picture of Albert Einstein

On page 3 of the paper format Royce Micro-Cap Trust report:
A picture of a scale balancing a dollar sign and a factory
A picture of a man in a long white coat pointing with a pointer

On page 4 of the paper format Royce Micro-Cap Trust report:
A bullseye and A picture of a sad face

On page 5 of the paper format Royce Micro-Cap Trust report:
A picture of a boy daydreaming
A picture of two Stone-Age men building a rocket

On page 6 of the paper format Royce Micro-Cap Trust report:
A line graph showing the Dow Jones Industrial Average's performance from
December 1975 to December 1995

On page 7 of the paper format Royce Micro-Cap Trust report:
A picture of a happy alarm clock ringing