N-CSRS 1 e81944.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT
OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number: 811-07537

Name of Registrant: Royce Capital Fund

Address of Registrant: 1414 Avenue of the Americas
New York, NY 10019

Name and address of agent for service:   John E. Denneen, Esquire
    1414 Avenue of the Americas
    New York, NY 10019

Registrant’s telephone number, including area code: (212) 486-1445
Date of fiscal year end: December 31
Date of reporting period: January 1, 2007 - June 30, 2007



Item 1. Reports to Shareholders

 
     
 
Royce Capital Fund —
Micro-Cap Portfolio


Royce Capital Fund —
Small-Cap Portfolio

























 		 

SEMIANNUAL
REVIEW AND REPORT
 TO SHAREHOLDERS
   


 


    
   


 


    
   


 		    
     
 





www.roycefunds.com		  


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

Semiannual Review    
 
 
 
Performance and Expenses   2
 
Letter to Our Shareholders   3
 
 
Semiannual Report to Shareholders   10
 
 
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Performance and Expenses   Through June 30, 2007
 
      Average Annual Total Returns      
     
     
                  Since   Annual Operating
  Fund   1-Year   5-Year   10-Year Inception   Expenses
  Royce Capital Fund — Micro-Cap Portfolio   18.82 %   15.64 %   17.98%     17.50 %   (12/27/96)     1.31 %
  Royce Capital Fund — Small-Cap Portfolio   22.12     14.91    
15.54
     15.96     (12/27/96)     1.08 %
 
  Russell 2000   16.43     13.88    
9.06
   n/a     n/a  

Important Performance, Expense and Risk Information

All performance information in this Review reflects past performance, is presented on a total return basis and reflects the reinvestment of distributions. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Current performance may be higher or lower than performance quoted. The Fund’s total returns do not reflect any deduction for changes or expenses of the variable contracts of retirement plans investing in the Fund. Current month-end performance may be obtained at www.roycefunds.com. All performance, risk and expense information reflects results of each Fund’s Investment Class. Shares of the Funds’ Service Class bear an annual distribution expense that is not borne by the Funds’ Investment Class. Annual operating expenses reflect the Fund’s total annual operating expenses for the Investment Class of the Fund’s most current prospectus and include management fees and other expenses. The Royce Funds invest primarily in securities of mid-, small- and/or micro-cap companies that may involve considerably more risk than investments in securities of larger-cap companies (see “Primary Risks for Fund Investors” in the respective Prospectus). Please read the Prospectus carefully before investing or sending money. The Russell 2000 Index is an unmanaged index of domestic small capitalization stocks.
 
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Letter to Our Shareholders
Rolling Stone Blues

At first blush, the mid-point of 2007 looked very similar to the end of 2006. The economy’s condition was mostly positive, interest rates remained low and global liquidity levels remained flush following some vexing signs of contraction earlier in the year. The stock market kept moving mostly upwards, and the long bull market for small-caps in particular showed few signs of slowing down prior to July of this year. What’s new for 2007 is that larger companies have emerged in the short run as market leaders, though the margin of outperformance versus small-cap both year-to-date and for the one-year period ended June 30 was not enormous. Within small-cap, there has been a move toward larger, arguably higher-quality companies that’s distinct from the generally better returns achieved by more speculative issues in 2006. The overall direction remained positive for smaller companies, as it did for stocks as a whole. Equity investors continued to benefit from a remarkable run that included more of the overall market than is usually thought, small-cap having long since stolen the headlines from its larger peers as “The Only Asset Class Worth Owning” in some quarters.
   Like the Rolling Stones, the bull market just kept going and going and going, almost automatic in its overall upward movement, its success seemingly taken for granted, with so many investors sure that the big hits would not fade away. As value investors, prone to a cautious, if not pessimistic, temperament, this blissful confidence on the part of certain observers was the object of our skepticism. Our view for the past few years has been that the bull market was nearly out of time. Although the market has so far seen fit to prove us wrong (though July’s correction could be a sign of things to come), we remain convinced


One of the advantages of employing an all-weather strategy to select smaller company stocks is that we continue to do what we have always done regardless of the market’s behavior. When smaller company stock prices were on the rise, it was more challenging to find the compelling values that have always been our stock in trade, but the search goes on whether the overall small-cap market is moving up or down.
 
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Letter to Our Shareholders
     
that a more historically typical correction of 15% or better is in the near future for smaller companies. The positive-performance phase that began in the fall of 2002 was interrupted by only two corrections in the 10%-14% range—one in 2004-5 and another in 2006—and a handful of others that were shy of double digits. To paraphrase the poet, the course of true market cycles never did run smooth. At least not as smooth as this current cycle. And to us, this was a warning. As we saw in July, when stock prices fell harder than they did during any other month this year, things can change very quickly. Along with our belief in regression to the mean, our conviction that markets are inherently cyclical is too firm to counter any temptation to abandon the lessons of history.
 
  Over the past decade or so the
growth in the number and variety of
equity market indices has been
explosive. Russell, Standard & Poor’s
(“S&P”), Wilshire, and Barra have all
become accepted names in the equity
world with stables of various indices.
Considering the burgeoning number
and scope of equity market indices, it
is critical that investors better under-
stand the composition, attribution
and construction methodology among
similar equity market indices.

As the Standard & Poor’s 500
index recently celebrated its 50th
anniversary, we thought that it
might be helpful to delve into the
particulars of the more prominent
small-cap indices, and how we at The
Royce Funds view them. Two of the
most prominent are the Russell 2000
and the S&P SmallCap 600, both
widely accepted benchmarks for
small-cap equities. Yet each is differ-
ent in composition, attribution and
construction methodology.		    
     As active small-cap managers with large stakes throughout the small-cap universe, perhaps we should be more consistently happy with a market that before July had been gathering no moss and few, if any bears. Maybe we should try a little harder to relax and simply enjoy the good times. Make no mistake, we are mostly very pleased—and more than happy to reap the benefits of the robust returns that smaller stocks have been providing since the most recent small-cap market trough in October 2002. However, as the small-cap bull stampeded its way toward a fifth full year, we were also in the midst of our own 19th Nervous Breakdown (and at least as many bear market predictions) as we awaited what seemed to us an inevitable small-cap downturn. Even as the market was swaying to higher and higher levels, we could not escape the nagging and persistent reality that historically strong bull markets often give way to serious corrections, and the longer the good times last, the more likely it seems that the bear’s bite will be deep. Of course, one of the advantages of employing an all-weather strategy to select smaller company stocks is that we
  
 
  The Russell 2000 index is the oldest—
dating back to 1979—and broadest
of the two small-cap indices. It meas-
ures the performance of the 2,000
smallest companies in the Russell 3000
Index (which represents 99% of the

Continued on page 6...		    
continue to do what we have always done regardless of the market’s behavior. When smaller company stock prices were on the rise, it was more challenging to find the compelling values that have always been our stock in trade, but the search goes on whether the overall small-cap market is moving up or down.

It’s All Over Now
If our call for overall lower returns has not yet panned out, and our prediction of a small-cap correction has thus far proved at best premature, we can take a small measure of comfort for
  
           
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our forecasting acumen in the emergence of large-cap as a market leader, a development we thought first looked likely by the beginning of 2006. As usually happens, the case for large-cap leadership took on a certain inevitability only with the gift of hindsight. In 2005, the large-cap S&P 500 and the small-cap Russell 2000 finished the year with near-identical
 
 
results—the S&P 500 was up 4.9% while the Russell 2000 gained 4.6%. The large-cap index relinquished the performance crown in 2006 (+15.8% versus 18.4%), but small-cap regained its edge mostly through the courtesy of a torrid first quarter and a strong fourth quarter. In both 2006’s bearish second quarter and flat-to-down third quarter, the S&P 500 beat the Russell 2000, events we regarded as especially telling of a shift to large-cap leadership. That third-quarter outperformance (+5.7% versus +0.4%) was the key to giving the large-cap index an edge for the second half of 2006; it also contributed to large-cap outgaining small-cap for the one-year period ended 6/30/07, up 20.6% versus 16.4%.
   We have been less focused on the leadership issue within small-cap than we are in the wider worlds of small- and large-cap in part because we do not limit ourselves in the broad small-cap universe by attaching labels to stocks such as “value” or “growth.”
 
       Two thousand seven has been different in terms of its first-half performance patterns, yet the end result through the end of June showed the S&P 500 ahead of its small-cap counterpart. During this year’s first quarter, a period that was positive for almost every segment of the stock market save certain small-cap growth companies and many micro-cap stocks, the S&P 500 gained a paltry 0.6% versus 2.0% for the Russell 2000. (The Nasdaq Composite, meanwhile, managed a 0.3% gain.) The second quarter saw higher returns spread more consistently throughout the market. Large-cap led small-cap, with the S&P 500 up 6.3% versus 4.4% for its small-cap sibling, while the Nasdaq Composite led both indices with a gain of 7.5%. For the year-to-date period ended 6/30/07, the Nasdaq Composite actually led, its 7.8% gain ahead of the S&P 500’s 7.0% return and the Russell 2000’s 6.5% showing.
       These first-half results, as well as the large- and small-cap indices’ one-year returns, were consistent with our thought that when large-cap stocks did finally assume a leadership role, the margin of outperformance would be slight. We remain committed to the idea that large-cap’s stay at the top should be brief, as frequent leadership rotation seems likely to roll on. Considering the recent status of large-cap’s leadership, it should come as no surprise that the long-term performance edge remained with smaller companies. The Russell 2000 outpaced the S&P 500 for the three-, five-, 10- and 15-year periods ended 6/30/07. In addition, the small-cap index outgained its large-cap counterpart in two-thirds of the S&P 500’s positive quarters in each three-, five- and 10-year period ended 6/30/07.

Not Fade Away
During the first half, a similar shift in leadership arrived via a different route between value and growth within small-cap. The Russell 2000 Value index had maintained a near-
  

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  U.S. equity market) and accounts for
approximately 8% of the total market
capitalization of the larger Russell
index. As of the end of June 2007,
the median market cap of the Russell
2000 was $695 million. The largest
company by market cap in the index
was $3.3 billion and the smallest was
$125 million. Companies with market
capitalizations in excess of $2.5
billion represented 6% of the index,
while micro-caps, which Royce defines
as companies with market capital-
izations less than $500 million,
comprised roughly 13% of the index.
In terms of attribution, Financial
Services represented the largest
sector weight in the index at the end
of June 2007, at 22.6%. Industrials
(autos and transportation, materials
and processing and producer durable)
and Consumer Discretionary followed,
with weightings of 21.5% and
19.2%, respectively.

Introduced in 1994, the S&P
SmallCap 600 is more concentrated
than the Russell 2000, consisting of
600 names that cover approximately
3% of the domestic equity market.
The median market cap of the S&P
SmallCap 600 was $820 million as of
the end of June 2007. The largest
company by market cap in the index
was $5.0 billion and the smallest was
$70 million. Companies with more
than $2.5 billion in market cap
comprised approximately 7%, while
micro-caps represented 20% of the
overall index. Industrials (materials
and processing and producer durable)
represented the largest sector
weighting in the index at 19.1%,

 Continued on page 8...

    
Letter to Our Shareholders
     
stranglehold on small-cap leadership until the first quarter of 2007, when it slipped under the thumb of its small-cap growth sibling. During both the first quarter (+1.5% versus +2.5%) and second quarter (+2.3% versus +6.7%), the Russell 2000 Value index lost ground to the Russell 2000 Growth index. Interestingly for us, value also underperformed growth from the interim small-cap peak on 2/22/07 through 6/30/07, down 0.8% compared to a gain of 2.9%. This consistent underperformance, even during the year’s more volatile periods, not only put small-cap value in second place for the year-to-date period ended 6/30/07 (+3.8% versus +9.3%), it also cost small-cap value the performance edge for the most recent 12-month period. For the one-year period ended 6/30/07, the Russell 2000 Value index was up 16.1% versus 16.8% for the Russell 2000 Growth index.
     Paralleling the performance patterns of small-cap versus large-cap, the Russell 2000 Value index maintained its lead over the Russell 2000 Growth index for longer-term periods. It bested small-cap growth for the three-, five-, 10-,15-, 20- and 25-year periods ended 6/30/07. A critical element in this performance edge came from small-cap value’s better performance during the nearly five-year bull-market period following the small-cap market trough in October 2002, and from its superior results from the previous small-cap market peak on 3/9/00 through 6/30/07. What gives us some pause about the current period is the relative strength of small-cap growth in the more volatile period from that February 2007 interim peak. This is in stark contrast to 2006, a period in which small-cap value beat small-cap growth in up, down and more mixed quarters. However, we have been less focused on the leadership issue within small-cap than we are in the wider worlds of small- and large-cap in part because we do not limit ourselves in the broad small-cap universe by attaching labels to stocks such as “value” or “growth.”

You Can’t Always Get What You Want
Indeed, the reality of small-cap’s status as a permanent, professional asset class—something that we are happy to report does not seem likely to change, even in the event of a correction more severe than what we think is probable—cuts both ways for us. The popularity of ETF’s and other index-based investments has played an important role in helping small-cap to be taken more seriously as an asset class. We also think that the related success of small-cap value approaches has been a factor in this growing esteem because a large number of investors saw that you could invest in small-cap stocks or indices with attractively low volatility scores. However, this has also created new tests for our purchase habits, in which we seek high-quality companies selling for bargain prices.
     Unquestionably, in our view, the major player in the extension of the small-cap bull market has been the vast amount of global liquidity. The world has been awash with capital looking for a profitable home, and that’s been an enormous factor in keeping stock prices afloat.
 
           
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Many of the investment vehicles that have become increasingly better known—not just ETFs, but hedge funds, as well as merger and acquisition (M&A) and private equity activity—have been fueled to some degree by the large amounts of cash circling the globe. Global liquidity has worked to make M&A’s, leveraged buyouts and privatizations increasingly commonplace in the financial marketplace. The United States is in the midst of a mega-merger wave, with the number and size of the transactions exploding. During the first half of 2007, 15 companies in the S&P 500 announced takeovers, while 111 companies in the Russell 2000 had deals pending. Equally important, the trend has shown no signs of slowing down within the small-cap world.
     However mindful of the significance of these figures, we still do not believe that the extraordinary amount of global liquidity changes the rules of the road in the U.S. equity market, at least over the long run. Cyclicality remains the norm. Today’s small-cap market is no  different than large-cap was during the ’90s. Global liquidity has
     
 
extended a wonderful bull market, but it cannot save the market from  history, which means that sooner  or later, the  good  times  will  end.  Smaller  companies   have   been, and  will continue to be, the target of private equity funds
    
 
and larger companies flush with cash. Although it’s clear that M&A activity is not the primary driver of long-term performance, it has already had a hand in the extended run for a small-cap bull market. Yet once the bull market for acquisitions ends, the softening in demand could precipitate a more widespread correction in the very market whose bullish phase it helped to extend in the first place.

Time Is On Our Side
As we look forward, we almost find ourselves wishing for a serious, though short-lived, correction for smaller stocks.  We are  still buying  mostly on  short-term  dips,  which typically  do  not yield  the  sort of
  
We have never allowed our thoughts on the short- or intermediate-term forecasts for the market to cloud our stock selection process. Regardless of where we think the market
may be headed next, the search for great values in smaller stocks goes on...		  
 
absolute value that we would ideally prefer. Our goal is to be fully invested, but with purchase decisions becoming harder and harder, it has not been easy. Yet that is the reality of the current market (at least as of this writing), so we make
  
 		  

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followed by Information Technology
at 17.1%, and Financial Services at
15.8% at the end of June 2007.
    
Letter to Our Shareholders
     
 
  
  Another important difference between
the two indices is the respective
construction methodology. The S&P
SmallCap 600 is designed to be an
“efficient portfolio of companies that
meet specific inclusion criteria to
ensure that they are investable and
financially viable.” Inclusion in the
index is determined subjectively
by the S&P Index Committee, which
adds new stocks to the index based
not only on size, but also on financial
viability, liquidity, adequate float
size and other trading requirements.

In contrast, the Russell 2000
is more objective in nature; it has
no committee to determine
membership and stresses the need
to accurately represent the market
as it is. Kelly Haughton, strategic
director for the Russell Indices,
believes that “the market should
decide which stocks belong in an
index, especially if the index is to
provide an unbiased benchmark for
measuring the results of money
managers’ investment decisions.”

With differing composition, attribution
and construction, performance
can also vary dramatically. In fact,
examining the annual performance of
the two indices over the past 10
years shows that the spread has been
as wide as 1400 basis points in a
single calendar year. Still, we think
that the Russell 2000 and the
Standard & Poor’s SmallCap 600
Index are reasonable proxies of the
small capitalization world.

    

our adjustments and deal with what we have on a daily basis. And even as we remain highly concerned about a correction for smaller companies, we are also confident about the long-term prospects for our chosen asset class. Whether or not a decidedly bearish July marked the beginning of a correction, we are managing our portfolios with a long-term outlook and an absolute return bias. We have never allowed our thoughts on the short- or intermediate-term forecasts for the market to cloud our stock selection process. Regardless of where we think the market may be headed next, the search for great values in smaller stocks goes on, with the thought that our Funds can provide the kind of terrific long-term absolute returns that help our shareholders to build wealth.

Sincerely,
                             
Charles M. Royce                             W. Whitney George                                       Jack E. Fockler, Jr.
        President                                        Vice President                                             Vice President
  
      July 31, 2007      
           
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Table of Contents
   
Semiannual Report to Shareholders
 
 
Trustees and Officers 11
   
Managers’ Discussions of Fund Performance  
   
Royce Capital Fund — Micro-Cap Portfolio 12
   
Royce Capital Fund — Small-Cap Portfolio 14
   
Financial Statements 17
   
Notes to Financial Statements 26
   
Understanding Your Fund’s Expenses 29
   
Board Approval of Investment Advisory Agreements 30
   
Notes to Performance and Other Important Information 32
   

10  |  Royce Capital Fund 2007 Semiannual Report to Shareholders


Trustees and Officers
 
All Trustees and Officers may be reached c/o The Royce Funds, 1414 Avenue of the Americas, New York, NY 10019
 
Charles M. Royce, Trustee*, President
Age: 67 | Number of Funds Overseen: 25 | Tenure: Since 1996
Non-Royce Directorships: Director of Technology Investment Capital Corp.
 
Principal Occupation(s) During Past Five Years: President, Chief Investment Officer and Member of Board of Managers of Royce & Associates, LLC (“Royce”), the Trust’s investment adviser.
 
Mark R. Fetting, Trustee*
Age: 52 | Number of Funds Overseen: 41 | Tenure: Since 2001
Non-Royce Directorships: Director/Trustee of registered investment companies constituting the 16 Legg Mason Funds.
 
Principal Occupation(s) During Past Five Years: Senior Executive Vice President of Legg Mason, Inc.; Member of Board of Managers of Royce. Mr. Fetting’s prior business experience includes having served as Division President and Senior Officer, Prudential Financial Group, Inc. and related companies; Partner, Greenwich Associates and Vice President, T. Rowe Price Group, Inc.
Donald R. Dwight, Trustee
Age: 76 | Number of Funds Overseen: 25 | Tenure: Since 1998
Non-Royce Directorships: None
 
Principal Occupation(s) During Past Five Years: President of Dwight Partners, Inc., corporate communications consultant; Chairman (from 1982 to March 1998) and Chairman Emeritus (since March 1998) of Newspapers of New England, Inc. Mr. Dwight’s prior experience includes having served as Lieutenant Governor of the Commonwealth of Massachusetts, as President and Publisher of Minneapolis Star and Tribune Company and as a Trustee of the registered investment companies constituting the Eaton Vance Funds.
 
Richard M. Galkin, Trustee
Age: 69 | Number of Funds Overseen: 25 | Tenure: Since 1996
Non-Royce Directorships: None
 
Principal Occupation(s) During Past Five Years: Private investor. Mr. Galkin’s prior business experience includes having served as President of Richard M. Galkin Associates, Inc., telecommunications consultants, President of Manhattan Cable Television (a subsidiary of Time, Inc.), President of Haverhills Inc. (another Time, Inc. subsidiary), President of Rhode Island Cable Television and Senior Vice President of Satellite Television Corp. (a subsidiary of Comsat).
 
Stephen L. Isaacs, Trustee
Age: 67 | Number of Funds Overseen: 25 | Tenure: Since 1996
Non-Royce Directorships: None
 
Principal Occupation(s) During Past Five Years: President of The Center for Health and Social Policy (since September 1996); Attorney and President of Health Policy Associates, Inc., consultants. Mr. Isaacs’s prior business experience includes having served as Director of Columbia University Development Law and Policy Program and Professor at Columbia University (until August 1996).
 
William L. Koke, Trustee
Age: 72 | Number of Funds Overseen: 25 | Tenure: Since 1996
Non-Royce Directorships: None
 
Principal Occupation(s) During Past Five Years: Private investor. Mr. Koke’s prior business experience includes having served as President of Shoreline Financial Consultants, Director of Financial Relations of SONAT, Inc., Treasurer of Ward Foods, Inc. and President of CFC, Inc.
 
Arthur S. Mehlman, Trustee
Age: 65 | Number of Funds Overseen: 41 | Tenure: Since 2004
Non-Royce Directorships: Director/Trustee of registered investment companies constituting the 16 Legg Mason Funds and Director of Municipal Mortgage & Equity, LLC.
 
Principal Occupation(s) During Past Five Years: Director of The League for People with Disabilities, Inc.; Director of University of Maryland Foundation (non-profits). Formerly: Director of University of Maryland College Park Foundation (non-profit) (from 1998 to 2005); Partner, KPMG LLP (international accounting firm) (from 1972 to 2002); Director of Maryland Business Roundtable for Education (from July 1984 to June 2002).
David L. Meister, Trustee
Age: 67 | Number of Funds Overseen: 25 | Tenure: Since 1996
Non-Royce Directorships: None
 
Principal Occupation(s) During Past Five Years: Consultant. Chairman and Chief Executive Officer of The Tennis Channel (from June 2000 to March 2005). Chief Executive officer of Seniorlife.com (from December 1999 to May 2000). Mr. Meister’s prior business experience includes having served as a consultant to the communications industry, President of Financial News Network, Senior Vice President of HBO, President of Time-Life Films and Head of Broadcasting for Major League Baseball.
 
G. Peter O’Brien, Trustee
Age: 61 | Number of Funds Overseen: 41 | Tenure: Since 2001
Non-Royce Directorships: Director/Trustee of registered investment companies constituting the 16 Legg Mason Funds; Director of Technology Investment Capital Corp.
 
Principal Occupation(s) During Past Five Years: Trustee Emeritus of Colgate University (since 2005); Board Member of Hill House, Inc. (since 1999); Formerly: Trustee of Colgate University (from 1996 to 2005), President of Hill House, Inc. (from 2001 to 2005) and Managing Director/Equity Capital Markets Group of Merrill Lynch & Co. (from 1971 to 1999).
John D. Diederich, Vice President and Treasurer
Age: 55 | Tenure: Since 2001
 
Principal Occupation(s) During Past Five Years: Chief Operating Officer, Managing Director and member of the Board of Managers of Royce; Chief Financial Officer of Royce; Director of Administration of the Trust; and President of RFS, having been employed by Royce since April 1993.
 
Jack E. Fockler, Jr., Vice President
Age: 48 | Tenure: Since 1996
 
Principal Occupation(s) During Past Five Years: Managing Director and Vice President of Royce, and Vice President of RFS, having been employed by Royce since October 1989.
 
W. Whitney George, Vice President
Age: 49 | Tenure: Since 1996
 
Principal Occupation(s) During Past Five Years: Managing Director and Vice President of Royce, having been employed by Royce since October 1991.
 
Daniel A. O’Byrne, Vice President and Assistant Secretary
Age: 45 | Tenure: Since 1996
 
Principal Occupation(s) During Past Five Years: Principal and Vice President of Royce, having been employed by Royce since October 1986.
 
John E. Denneen, Secretary and Chief Legal Officer
Age: 40 | Tenure: 1996-2001 and Since April 2002
 
Principal Occupation(s) During Past Five Years: General Counsel (Deputy General Counsel prior to 2003), Principal, Chief Legal and Compliance Officer and Secretary of Royce; Secretary and Chief Legal Officer of The Royce Funds.
 
Lisa Curcio, Chief Compliance Officer
Age: 47 | Tenure: Since 2004
 
Principal Occupation(s) During Past Five Years: Chief Compliance Officer of The Royce Funds (since October 2004); Compliance Officer of Royce (since June 2004); Vice President, The Bank of New York (from February 2001 to June 2004).
 
*   Interested Trustee.
 
Each trustee will hold office until the Trust’s next special meeting of shareholders and until their successors have been duly elected and qualified or until their earlier resignation or removal. The Statement of Additional Information, which contains additional information about the Trust’s trustees and officers, is available and can be obtained without charge at www.roycefunds.com or by calling 1-800-221-4268.

Royce Capital Fund 2007 Semiannual Report to Shareholders  |  11


                   
                   
  AVERAGE ANNUAL TOTAL RETURNS
Through 6/30/07		  
 
 
  Jan-June 2007*   9.31 %  
 
 
  One-Year   18.82    
 
 
  Three-Year   16.67    
 
 
  Five-Year   15.64    
 
 
  10-Year   17.98    
 
 
  Since Inception (12/27/96)   17.50    
 
 
  EXPENSE RATIO        
 
 
  Annual Operating Expenses   1.31 %  
 
 
  * Not annualized.        
                   
  CALENDAR YEAR TOTAL RETURNS  
 
 
  Year RCM   Year   RCM  
 
 
  2006 21.1 %   2001   29.7 %  
 
 
  2005 11.6     2000   18.6    
 
 
  2004 13.9     1999   28.1    
 
 
  2003 49.2     1998   4.1    
 
 
  2002 -12.9     1997   21.2    
 
 
                   
  TOP 10 POSITIONS % of Net Assets  
 
 
  Novamerican Steel   1.4 %  
 
 
  Exponent   1.2    
 
 
  TTM Technologies   1.2    
 
 
  Bronco Drilling Company   1.1    
 
 
  Edge Petroleum   1.1    
 
 
  Tesco Corporation   1.1    
 
 
  Cavco Industries   1.0    
 
 
  True Religion Apparel   1.0    
 
 
  Gulf Island Fabrication   1.0    
 
 
  Dynamic Materials   0.9    
 
 
                   
  PORTFOLIO SECTOR BREAKDOWN
% of Net Assets		  
 
 
  Technology   16.8 %  
 
 
  Natural Resources   16.0    
 
 
  Industrial Services   11.8    
 
 
  Health   11.1    
 
 
  Industrial Products   10.5    
 
 
  Consumer Services   5.2    
 
 
  Financial Intermediaries   4.2    
 
 
  Consumer Products   4.5    
 
 
  Financial Services   0.5    
 
 
  Miscellaneous   4.8    
 
 
  Cash and Cash Equivalents   14.6    
 
 
     
     

 
 
Royce Capital Fund — Micro-Cap Portfolio
 
Managers’ Discussion
Although micro-cap stocks trailed their bigger siblings in the small-cap world, Royce Capital Fund—Micro-Cap Portfolio’s (RCM) diversified portfolio of diminutive companies fared well in the first half on both an absolute and relative basis. The Portfolio gained 9.3% for the year-to-date period ended 6/30/07, versus a return of 6.5% for its small-cap benchmark, the Russell 2000. The Fund’s strong absolute and relative showing was consistent during the first half of 2007. RCM gained 4.3% in the first quarter, compared to 2.0% for the Russell 2000. The Fund then narrowly outpaced the small-cap index during the second quarter, up 4.8% versus 4.4% for the benchmark. We were also pleased that RCM outgained its benchmark from the interim small-cap peak on 2/22/07 through 6/30/07, up 4.0% versus 1.0% for the Russell 2000.
     Although short-term results are of far less concern to us than market cycle and other long-term performances, it must also be allowed that short-term periods are the building blocks for attractive long-term returns. Certainly the Fund’s notable performance advantage in the most recent small-cap market cycle periods received a boost from its terrific first-half performance. From the previous small-cap market peak on 3/9/00 through 6/30/07, the Fund was up 225.9% compared to the Russell 2000’s 51.0% gain. During the more bullish phase from the small-cap market trough on 10/9/02 through 6/30/07, RCM gained 187.1% versus 169.9% for the small-cap benchmark. The Fund’s returns during these market cycle periods were equally impressive on an absolute basis, something of greater importance to us, as much as we like to beat our benchmark. RCM also outperformed the Russell 2000 for the one-, three-, five-, 10-year and since inception (12/27/96) periods ended 6/30/07. The Fund’s average annual total return since inception was 17.5%.
     One very interesting development that we have seen over the last several months has been a performance disparity within the micro-cap sector. Roughly coinciding with the move to higher quality that we have observed in the upper tier of the small-cap world has been better performance from larger, more established micro-cap companies. This clearly benefited the Fund in the first half of 2007, as the Fund’s average market capitalization of $305 million is in the higher range of the micro-cap world. The Fund’s three best-performing sectors on a dollar basis were areas that we have long
  
GOOD IDEAS THAT WORKED
Net Realized and Unrealized Investment Return*
Year-to-Date Through 6/30/07
Tesco Corporation     $3,473,028
Novamerican Steel     2,848,356
Orchid Cellmark     2,354,785
Bioveris Corporation     2,332,821
Dendreon Corporation     2,190,481
*Includes dividends      
 
 
 
Important Performance and Expense Information
All performance information in this Report reflects past performance, is presented on a total return basis and reflects the reinvestment of distributions. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Current performance may be higher or lower than performance quoted. The Fund’s total returns do not reflect any deduction for changes or expenses of the variable contracts of retirement plans investing in the Fund. Current month-end performance may be obtained at www.roycefunds.com. All performance and risk information for RCM reflects Investment Class results. Shares of RCM’s Service Class bear an annual distribution expense that is not borne by the Investment Class. Annual operating expenses reflect the Fund’s total annual operating expenses for the Investment Class as of the date of the Fund’s most current prospectus and include management fees and other expenses.

12  |  Royce Capital Fund 2007 Semiannual Report to Shareholders



 
 
Performance and Portfolio Review
 
believed house quality micro-cap companies—Natural Resources, Industrial Products, and Health. Tesco Corporation designs and manufactures oilfield products such as drilling and hydraulic systems. The firm reported record first-quarter earnings, which helped its already rising stock price to keep climbing. We reduced our position at increasing prices between March and May. Although silver and gold commodity prices were flat to down during the first half, several holdings in the precious metals and mining industry fared well. Copper and gold mining company Northern Orion Resources and African Platinum were both takeover candidates. Steel processor and distributor Novamerican Steel also attracted takeover attention. We’re guessing that 37 consecutive profitable quarters helped to make it attractive to its suitor. (Shortly after the acquisition was announced in June, the company made it 38.)
     Three healthcare companies were among the Fund’s best performers. DNA Testing company Orchid Cellmark posted better-than-expected earnings when new management implemented successful cost savings initiatives. We reduced our position in March and April, but continue to hold a good-sized stake because we believe that there are many long-term market opportunities for the firm. Bioveris Corporation makes its second consecutive appearance among the top five “Good Ideas That Worked,” though, sadly, it will not return. This bioanalytical devices maker was also acquired by a larger firm. We finished selling our position late in June. The share price of cancer treatment drug maker Dendreon Corporation more than doubled in late March when a promising vaccine for prostate cancer won key support. The increase led us to sell our stake in early April, which proved fortuitous when the efficacy of the treatment was questioned later that month. By May, its share price had come back to earth.
GOOD IDEAS AT THE TIME
Net Realized and Unrealized Investment Loss*
Year-to-Date Through 6/30/07
  
     We built up our position in women’s clothing store operator Cache during the second quarter as its price slumped from peak levels amidst disappointing sales and earnings, thinking that this well-run, conservatively capitalized retailer can rebound. We felt a little less certain about the long-term prospects for NetList, a maker of DRAM integrated circuits and other components. Its high-end niche products have had trouble for longer than we’d like and efforts to enter new markets may take longer than we expected. The wild card is the firm’s unique products, which remain promising, and the fact that it spent much of June trading for not much more than cash per share.
NetList     $2,200,639
Cache     2,092,769
TVI Corporation     1,688,973
Distributed Energy Systems     1,534,512
Shoe Pavilion     1,414,445
*Includes dividends      
 
 
                             
                             
  PORTFOLIO DIAGNOSTICS  
 
 
  Average Market Capitalization   $305 million  
 
 
  Weighted Average P/E Ratio   18.2x*  
 
 
  Weighted Average P/B Ratio   2.1x  
 
 
  Weighted Average Yield   0.5%  
 
 
  Fund Net Assets   $672 million  
 
 
  Number of Holdings   210  
 
 
  Symbol      
 

Investment Class

   RCMCX  
 

Service Class

   RCMSX  
 
 
 
*Excludes 23% of portfolio holdings with zero or negative earnings as of 6/30/07.
  
     
  RISK/RETURN COMPARISON
Five-Year Period Ended 6/30/07		  
 
 
      Average Annual   Standard   Return  
      Total Return   Deviation   Efficiency*  
 
 
  RCM     15.64 %     16.22       0.96    
 
 
  Russell 2000     13.88       16.47       0.84    
 
 
 
*Return Efficiency is the average annual total return divided by the annualized standard deviation over a designated time period. Please read the prospectus for a more complete discussion of risk.
  
 
 
     
     

Royce Capital Fund 2007 Semiannual Report to Shareholders  |  13
                   
                   
  AVERAGE ANNUAL TOTAL RETURNS
Through 6/30/07		  
 
 
  Jan-June 2007*   10.59 %  
 
 
  One-Year   22.12    
 
 
  Three-Year   16.23    
 
 
  Five-Year   14.91    
 
 
  10-Year   15.54    
 
 
  Since Inception (12/27/96)   15.96    
 
 
  EXPENSE RATIO        
 
 
  Annual Operating Expenses   1.08 %  
 
 
  * Not annualized.        
                   
  CALENDAR YEAR TOTAL RETURNS  
 
 
  Year RCS   Year   RCS  
 
 
  2006 15.6 %   2001   21.0 %  
 
 
  2005 8.6     2000   33.3    
 
 
  2004 25.0     1999   8.2    
 
 
  2003 41.1     1998   8.9    
 
 
  2002 -13.8     1997   17.1    
 
 
                   
  TOP 10 POSITIONS % of Net Assets  
 
 
  Unit Corporation   2.4 %  
 
 
  Oil States International   2.1    
 
 
  Knight Capital Group Cl. A   2.0    
 
 
  RC2 Corporation   1.9    
 
 
  St. Mary Land & Exploration   1.7    
 
 
  Chaparral Steel   1.6    
 
 
  Heidrick & Struggles International   1.6    
 
 
  Korn/Ferry International   1.6    
 
 
  Thor Industries   1.5    
 
 
  Mariner Energy   1.5    
 
 
                   
  PORTFOLIO SECTOR BREAKDOWN
% of Net Assets		  
 
 
  Industrial Products   19.9 %  
 
 
  Natural Resources   14.4    
 
 
  Industrial Services   13.4    
 
 
  Consumer Products   10.5    
 
 
  Technology   10.0    
 
 
  Consumer Services   9.2    
 
 
  Financial Intermediaries   4.5    
 
 
  Health   4.0    
 
 
  Financial Services   1.2    
 
 
  Cash and Cash Equivalents   12.9    
 
 
     
     

 
 
Royce Capital Fund — Small-Cap Portfolio
 
Managers’ Discussion
Royce Capital Fund—Small-Cap Portfolio (RCS) made its way successfully through the pleasantly buoyant waters of 2007’s first half, with notable results on both an absolute and relative basis. The Fund gained 10.6% for the year-to-date period ended 6/30/07, versus a return of 6.5% for its small-cap benchmark, the Russell 2000. RCS’s attractive absolute results increased through the year’s first six months, as did its relative performance advantage. In the first quarter, the Fund was up 2.7% versus 2.0% for the small-cap index, while the Fund outpaced the Russell 2000 by a much larger margin in the second quarter, up 7.7% versus 4.4% for the benchmark. RCS also had a strong showing from the interim small-cap peak on 2/22/07 through 6/30/07, up 5.8% versus 1.0% for the Russell 2000.
     From the previous small-cap market peak on 3/9/00 through 6/30/07, RCS was up 225.7% versus a 50.8% result for the small-cap index. The Fund also established a lead over its benchmark during the mostly bullish phase from 10/9/02 through 6/30/07, gaining 191.3% versus the Russell 2000’s 169.9% return. These strong market cycle results were a key factor in RCS’s outperformance of the benchmark over calendar-based periods. The Fund outpaced the Russell 2000 for the one-, three-, five-, 10-year and since inception (12/27/96) periods ended 6/30/07. RCS’s average annual total return since inception was 16.0%.
     We were both surprised and delighted by the strength of the market in the first half. A particular satisfaction came from the success of smaller companies with low leverage and other financial characteristics that signify quality to us. Investors’ desire for higher-quality—which was in stark
contrast to what often found favor within small-cap during 2006—was only underscored by both the undoing of the subprime market and a couple of well-publicized hedge fund unravelings. After a couple of years of showing a seemingly insatiable appetite for risk and speculation, investors began to recognize the quieter charms of successful businesses with established records of earnings and strong balance sheets. What accounted for this sudden shift in taste remains mysterious, but we were only too pleased to see more attention paid to the kind of companies that we seek in the Fund’s portfolio.
  
GOOD IDEAS THAT WORKED
Net Realized and Unrealized Investment Return*
Year-to-Date Through 6/30/07
Florida Rock Industries     $2,905,256
Chaparral Steel     2,593,210
Unit Corporation     1,965,991
Oil States International     1,709,142
Inter Parfums     1,486,371
*Includes dividends      
 
 
 
Important Performance and Expense Information
All performance information in this Report reflects past performance, is presented on a total return basis and reflects the reinvestment of distributions. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Current performance may be higher or lower than performance quoted. The Fund’s total returns do not reflect any deduction for changes or expenses of the variable contracts of retirement plans investing in the Fund. Current month-end performance may be obtained at www.roycefunds.com. All performance and risk information for RCS reflects Investment Class results. Shares of RCS’s Service Class bear an annual distribution expense that is not borne by the Investment Class. Annual operating expenses reflect the Fund’s total annual operating expenses for the Investment Class as of the date of the Fund’s most current prospectus and include management fees and other expenses.

14  |  Royce Capital Fund 2007 Semiannual Report to Shareholders



 
 
Performance and Portfolio Review
 
      Positive performances could be found throughout the portfolio, yet nothing was as impressive as the dollar-based net gains in the Industrial Products sector, which more than doubled that of the next-best performing sector, Natural Resources. The Industrial Products sector was home to the Fund’s top two performing holdings: Florida Rock Industries and Chaparral Steel. Although we first bought its shares in RCS’ portfolio in 1997, we have owned shares of construction aggregates business Florida Rock Industries in other Royce-managed portfolios for more than 20 years. In February 2007, the company was acquired by a larger competitor at a substantial premium. We finished selling our stake in April. The firm was consistently attractive to us as a conservatively capitalized, well-run business in a cyclical industry that has historically garnered attention from value investors. Chaparral Steel, from the metal fabrication and distribution industry, also enjoyed noteworthy net gains in the first half, thanks to ongoing success in its business and takeover talk (finally made official in July). The Natural Resources sector was led by oil and gas and energy services holdings, while in Technology components and systems, and telecommunications were especially strong.
     Although all but one sector posted net gains—and the net losses in the Consumer Services sector were modest on a dollar basis—even the best performance periods have their blemishes. Trepidation about the company’s ability to effectively manage its way out of a period of lackluster performance, along with recent tough times for retail stores, drove us to a significant reduction of
GOOD IDEAS AT THE TIME
Net Realized and Unrealized Investment Loss*
Year-to-Date Through 6/30/07
  
our position in shoe retailer, The Finish Line. A decidedly negative reaction by investors to the acquisition of a competitor announced in June only served to exacerbate our anxiety, and we were part of that month’s sell-off. We had been building a position in semiconductor equipment maker Semitool since June 2001. A recent reduction in projected quarterly revenues led us to begin reducing our position in May. Although it fits the profile of what we like in technology companies—an attractive niche business in the picks and shovels end of the sector and a balance sheet with little debt—its stock price volatility in the first half concerned us enough to start selling.
Finish Line (The) Cl. A     $1,099,152
Semitool     944,148
Universal Stainless & Alloy Products     832,610
LECG Corporation     641,972
Knight Capital Group Cl. A     630,625
*Includes dividends      
 
 
                             
                             
  PORTFOLIO DIAGNOSTICS  
 
 
  Average Market Capitalization   $1,066 million  
 
 
  Weighted Average P/E Ratio   15.6x  
 
 
  Weighted Average P/B Ratio   2.4x  
 
 
  Weighted Average Yield   0.6%  
 
 
  Fund Net Assets   $354 million  
 
 
  Number of Holdings   93  
 
 
  Symbol      
 

Investment Class

   RCPFX  
 

Service Class

   RCSSX  
 
 
 
The Funds’ P/E calculation excludes companies with zero or negative earnings.
  
     
  RISK/RETURN COMPARISON
Five-Year Period Ended 6/30/07		  
 
 
      Average Annual   Standard   Return  
      Total Return   Deviation   Efficiency*  
 
 
  RCS     14.91 %     15.07       0.99    
 
 
  Russell 2000     13.88       16.47       0.84    
 
 
 
*Return Efficiency is the average annual total return divided by the annualized standard deviation over a designated time period. Please read the prospectus for a more complete discussion of risk.
  
 
 
     
     

Royce Capital Fund 2007 Semiannual Report to Shareholders  |  15
























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16  |  Royce Capital Fund 2007 Semiannual Report to Shareholders



Schedules of Investments

June 30, 2007 (unaudited)

 
Royce Capital Fund – Micro-Cap Portfolio
 

    SHARES   VALUE  

COMMON STOCKS – 85.4%

            
             

Consumer Products – 4.5%

            

Apparel and Shoes - 2.8%

            

Jos. A. Bank Clothiers a,b

   107,900   $ 4,474,613  

LaCrosse Footwear

   213,208     3,852,669  

Stride Rite

   197,600     4,003,376  

True Religion Apparel a,b

   315,900     6,422,247  
       
 
          18,752,905  
       
 

Food/Beverage/Tobacco - 1.0%

            

Boston Beer Cl. A a,b

   34,400     1,353,640  

Jones Soda a

   140,000     1,962,800  

Monterey Gourmet Foods a

   331,600     1,415,932  

Reliv International

   181,000     1,900,500  
       
 
          6,632,872  
       
 

Sports and Recreation - 0.3%

            

Arctic Cat

   103,000     2,039,400  
       
 

Other Consumer Products - 0.4%

            

RC2 Corporation a,b

   74,800     2,992,748  
       
 

Total (Cost $20,866,013)

         30,417,925  
       
 

Consumer Services – 5.2%

            

Direct Marketing - 0.1%

            

Dover Saddlery a,b

   120,065     857,264  
       
 

Leisure and Entertainment - 1.2%

            

FortuNet a,b

   138,200     1,394,438  

4Kids Entertainment a,b

   113,000     1,695,000  

New Frontier Media

   566,600     4,940,752  
       
 
          8,030,190  
       
 

Restaurants and Lodgings - 0.3%

            

Benihana Cl. A a

   97,930     1,958,600  
       
 

Retail Stores - 2.3%

            

A.C. Moore Arts & Crafts a,b

   205,500     4,029,855  

Buckle (The)

   79,350     3,126,390  

Build-A-Bear Workshop a,b

   60,000     1,568,400  

Cache a,b

   308,800     4,097,776  

Cato Corporation Cl. A

   124,500     2,731,530  
       
 
          15,553,951  
       
 

Other Consumer Services - 1.3%

            

Collectors Universe

   261,807     4,003,029  

Lincoln Educational Services a,b

   220,304     3,273,717  

Renaissance Learning

   111,700     1,468,855  
       
 
          8,745,601  
       
 

Total (Cost $29,524,249)

         35,145,606  
       
 

Financial Intermediaries – 4.2%

            

Banking - 1.0%

            

Bancorp (The) a,b

   127,528     2,851,526  

Canadian Western Bank

   150,800     3,997,740  
       
 
          6,849,266  
       
 

Insurance - 2.2%

            

AmCOMP a,b

   197,400     1,924,650  

American Safety Insurance Holdings a

   163,200     3,889,056  

Argonaut Group b

   108,000     3,370,680  

Navigators Group a,b

   56,300     3,034,570  

United Fire & Casualty

   78,630     2,781,929  
       
 
          15,000,885  
       
 
    SHARES   VALUE  

Securities Brokers - 1.0%

            

Cowen Group a,b

   196,900   $ 3,526,479  

Sanders Morris Harris Group

   255,400     2,972,856  
       
 
          6,499,335  
       
 

Total (Cost $17,581,362)

         28,349,486  
       
 

Financial Services – 0.5%

            

Investment Management - 0.5%

            

ADDENDA Capital

   163,100     3,467,932  
       
 

Total (Cost $3,535,767)

         3,467,932  
       
 

Health – 11.1%

            

Drugs and Biotech - 4.9%

            

Barrier Therapeutics a,b

   186,400     1,211,600  

Cell Genesys a,b

   285,500     956,425  

Cerus Corporation a,b

   398,000     2,690,480  

DUSA Pharmaceuticals a,b

   444,849     1,370,135  

Dyax Corporation a,b

   622,316     2,607,504  

Genitope Corporation a,b

   311,000     1,200,460  

Halozyme Therapeutics a,b

   368,200     3,398,486  

Idenix Pharmaceuticals a,b

   229,500     1,354,050  

Infinity Pharmaceuticals a,b

   116,925     1,272,144  

Lexicon Pharmaceuticals a,b

   612,600     1,966,446  

Maxygen a,b

   183,000     1,568,310  

Neogen Corporation a,b

   116,700     3,356,292  

Orchid Cellmark a

   1,009,200     4,682,688  

†ULURU a,b

   694,800     3,265,560  

Zila a,b

   1,419,500     1,973,105  
       
 
          32,873,685  
       
 

Health Services - 0.9%

            

Bio-Imaging Technologies a

   303,823     2,075,111  

Hooper Holmes a

   585,700     1,962,095  

U.S. Physical Therapy a

   136,400     1,837,308  
       
 
          5,874,514  
       
 

Medical Products and Devices - 5.0%

            

Anika Therapeutics a

   123,252     1,872,198  

Bruker BioSciences a

   506,543     4,563,952  

Caliper Life Sciences a,b

   321,000     1,505,490  

Exactech a,b

   149,000     2,395,920  

Kensey Nash a,b

   110,000     2,949,100  

Langer a

   360,300     1,974,444  

Merit Medical Systems a,b

   176,600     2,112,136  

Minrad International a,b

   293,400     1,739,862  

NMT Medical a,b

   174,000     2,067,120  

Possis Medical a,b

   156,200     1,699,456  

Shamir Optical Industry a,b

   145,700     1,433,688  

Syneron Medical a,b

   69,700     1,739,015  

Synovis Life Technologies a

   92,800     1,336,320  

Thermage a

   222,200     1,857,592  

Young Innovations

   141,200     4,120,216  
       
 
          33,366,509  
       
 

Personal Care - 0.3%

            

Nutraceutical International a

   146,500     2,427,505  
       
 

Total (Cost $69,173,693)

         74,542,213  
       
 

Industrial Products – 10.5%

            

Automotive - 0.5%

            

Aftermarket Technology a

   108,900     3,232,152  
       
 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. Royce Capital Fund 2007 Semiannual Report to Shareholders  |  17


Schedules of Investments

 

 
Royce Capital Fund – Micro-Cap Portfolio (continued)
 

    SHARES   VALUE  

Industrial Products (continued)

            

Building Systems and Components - 2.3%

            

AAON

   141,450   $ 4,505,183  

Drew Industries a,b

   160,600     5,322,284  

Flanders Corporation a,b

   195,334     1,504,072  

LSI Industries

   218,750     3,915,625  
       
 
          15,247,164  
       
 

Industrial Components - 0.4%

            

Powell Industries a

   76,200     2,420,112  
       
 

Machinery - 2.0%

            

Eagle Test Systems a

   367,100     5,895,626  

Key Technology a

   153,200     3,431,680  

T-3 Energy Services a

   116,297     3,890,135  
       
 
          13,217,441  
       
 

Metal Fabrication and Distribution - 4.1%

            

Dynamic Materials

   168,600     6,322,500  

Metal Management

   125,600     5,535,192  

Novamerican Steel a,b

   172,047     9,175,267  

Olympic Steel

   207,600     5,949,816  

Samuel Manu-Tech

   78,800     915,049  
       
 
          27,897,824  
       
 

Specialty Chemicals and Materials - 0.5%

            

American Vanguard

   111,033     1,589,993  

Hawkins

   128,300     1,982,235  
       
 
          3,572,228  
       
 

Other Industrial Products - 0.7%

            

Electro Rent

   95,100     1,382,754  

Peerless Manufacturing a,b

   156,600     3,230,658  
       
 
          4,613,412  
       
 

Total (Cost $47,751,644)

         70,200,333  
       
 

Industrial Services – 11.8%

            

Commercial Services - 4.0%

            

Barrett Business Services

   84,099     2,172,277  

BB Holdings a

   693,924     3,657,857  

CorVel Corporation a,b

   78,225     2,044,802  

GP Strategies a

   336,100     3,656,768  

Intersections a

   301,042     3,010,420  

LECG Corporation a,b

   384,259     5,806,154  

†Metalico a,b

   158,500     1,260,075  

OneSource Services a

   48,631     627,439  

†PeopleSupport a,b

   149,387     1,695,542  

Willdan Group a

   258,300     2,531,340  
       
 
          26,462,674  
       
 

Engineering and Construction - 3.0%

            

Cavalier Homes a

   405,700     1,983,873  

Cavco Industries a,b

   171,481     6,433,967  

Exponent a

   354,500     7,930,165  

Sterling Construction a,b

   187,000     3,955,050  
       
 
          20,303,055  
       
 

Food and Tobacco Processors - 0.9%

            

Omega Protein a,b

   340,300     3,151,178  

Zapata Corporation a

   369,300     2,492,775  
       
 
          5,643,953  
       
 

Printing - 1.1%

            

CSS Industries

   64,000     2,535,040  

Courier Corporation

   76,718     3,068,720  

Ennis

   81,500     1,916,880  
       
 
          7,520,640  
       
 
    SHARES   VALUE  

Transportation and Logistics - 2.8%

            

†Euroseas

   332,100   $ 4,735,746  

Marten Transport a,b

   228,949     4,123,372  

Patriot Transportation Holding a,b

   54,409     4,717,260  

Vitran Corporation Cl. A a

   251,050     5,357,407  
       
 
          18,933,785  
       
 

Total (Cost $62,266,598)

         78,864,107  
       
 

Natural Resources – 16.0%

            

Energy Services - 4.6%

            

Dawson Geophysical a

   21,900     1,345,974  

†Flotek Industries a,b

   69,500     4,166,525  

Gulf Island Fabrication

   184,200     6,391,740  

TGC Industries a

   361,588     3,941,309  

Tesco Corporation a

   224,400     7,079,820  

Total Energy Services Trust

  513,900     5,403,126  

World Energy Solutions a

   1,913,200     2,783,816  
       
 
          31,112,310  
       
 

Oil and Gas - 3.5%

            

Bronco Drilling a

   458,200     7,519,062  

Edge Petroleum a,b

   507,200     7,105,872  

Particle Drilling Technologies a,b

   332,200     730,840  

PetroCorp a,c

   163,200     0  

Pioneer Drilling a

   152,500     2,273,775  

Savanna Energy Services a

   166,084     3,118,216  

Superior Well Services a,b

   50,800     1,290,828  

TXCO Resources a,b

   149,900     1,540,972  
       
 
          23,579,565  
       
 

Precious Metals and Mining - 7.9%

            

Alamos Gold a

   429,200     2,216,006  

†Allied Nevada Gold a,b

   218,609     942,205  

Central African Gold a

   1,151,500     1,260,219  

Central African Gold (Warrants) a

   2,099,131     421,527  

Eldorado Gold a,b

   200,000     1,166,000  

Endeavour Mining Capital

   694,900     6,249,371  

Endeavour Silver a

   428,100     1,930,731  

Entree Gold a,b

   988,700     2,422,315  

First Majestic Silver a,b

   775,800     3,291,824  

Gammon Gold a,b

   350,447     4,422,641  

Greystar Resources a

   305,300     2,006,196  

Hecla Mining a,b

   320,500     2,737,070  

Kingsgate Consolidated

   742,975     3,495,914  

Metallica Resources a,b

   658,500     2,963,250  

Midway Gold a

   782,900     2,021,098  

Miramar Mining a,b

   338,000     1,450,020  

Northern Orion Resources a

   976,800     5,557,992  

Quaterra Resources a

   542,500     1,919,948  

Silvercorp Metals a

   105,800     1,792,715  

U.S. Gold a

   498,600     2,742,300  

Western Copper a,b

   1,252,500     1,940,038  
       
 
          52,949,380  
       
 

Total (Cost $72,149,579)

         107,641,255  
       
 

Technology – 16.8%

            

Aerospace and Defense - 2.3%

            

†Aerovironment a,b

   118,970     2,451,972  

†American Science & Engineering a,b

   50,500     2,870,925  

Axsys Technologies a,b

   163,600     3,499,404  

Ducommun a

   132,900     3,419,517  


18  |  Royce Capital Fund 2007 Semiannual Report to Shareholders		 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


 

June 30, 2007 (unaudited)

 
 
 

    SHARES   VALUE  

Technology (continued)

            

Aerospace and Defense (continued)

            

Integral Systems

   105,000   $ 2,552,550  

TVI Corporation a,b

   1,332,490     772,844  
       
 
          15,567,212  
       
 

Components and Systems - 2.7%

            

Digi International a

   256,200     3,776,388  

Excel Technology a

   143,200     4,001,008  

Perceptron a

   106,708     1,055,342  

Performance Technologies a

   369,000     1,667,880  

TTM Technologies a,b

   606,200     7,880,600  
       
 
          18,381,218  
       
 

Internet Software and Services - 1.9%

            

Answers Corporation a,b

   144,100     1,779,635  

CryptoLogic

   106,000     2,586,400  

EDGAR Online a,b

   337,000     909,900  

Jupitermedia Corporation a,b

   458,207     3,335,747  

Packeteer a,b

   226,300     1,767,403  

SupportSoft a

   372,100     2,031,666  
       
 
          12,410,751  
       
 

IT Services - 0.8%

            

Entrust a,b

   471,600     1,914,696  

MAXIMUS

   81,000     3,513,780  
       
 
          5,428,476  
       
 

Semiconductors and Equipment - 5.3%

            

Advanced Energy Industries a

   141,100     3,197,326  

Cascade Microtech a

   184,763     2,215,308  

CEVA a

   436,500     3,710,250  

†Genesis Microchip a,b

   310,000     2,901,600  

Ikanos Communications a,b

   261,900     1,993,059  

Integrated Silicon Solution a,b

   459,824     2,896,891  

MIPS Technologies a

   25,000     219,750  

NetList a,b

   641,800     2,246,300  

Nextest Systems a,b

   393,500     5,379,145  

PDF Solutions a,b

   340,900     4,032,847  

QuickLogic Corporation a

   287,800     768,426  

†STEC a,b

   198,000     1,273,140  

Semitool a,b

   253,500     2,436,135  

Staktek Holdings a,b

   664,900     2,613,057  
       
 
          35,883,234  
       
 

Software - 1.9%

            

Descartes Systems Group (The) a

   240,000     988,800  

Fundtech a

   128,100     1,856,169  

iPass a,b

   471,500     2,555,530  

Moldflow Corporation a

   77,300     1,699,054  

NetScout Systems a,b

   311,500     2,700,705  

Pervasive Software a

   168,505     775,123  

PLATO Learning a,b

   425,978     1,959,499  
       
 
          12,534,880  
       
 

Telecommunications - 1.9%

            

Anaren a,b

   198,100     3,488,541  

Atlantic Tele-Network

   160,250     4,589,560  

†EFJ a,b

   200,000     1,078,000  

Hurray! Holding Company ADR a

   202,000     909,000  

KVH Industries a,b

   181,900     1,595,263  

PC-Tel a

   125,000     1,093,750  
       
 
          12,754,114  
       
 

Total (Cost $103,274,933)

         112,959,885  
       
 
        VALUE  

Miscellaneous d– 4.8%

            

Total (Cost $30,222,770)

       $ 31,927,401  
       
 

TOTAL COMMON STOCKS

           

(Cost $456,346,608)

         573,516,143  
       
 
             

REPURCHASE AGREEMENTS – 16.4%

            

State Street Bank & Trust Company,

            

5.10% dated 6/29/07, due 7/2/07,

            

maturity value $45,070,147 (collateralized

            

by obligations of various U.S. Government

            

Agencies, valued at $46,181,013)

            

(Cost $45,051,000)

         45,051,000  
       
 

Lehman Brothers (Tri-Party),

            

5.05% dated 6/29/07, due 7/2/07,

            

maturity value $65,027,354 (collateralized

            

by obligations of various U.S. Government

            

Agencies, valued at $66,328,151)

            

(Cost $65,000,000)

         65,000,000  
       
 

TOTAL REPURCHASE AGREEMENTS

           

(Cost $110,051,000)

         110,051,000  
       
 
             
  PRINCIPAL        
  AMOUNT        

COLLATERAL RECEIVED FOR SECURITIES

            

LOANED – 15.3%

            

U.S. Treasury Bonds 6.25%-8.875%

            

due 2/15/19-8/15/23

   $146     149  

U.S. Treasury Notes 4.75%

            

due 2/15/10

   254     259  

U.S. Treasury Strip-Principal

            

due 5/15/17-11/15/21

   31     31  

U.S. Treasury Strip-Interest

            

due 8/15/23

   2     2  

Money Market Funds

            

State Street Navigator Securities Lending

            

Prime Portfolio (7 day yield-5.27%)

         102,917,723  
       
 

TOTAL COLLATERAL RECEIVED FOR SECURITIES LOANED (Cost $102,918,164)

         102,918,164  
       
 

TOTAL INVESTMENTS – 117.1%

           

(Cost $669,315,772)

         786,485,307  

LIABILITIES LESS CASH		            

AND OTHER ASSETS – (17.1)%

         (114,783,040 )
       
 

NET ASSETS – 100.0%

       $ 671,702,267  
       
 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. Royce Capital Fund 2007 Semiannual Report to Shareholders  |  19


Schedules of Investments

 

 
Royce Capital Fund — Small-Cap Portfolio
 

    SHARES   VALUE  

COMMON STOCKS – 87.1%

            
             

Consumer Products – 10.5%

            

Apparel and Shoes - 3.6%

            

K-Swiss Cl. A b

   102,400   $ 2,900,992  

Stride Rite b

   240,100     4,864,426  

Timberland Company Cl. A a,b

   24,600     619,674  

†Tween Brands a,b

   96,700     4,312,820  
       
 
          12,697,912  
       
 

Home Furnishing and Appliances - 1.8%

            

Ethan Allen Interiors b

   108,900     3,729,825  

Stanley Furniture b

   134,800     2,768,792  
       
 
          6,498,617  
       
 

Sports and Recreation - 2.2%

            

Thor Industries b

   120,600     5,443,884  

Winnebago Industries b

   76,000     2,243,520  
       
 
          7,687,404  
       
 

Other Consumer Products - 2.9%

            

RC2 Corporation a,b

   169,220     6,770,492  

†Sonic Solutions a,b

   287,000     3,619,070  
       
 
          10,389,562  
       
 

Total (Cost $32,606,410)

         37,273,495  
       
 

Consumer Services – 9.2%

            

Direct Marketing - 1.3%

            

Nu Skin Enterprises Cl. A b

   274,000     4,521,000  
       
 

Leisure and Entertainment - 0.8%

            

International Speedway Cl. A b

   56,100     2,957,031  
       
 

Media and Broadcasting - 1.0%

            

Westwood One b

   470,000     3,379,300  
       
 

Restaurants and Lodgings - 1.2%

            

CEC Entertainment a,b

   125,700     4,424,640  
       
 

Retail Stores - 4.9%

            

Buckle (The) b

   124,400     4,901,360  

Cato Corporation Cl. A b

   204,000     4,475,760  

Deb Shops

   95,000     2,626,750  

†Dress Barn (The) a,b

   179,200     3,677,184  

Finish Line (The) Cl. A b

   164,800     1,501,328  
       
 
          17,182,382  
       
 

Total (Cost $32,012,540)

         32,464,353  
       
 

Financial Intermediaries – 4.5%

            

Insurance - 2.5%

            

Assured Guaranty b

   134,800     3,984,688  

†Max Capital Group b

   110,103     3,115,915  

ProAssurance Corporation a,b

   14,100     784,947  

Security Capital Assurance b

   34,200     1,055,754  
       
 
          8,941,304  
       
 

Securities Brokers - 2.0%

            

Knight Capital Group Cl. A a,b

   417,700     6,933,820  
       
 

Total (Cost $14,123,737)

         15,875,124  
       
 

Financial Services – 1.2%

            

Information and Processing - 1.2%

            

eFunds Corporation a,b

   116,800     4,121,872  
       
 

Total (Cost $1,537,914)

         4,121,872  
       
 
    SHARES   VALUE  

Health – 4.0%

            

Drugs and Biotech - 0.2%

            

Alpharma Cl. A a,b

   28,300   $ 736,083  
       
 

Health Services - 0.8%

            

U.S. Physical Therapy a

   201,200     2,710,164  
       
 

Medical Products and Devices - 0.7%

            

Vital Signs b

   47,300     2,627,515  
       
 

Personal Care - 2.3%

            

Inter Parfums b

   188,000     5,004,560  

Nutraceutical International a

   184,104     3,050,603  
       
 
          8,055,163  
       
 

Total (Cost $11,836,294)

         14,128,925  
       
 

Industrial Products – 19.9%

            

Automotive - 0.8%

            

Dorman Products a,b

   120,459     1,664,743  

†Miller Industries a,b

   52,800     1,325,280  
       
 
          2,990,023  
       
 

Building Systems and Components - 2.3%

            

Drew Industries a,b

   123,200     4,082,848  

Simpson Manufacturing b

   118,800     4,008,312  
       
 
          8,091,160  
       
 

Construction Materials - 1.3%

            

Eagle Materials b

   94,400     4,630,320  
       
 

Industrial Components - 0.8%

            

†Bel Fuse Cl. A b

   8,466     313,073  

Bel Fuse Cl. B b

   69,388     2,361,274  
       
 
          2,674,347  
       
 

Machinery - 7.6%

            

Applied Industrial Technologies b

   142,900     4,215,550  

Eagle Test Systems a,b

   170,169     2,732,914  

Graco b

   53,500     2,154,980  

Lincoln Electric Holdings b

   50,500     3,749,120  

MTS Systems b

   97,509     4,355,727  

Rofin-Sinar Technologies a,b

   65,300     4,505,700  

†T-3 Energy Services a

   9,900     331,155  

Woodward Governor b

   91,200     4,894,704  
       
 
          26,939,850  
       
 

Metal Fabrication and Distribution - 5.8%

            

Chaparral Steel

   80,714     5,800,915  

Metal Management b

   103,800     4,574,466  

†Quanex Corporation b

   76,100     3,706,070  

†Schnitzer Steel Industries Cl. A b

   60,300     2,890,782  

†Universal Stainless & Alloy Products a,b

   104,117     3,668,042  
       
 
          20,640,275  
       
 

Specialty Chemicals and Materials - 1.3%

            

Westlake Chemical b

   161,700     4,547,004  
       
 

Total (Cost $53,198,693)

         70,512,979  
       
 

Industrial Services – 13.4%

            

Commercial Services - 9.3%

            

Barrett Business Services b

   165,226     4,267,788  

Heidrick & Struggles International a,b

   112,000     5,738,880  

†Kforce a,b

   212,500     3,395,750  

Korn/Ferry International a,b

   213,400     5,603,884  

Labor Ready a,b

   223,800     5,172,018  

LECG Corporation a,b

   343,191     5,185,616  


20  |  Royce Capital Fund 2007 Semiannual Report to Shareholders		 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


 

June 30, 2007 (unaudited)

 
 
 

    SHARES   VALUE  

Industrial Services (continued)

            

Commercial Services (continued)

            

†Navigant Consulting a,b

   139,200   $ 2,583,552  

SM&A a,b

   116,934     819,707  
       
 
          32,767,195  
       
 

Engineering and Construction - 0.5%

            

Exponent a

   78,616     1,758,640  
       
 

Transportation and Logistics - 3.6%

            

Arkansas Best b

   96,300     3,752,811  

†Heartland Express b

   243,800     3,973,940  

†Nordic American Tanker Shipping b

   39,300     1,605,012  

†Pacer International b

   148,900     3,502,128  
       
 
          12,833,891  
       
 

Total (Cost $42,691,239)

         47,359,726  
       
 

Natural Resources – 14.4%

            

Energy Services - 4.6%

            

Ensign Energy Services

   208,900     3,725,980  

Oil States International a,b

   179,900     7,437,066  

Patterson-UTI Energy

   35,400     927,834  

RPC b

   241,000     4,106,640  
       
 
          16,197,520  
       
 

Oil and Gas - 8.2%

            

Cimarex Energy b

   58,518     2,306,194  

†Grey Wolf a,b

   209,000     1,722,160  

Mariner Energy a,b

   223,200     5,412,600  

St. Mary Land & Exploration b

   165,100     6,045,962  

Superior Well Services a,b

   201,769     5,126,950  

Unit Corporation a,b

   134,000     8,429,940  
       
 
          29,043,806  
       
 

Precious Metals and Mining - 1.6%

            

Agnico-Eagle Mines

   105,000     3,832,500  

Pan American Silver a,b

   77,500     2,040,575  
       
 
          5,873,075  
       
 

Total (Cost $37,161,664)

         51,114,401  
       
 

Technology – 10.0%

            

Components and Systems - 1.9%

            

Digi International a,b

   168,200     2,479,268  

Rimage Corporation a,b

   92,897     2,934,616  

Tektronix b

   41,400     1,396,836  
       
 
          6,810,720  
       
 

Distribution - 0.8%

            

Insight Enterprises a,b

   120,600     2,721,942  
       
 

IT Services - 1.0%

            

Perot Systems Cl. A a,b

   220,500     3,757,320  
       
 
    SHARES   VALUE  

Semiconductors and Equipment - 4.0%

            

Cirrus Logic a,b

   224,718   $ 1,865,160  

Entegris a,b

   242,400     2,879,712  

Fairchild Semiconductor International a

   89,300     1,725,276  

IXYS Corporation a,b

   164,700     1,375,245  

†MKS Instruments a,b

   85,600     2,371,120  

Nextest Systems a

   164,500     2,248,715  

Semitool a,b

   181,889     1,747,953  
       
 
          14,213,181  
       
 

Software - 2.1%

            

iPass a,b

   316,280     1,714,238  

ManTech International Cl. A a,b

   118,300     3,647,189  

PAR Technology a,b

   42,300     359,973  

Pervasive Software a

   379,372     1,745,111  
       
 
          7,466,511  
       
 

Telecommunications - 0.2%

            

ADTRAN b

   30,600     794,682  
       
 

Total (Cost $30,688,907)

         35,764,356  
       
 

TOTAL COMMON STOCKS

           

(Cost $255,857,398)

         308,615,231  
       
 

REPURCHASE AGREEMENT – 13.0%

            

State Street Bank & Trust Company,

            

5.10% dated 6/29/07, due 7/2/07,

            

maturity value $45,899,499 (collateralized

            

by obligations of various U.S. Government

            

Agencies, valued at $47,030,100)

            

(Cost $45,880,000)

         45,880,000  
       
 

COLLATERAL RECEIVED FOR SECURITIES

            

LOANED – 22.6%

            

Money Market Funds

            

State Street Navigator Securities Lending

            

Prime Portfolio (7 day yield-5.27%)

            

(Cost $80,228,788)

         80,228,788  
       
 

TOTAL INVESTMENTS – 122.7%

           

(Cost $381,966,186)

         434,724,019  
           

LIABILITIES LESS CASH

            

AND OTHER ASSETS – (22.7)%

         (80,426,452 )
       
 

NET ASSETS – 100.0%

       $ 354,297,567  
       
 

a   Non-income producing.
 
b   All or a portion of these securities were on loan at June 30, 2007.
 
c   A security for which market quotations are no longer readily available represents 0.0% of net assets for Royce Micro-Cap Portfolio. This security has been valued at its fair value under procedures established by the Fund’s Board of Trustees.
 
d   Includes securities first acquired in 2007 and less than 1% of net assets.
 
†   New additions in 2007.
 
    Bold indicates a Fund’s largest 20 equity holdings in terms of June 30, 2007 market value.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. Royce Capital Fund 2007 Semiannual Report to Shareholders  |  21


Statements of Assets and Liabilities

June 30, 2007 (unaudited)

    Micro-Cap   Small-Cap
    Portfolio   Portfolio

ASSETS:

                

Investments at value (including collateral on loaned securities) *

   $ 676,434,307     $ 388,844,019  

Repurchase agreements (at cost and value)

     110,051,000       45,880,000  

Cash

     33,383       358  

Receivable for investments sold

     1,567,561       654,052  

Receivable for capital shares sold

     562,082       392,654  

Receivable for dividends and interest

     436,098       107,675  

Prepaid expenses and other assets

     3,260       1,614  

Total Assets

     789,087,691       435,880,372  

LIABILITIES:

                

Payable for collateral on loaned securities

     102,918,164       80,228,788  

Payable for investments purchased

     12,786,791       948,731  

Payable for capital shares redeemed

     858,906       42,439  

Payable for investment advisory fees

     685,502       291,085  

Accrued expenses

     136,061       71,762  

Total Liabilities

     117,385,424       81,582,805  

Net Assets

   $ 671,702,267     $ 354,297,567  

ANALYSIS OF NET ASSETS:

                

Paid-in capital

   $ 456,404,922     $ 266,715,469  

Undistributed net investment income (loss)

     2,042,846       1,723,466  

Accumulated net realized gain (loss) on investments and foreign currency

     96,084,909       33,100,711  

Net unrealized appreciation (depreciation) on investments and foreign currency

     117,169,590       52,757,921  

Net Assets

   $ 671,702,267     $ 354,297,567  

Investment Class

   $ 669,616,944     $ 352,214,036  

Service Class

     2,085,323       2,083,531  

SHARES OUTSTANDING:

                

(unlimited number of $.001 par value shares authorized for each Fund)

                

Investment Class

     42,528,891       29,846,127  

Service Class

     132,737       176,881  

NET ASSET VALUES:

                

(Net Assets ÷ Shares Outstanding) (offering and redemption price per share)

                

Investment Class

     $15.74       $11.80  

Service Class

     15.71       11.78  

*Investments at identified cost

   $ 559,264,772     $ 336,086,186  

Market value of loaned securities

     98,643,889       77,666,184  



22  |  Royce Capital Fund 2007 Semiannual Report to Shareholders		 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


Statements of Changes in Net Assets

 

    Micro-Cap Portfolio   Small-Cap Portfolio
   
 
    Six months ended           Six months ended        
    6/30/07   Year ended   6/30/07   Year ended
    (unaudited)   12/31/06   (unaudited)   12/31/06

INVESTMENT OPERATIONS:

                                

Net investment income (loss)

   $ 837,485     $ (438,651 )   $ 1,543,636     $ 180,298  

Net realized gain (loss) on investments and foreign currency

     42,637,250       61,308,861       17,278,053       15,832,811  

Net change in unrealized appreciation (depreciation) on investments and foreign currency

     12,117,141       27,296,223       13,051,835       16,638,306  

Net increase (decrease) in net assets from investment operations

     55,591,876       88,166,433       31,873,524       32,651,415  

DISTRIBUTIONS:

                                

Net investment income

                                

Investment Class

     –       (947,018 )     –       (160,670 )

Service Class

     –       (1,059 )     –       –  

Net realized gain on investments and foreign currency

                                

Investment Class

     –       (28,847,326 )     –       (11,959,081 )

Service Class

     –       (35,126 )     –       (4,597 )

Total distributions

     –       (29,830,529 )     –       (12,124,348 )

CAPITAL SHARE TRANSACTIONS:

                                

Value of shares sold

                                

Investment Class

     99,628,805       168,827,134       62,769,454       99,650,121  

Service Class

     785,455       1,242,229       2,076,698       100,000  

Distributions reinvested

                                

Investment Class

     –       29,794,340       –       12,119,749  

Service Class

     –       36,184       –       4,596  

Value of shares redeemed

                                

Investment Class

     (46,714,883 )     (79,785,472 )     (16,366,650 )     (45,248,435 )

Service Class

     (107,465 )     (1,273 )     (247,109 )     –  

Net increase (decrease) in net assets from capital share transactions

     53,591,912       120,113,142       48,232,393       66,626,031  

NET INCREASE (DECREASE) IN NET ASSETS

     109,183,788       178,449,046       80,105,917       87,153,098  

NET ASSETS:

                                

Beginning of period

     562,518,479       384,069,433       274,191,650       187,038,552  

End of period

   $ 671,702,267     $ 562,518,479     $ 354,297,567     $ 274,191,650  

UNDISTRIBUTED NET INVESTMENT INCOME (LOSS) AT END OF PERIOD

   $ 2,042,846     $ 1,205,361     $ 1,723,466     $ 179,830  

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. Royce Capital Fund 2007 Semiannual Report to Shareholders  |  23


Statements of Operations

Six Months Ended June 30, 2007 (unaudited)

    Micro-Cap   Small-Cap
    Portfolio   Portfolio

INVESTMENT INCOME:

                

Income:

                

Dividends

   $ 2,074,437     $ 2,249,559  

Interest

     2,532,679       930,452  

Securities lending

     219,695       –  

Total income

     4,826,811       3,180,011  

Expenses:

                

Investment advisory fees

     3,833,099       1,558,636  

Distribution fees

     2,012       1,525  

Shareholder reports

     47,946       14,499  

Custody

     34,217       17,641  

Administrative and office facilities

     23,128       11,469  

Trustees’ fees

     23,067       11,595  

Shareholder servicing

     13,231       11,628  

Audit

     12,776       12,636  

Legal

     2,833       1,404  

Registration

     2,588       1,882  

Other expenses

     21,647       5,793  

Total expenses

     4,016,544       1,648,708  

Compensating balance credits

     (21,901 )     (7,094 )

Fees waived by distributor

     (2,012 )     (1,525 )

Expenses reimbursed by investment adviser-Service Class

     (3,305 )     (3,714 )

Net expenses

     3,989,326       1,636,375  

Net investment income (loss)

     837,485       1,543,636  

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY:

                

Net realized gain (loss) on investments and foreign currency

                

Non-Affiliates

     42,743,379       17,278,053  

Affiliated Companies

     (106,129 )     –  

Net change in unrealized appreciation (depreciation) on investments and foreign currency

     12,117,141       13,051,835  

Net realized and unrealized gain (loss) on investments and foreign currency

     54,754,391       30,329,888  

NET INCREASE (DECREASE) IN NET ASSETS FROM INVESTMENT OPERATIONS

   $ 55,591,876     $ 31,873,524  


24  |  Royce Capital Fund 2007 Semiannual Report to Shareholders		 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


Financial Highlights

This table is presented to show selected data for a share outstanding throughout each period, and to assist shareholders in evaluating a Fund’s performance for the periods presented. Per share amounts have been determined on the basis of the weighted average number of shares outstanding during the period.
 
    Net Net   Net Realized
and Unrealized
           Distributions   Distributions
from Net		                               Ratio of Expenses
to Average Net Assets
  Ratio of Net
Investment		          
    Asset Value,  
Beginning
of Period		 Investment
Income
(Loss)		   Gain (Loss) on
Investments and
Foreign Currency		   Total from
Investment
Operations		   from Net
Investment
Income		   Realized Gain on
Investments and
Foreign Currency		   Total
Distributions		   Net Asset
Value, End
of Period		 Total
Return		   Net Assets,
End of Period
(in thousands)		 Prior to Fee
Waivers and
Balance Credits		   Prior
to Fee
Waivers		 Net of
Fee
Waivers		   Income (Loss)
to Average
Net Assets		   Portfolio
Turnover
Rate		  
Micro-Cap Portfolio – Investment Class
†2007   $ 14.40   $ 0.02     $ 1.32     $ 1.34     $ –     $ –     $ –     $ 15.74     9.31 %**   $ 669,617     1.31 %*     1.30 %*   1.30 %*     0.27 %*     24 %  
2006     12.57     0.01       2.63       2.64       (0.03 )     (0.78 )     (0.81 )     14.40     21.07       561,257     1.32       1.31     1.31       (0.09 )     41    
2005     11.50     (0.05 )     1.38       1.33       (0.06 )     (0.20 )     (0.26 )     12.57     11.61       384,069     1.33       1.33     1.33       (0.51 )     38    
2004     10.90     (0.09 )     1.58       1.49       –       (0.89 )     (0.89 )     11.50     13.85       345,499     1.34       1.34     1.34       (0.78 )     38    
2003     7.60     (0.08 )     3.80       3.72       –       (0.42 )     (0.42 )     10.90     49.16       249,652     1.36       1.36     1.35       (0.84 )     41    
2002     9.00     (0.08 )     (1.08 )     (1.16 )     –       (0.24 )     (0.24 )     7.60     (12.87 )     133,944     1.38       1.38     1.35       (0.88 )     27    
Micro-Cap Portfolio – Service Class(a)
†2007   $ 14.39   $ 0.00     $ 1.32     $ 1.32     $ –     $ –     $ –     $ 15.71     9.17 %**   $ 2,085     2.25 %*     2.24 %*   1.58 %*     0.02 %*     24 %  
2006     14.90     (0.04 )     0.34       0.30       (0.02 )     (0.79 )     (0.81 )     14.39     2.06 **     1,262     8.67 *     8.67 *   1.58 *     0.16 *     41    
Small-Cap Portfolio – Investment Class
†2007   $ 10.67   $ 0.06     $ 1.07     $ 1.13     $ –     $ –     $ –     $ 11.80     10.59 %**   $ 352,214     1.05 %*     1.05 %*   1.05 %*     0.99 %*     35 %  
2006     9.67     0.00       1.51       1.51       (0.01 )     (0.50 )     (0.51 )     10.67     15.57       274,089     1.08       1.08     1.08       0.08 )     54    
2005     9.00     0.01       0.76       0.77       –       (0.10 )     (0.10 )     9.67     8.56       187,039     1.11       1.11     1.11       0.11       45    
2004     7.59     (0.05 )     1.93       1.88       –       (0.47 )     (0.47 )     9.00     24.95       110,911     1.14       1.14     1.14       (0.62 )     47    
2003     5.71     (0.04 )     2.38       2.34       –       (0.46 )     (0.46 )     7.59     41.10       57,391     1.21       1.21     1.21       (0.55 )     70    
2002     6.66     (0.05 )     (0.87 )     (0.92 )     –       (0.03 )     (0.03 )     5.71     (13.81 )     18,190     1.87       1.87     1.35       (0.80 )     53    
Small-Cap Portfolio – Service Class(a)
†2007   $ 10.67   $ 0.03     $ 1.08     $ 1.11     $ –     $ –     $ –     $ 11.78     10.40 %**   $ 2,084     2.23 %*     2.22 %*   1.36 %*     0.58 %*     35 %  
2006     10.85     (0.01 )     0.33       0.32       –       (0.50 )     (0.50 )     10.67     2.94 **     103     15.77 *     15.77 *   1.36 *     (0.12 )*     54    
(a)   The Class commenced operations on May 2, 2006.
  *   Annualized.
 **   Not annualized.
 †   Six months ended June 30, 2007 (unaudited).

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
Royce Capital Fund 2007 Semiannual Report to Shareholders  |  25



Notes to Financial Statements (unaudited)

 

Summary of Significant Accounting Policies:
     Royce Micro-Cap Portfolio and Royce Small-Cap Portfolio (the “Fund” or “Funds”) are the two series of Royce Capital Fund (the “Trust”), a diversified open-end management investment company organized as a Delaware business trust. Shares of the Funds are offered to life insurance companies for allocation to certain separate accounts established for the purpose of funding qualified and non-qualified variable annuity contracts and variable life insurance contracts, and may also be offered directly to certain pension plans and retirement plans and accounts permitting accumulation of assets on a tax-deferred basis. Micro-Cap Portfolio and Small-Cap Portfolio commenced operations on December 27, 1996.
     Classes of shares have equal rights as to earnings and assets, except that each class may bear different fees and expenses for distribution, shareholder servicing, registration, shareholder reports, compensating balance credits and different expense reimbursements. Investment income, realized and unrealized capital gains or losses on investments and foreign currency, and expenses other than those attributable to a specific class are allocated to each class of shares based on its relative net assets.
     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

Valuation of Investments:
     Securities are valued as of the close of trading on the New York Stock Exchange (NYSE) (generally 4:00 p.m. Eastern time) on the valuation date. Securities that trade on an exchange, and securities traded on Nasdaq’s Electronic Bulletin Board, are valued at their last reported sales price or Nasdaq official closing price taken from the primary market in which each security trades or, if no sale is reported for such day, at their bid price. Other over-the-counter securities for which market quotations are readily available are valued at their highest bid price. Securities for which market quotations are not readily available are valued at their fair value under procedures established by the Board of Trustees. In addition, if, between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that are significant and may make the closing price unreliable, the Fund may fair value the security. The Funds use an independent pricing service to provide fair value estimates for relevant non-U.S. equity securities on days when the U.S. market volatility exceeds a certain threshold. This pricing service uses proprietary correlations it has developed between the movement of prices of non-U.S. equity securities and indices of U.S.-traded securities, futures contracts and other indications to estimate the fair value of relevant non-U.S. securities. 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. Investments in money market funds are valued at net asset value per share.

Foreign Currency:
     The Funds value their non-U.S. securities in U.S. dollars on the basis of foreign currency exchange rates provided to the Funds by their custodian, State Street Bank and Trust Company. The effects of changes in foreign exchange rates on investments and other assets and liabilities are
  
included with net realized and unrealized gains and losses on investments.
     Net realized foreign exchange gains or losses arise from sales and maturities of short-term securities, sales of foreign currencies, expiration of currency forward contracts, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund’s books, and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities, including investments in securities at the end of the reporting period, as a result of changes in foreign currency exchange rates.

Investment Transactions and Related Investment Income:
     Investment transactions are accounted for on the trade date. Dividend income is recorded on the ex-dividend date. Non-cash dividend income is recorded at the fair market value of the securities received. Interest income is recorded on an accrual basis. Realized gains and losses from investment transactions are determined on the basis of identified cost for book and tax purposes.

Expenses:
     The Funds incur direct and indirect expenses. Expenses directly attributable to a Fund are charged to the Fund’s operations, while expenses applicable to more than one series of the Trust are allocated equitably. Allocated personnel and occupancy costs related to the Royce Funds are included in administrative and office facilities expenses. The Fund has adopted a deferred fee agreement that allows the Trustees to defer the receipt of all or a portion of Trustees Fees otherwise payable. The deferred fees are invested in certain Royce Funds until distribution in accordance with the agreement.

Compensating Balance Credits:
     The Fund has arrangements with its custodian bank and transfer agent, whereby a portion of the custodian’s fee and transfer agent’s fee is paid indirectly by credits earned on the Fund’s cash on deposit with the bank and transfer agent. These deposit arrangements are an alternative to purchasing overnight investments.

Distributions and Taxes:
     As qualified regulated investment companies under Subchapter M of the Internal Revenue Code, the Funds are not subject to income taxes to the extent that each Fund distributes substantially all of its taxable income for its fiscal year.
     The Funds pay any dividends and capital gain distributions annually in December. Because federal income tax regulations differ from generally accepted accounting principles, income and capital gain distributions determined in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Accordingly, the character of distributions and composition of net assets for tax purposes differ from those reflected in the accompanying financial statements.

Repurchase Agreements:
     The Funds may enter into repurchase agreements with institutions that the Funds’ investment adviser has determined are creditworthy. Each Fund restricts repurchase agreements to maturities of no more than seven days.


26  |  Royce Capital Fund 2007 Semiannual Report to Shareholders		  


 

 

Securities pledged as collateral for repurchase agreements, which are held until maturity of the repurchase agreements, are marked-to-market daily and maintained at a value at least equal to the principal amount of the repurchase agreement (including accrued interest). Repurchase agreements could involve certain risks in the event of default or insolvency of the counter-party, including possible delays or restrictions upon the ability of each Fund to dispose of its underlying securities.

Securities Lending:
     The Funds loan securities to qualified institutional investors for the purpose of realizing additional income. Collateral on all securities loaned for the Funds is accepted in cash and cash equivalents and invested temporarily by the custodian. The collateral is equal to at least 100% of the current market value of the loaned securities. The market value of the loaned securities is determined at the close of business of the Funds and any additional required collateral is delivered to the Funds on the next business day.

Line of Credit:
     The Funds, along with certain other Royce Funds, participate in a $75 million line of credit (“Credit Agreement”) to be used for temporary or emergency purposes. Pursuant to the Credit Agreement, each participating Fund is liable only for principal and interest payments related to borrowings made by that Fund. Borrowings under the Credit Agreement bear interest at a rate equal to the prevailing federal funds rate plus the federal funds rate margin. The Funds did not utilize the line of credit during the six months ended June 30, 2007.
  
Recent Accounting Pronouncements:
     Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. FIN 48 was adopted for the Funds on June 29, 2007. There was no material impact to the financial statements or disclosures thereto as a result of the adoption of this pronouncement.
     FASB Statement of Financial Accounting Standard No. 157, “Fair Value Measurement” (“FAS 157”), provides enhanced guidance for using fair value to measure assets and liabilities. The standard requires companies to provide expanded information about the assets and liabilities measured at fair value and the potential effect of these fair valuations on an entity’s financial performance. The standard does not expand the use of fair value in any new circumstances, but provides clarification on acceptable fair valuation methods and applications. Adoption of FAS 157 is required for fiscal years beginning after November 15, 2007. The standard is not expected to materially impact the Fund’s financial statements.

Capital Share Transactions (in shares):                          
                                                                 
                    Shares issued for reinvestment   Shares   Net increase (decrease) in
    Shares sold   of distributions   redeemed   shares outstanding
   
 
 
 
    Period ended           Period ended           Period ended           Period ended        
    6/30/07   Period ended   6/30/07   Period ended   6/30/07   Period ended   6/30/07   Period ended
    (unaudited)   12/31/06   (unaudited)   12/31/06   (unaudited)   12/31/06   (unaudited)   12/31/06
Micro-Cap Portfolio                                                                

Investment Class

     6,651,249       12,072,766       –       2,086,439       (3,096,194 )     (5,736,206 )     3,555,055       8,422,999  

Service Class

     52,106       85,242       –       2,536       (7,060 )     (87 )     45,046       87,691  
Small-Cap Portfolio                                                                

Investment Class

     5,613,803       9,674,258       –       1,135,871       (1,445,066 )     (4,474,336 )     4,168,737       6,335,793  

Service Class

     189,393       9,217       –       431       (22,160 )     –       167,233       9,648  

  Royce Capital Fund 2007 Semiannual Report to Shareholders  |  27


Notes to Financial Statements (unaudited) (continued)

Investment Adviser and Distributor:
Investment Adviser: Under the Trust’s investment advisory agreements with Royce & Associates, LLC (“Royce”), Royce is entitled to receive Investment Advisory fees that are computed daily and payable monthly, at an annual rate of 1.25% and 1.00% of the average net assets of Micro-Cap Portfolio and Small-Cap Portfolio, respectively. Royce has contractually committed to reimburse expenses to the extent necessary to maintain the net annual operating expense ratios to average net assets at or below 1.58% and 1.36% for the Service Classes of Micro-Cap Portfolio and Small-Cap Portfolio, respectively, through December 31, 2007. For the six months ended June 30, 2007, Micro-Cap Portfolio recorded advisory fees of $3,833,099 and Small-Cap Portfolio recorded advisory fees of $1,558,636.

 Distributor: Royce Fund Services, Inc. (“RFS”), the distributor of the Trust’s shares, is a wholly owned subsidiary of Royce. RFS is entitled to receive distribution fees from each Fund’s Service Class that are computed daily and payable monthly, at an annual rate of 0.25% of the average net assets of each Class. For the six months ended June 30, 2007, Micro-Cap Portfolio-Service Class recorded net distribution fees of $0 and Small-Cap Portfolio-Service Class recorded net distribution fees of $0.

 Purchases and Sales of Investment Securities:
       For the six months ended June 30, 2007, the cost of purchases and the proceeds from sales of investment securities, other than short-term securities and collateral received for securities loaned, were as follows:

    Purchases   Sales                

Micro-Cap Portfolio

   $ 169,516,039     $ 125,309,442                  

Small-Cap Portfolio

     133,018,389       97,221,522                  

Class Specific Expenses:                                              
Class specific expenses were as follows:
                                      
                              Expenses
    Net               Transfer Agent       Reimbursed by
    Distribution   Shareholder   Shareholder       Balance       Investment
    Fees   Servicing   Reports   Registration   Credits   Total   Adviser

Micro-Cap Portfolio – Investment Class

   $ –     $8,219     $47,238     $2,556     $(6,814 )     $51,199   $ –  

Micro-Cap Portfolio – Service Class

     –     5,012     708     32     (25 )     5,727     3,305  
      –     13,231     47,946     2,588     (6,839 )              

Micro-Cap Portfolio – Investment Class

     –     6,622     13,829     1,828     (3,485 )     18,794     –  

Micro-Cap Portfolio – Service Class

     –     5,006     670     54     (12 )     5,718     3,714  
      –     11,628     14,499     1,882     (3,497 )              

Tax Information:
     At June 30, 2007, net unrealized appreciation (depreciation) based on identified cost for tax purposes was as follows:

            Net Unrealized   Gross Unrealized
            Appreciation  
    Tax Basis Cost   (Depreciation)   Appreciation   Depreciation

Micro-Cap Portfolio

   $ 669,359,286     $ 117,126,021     $ 140,613,772     $ 23,487,751  

Micro-Cap Portfolio

     381,969,791       52,754,228       58,344,466       5,590,238  

     The primary difference between book and tax basis cost is the timing of the recognition of losses on securities sold for book and tax purposes.

Transactions in Affiliated Companies:
     An “Affiliated Company,” as defined in the Investment Company Act of 1940, is a company in which a fund owns 5% or more of the company’s outstanding voting securities at any time during the period. The following transactions were effected in shares of such companies for the six months ended June 30, 2007.

          Market                 Realized                 Market
    Shares     Value     Cost of     Cost of     Gain     Dividend   Shares     Value
Affiliated Company   12/31/06     12/31/06     Purchases     Sales     (Loss)     Income   6/30/07     6/30/07
Micro-Cap Portfolio                                              
Inforte Corporation *   396,000   $ 1,481,040     $2,416,930   $ 4,661,818     $(106,129 )   $ –          
        $ 1,481,040                 (106,129 )   $ –          
                                               
*Not an Affiliated Company at June 30, 2007.                            
                                               
28  |  Royce Capital Fund 2007 Semiannual Report to Shareholders


Understanding Your Fund’s Expenses (unaudited)

    As a shareholder of a mutual fund, you pay ongoing expenses, including management fees and other Fund expenses including, for some funds, distribution and/or service (12b-1) fees. Using the information below, you can estimate how these ongoing expenses (in dollars) affect your investment and compare them with the ongoing expenses of other funds. You may also incur one-time transaction expenses, including redemption fees, which are not shown in this section and would result in higher total costs. The example is based on an investment of $1,000 invested at January 1, 2007 and held for the entire six-month period ended June 30, 2007. Service Class shares are generally available only through certain brokers or retirement plan administrators who receive distribution and/or service fees from the Fund for services that they perform.

Actual Expenses
     The first part of the table below provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value at June 30, 2007 by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during this period.
    
Hypothetical Example for Comparison Purposes
    The second part of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
    Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads), redemption fees, or exchange fees. Therefore, this section is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

      Actual   Hypothetical (5% per year return before expenses)
     
 
    Beginning   Ending   Expenses Paid   Beginning   Ending   Expenses Paid   Annualized
    Account Value   Account Value   During the   Account Value   Account Value   During the   Expense
    1/1/07   6/30/07   Period (1)   1/1/07   6/30/07   Period (1)   Ratio (2)
Investment Class                                        
                                         
Micro-Cap Portfolio    

$1,000.00

    

$1,093.06

    

$6.75

    

$1,000.00

    

$1,018,36

    

$6.51

  

1.30%
Small-Cap Portfolio     1,000.00     1,105,90     5.48     1,000.00     1,019,59     5.26   1.05
                                         
Service Class                                        
                                         
Micro-Cap Portfolio     1,000.00     1,091.73     8.19     1,000.00     1,016.95     7.90   1.58
Small-Cap Portfolio     1,000.00     1,104.03     7.09     1,000.00     1,018.04     6.80   1.36
                                         
(1)

Expenses are equal to the Fund’s annualized expense ratio multiplied by the average account value for the period, multiplied by 181 days in the most recent fiscal half year divided by 365 days (to reflect the half year period). This information does not include fees or expenses of the variable annuity contracts or retirement plans investing in the Fund.
(2) Annualized expense ratio used to derive figures in the table based on the most recent fiscal half year.
                                         
                                         
                        Royce Capital Fund 2007 Semiannual Report to Shareholders  |  29


Board Approval of Investment Advisory Agreements

 

     At meetings held on June 6-7, 2007, Royce Capital Fund’s Board of Trustees, including all of the non-interested trustees, approved the continuance of the Investment Advisory Agreements between Royce & Associates, LLC (“R&A”) and each of Royce Micro-Cap Portfolio and Royce Small-Cap Portfolio (the “Funds”). In reaching these decisions, the Board reviewed the materials provided by R&A, which included, among other things, information prepared internally by R&A and independently by Morningstar Associates, LLC (“Morningstar”) containing detailed expense ratio and investment performance comparisons for each Fund with other mutual funds in their “peer group”, information regarding the past performance of Funds managed by R&A and a memorandum outlining the legal duties of the Board prepared independent counsel to the non-interested trustees. R&A also provided the trustees with an analysis of its profitability with respect to providing investment advisory services to each of the Funds. In addition, the Board took into account information furnished throughout the year at regular Board meetings, including reports on investment performance, shareholder services, regulatory compliance, brokerage commissions and research, brokerage and execution products and services provided to the Funds. The Board also considered other matters it deemed important to the approval process such as payments made to R&A or its affiliates relating to allocation of Fund brokerage fees, and other direct and indirect benefits to R&A and its affiliates, from their relationship with the Funds. The trustees also met throughout the year with investment advisory personnel from R&A. The Board, in its deliberations, recognized that, for many of the Funds’ shareholders, the decision to purchase Fund shares included a decision to select R&A as the investment adviser and that there was a strong association in the minds of Fund shareholders between R&A and each Fund. In considering factors relating to the approval of the continuance of the Investment Advisory Agreements, the non-interested trustees received assistance and advice from, and met separately with, their independent counsel. While the Investment Advisory Agreements for the Funds were considered at the same meetings, the trustees dealt with each agreement separately. Among other factors, the trustees considered the following:
     The nature, extent and quality of services provided by R&A: The trustees considered the following factors to be of fundamental importance to their consideration of whether to approve the continuance of the Funds’ Investment Advisory Agreements: (i) R&A’s more than 30 years of small-cap value investing experience and track record; (ii) R&A’s sole focus on mid-cap, small-cap and micro-cap value investing; (iii) the consistency of R&A’s approach to managing mutual funds over more than 30 years; (iv) the integrity and high ethical standards adhered to at R&A; (v) R&A’s specialized experience in the area of trading small- and micro-cap securities; (vi) R&A’s historical ability to attract and retain portfolio management talent and (vii) R&A’s focus on shareholder interests as exemplified by capping expenses on smaller funds, closing funds to new investors when R&A believed such closings were in the best interests of shareholders and expansive shareholder reporting and communications. The trustees reviewed the services that R&A provides to the Funds, including, but not limited to, managing each Fund’s investments in accordance with the stated policies of each Fund. The trustees determined that the services to be provided to each Fund by R&A would be the same as those it previously provided to the Funds. They also took into consideration the histories, reputations and backgrounds of R&A’s portfolio managers for the Funds, finding that these would likely have an impact on the continued success of the funds. Lastly, the trustees noted R&A’s ability to attract quality and experienced personnel. The trustees concluded that the services provided by R&A to each Fund compared favorably to services provided by R&A to other R&A client accounts, including other funds, in both nature and quality, and that the scope of services provided by R&A would continue to be suitable for each Fund.
     Investment performance of the Funds and R&A: In light of R&A’s risk-averse approach to investing, the trustees believe that risk-adjusted performance continues to be an appropriate measure of each Fund’s investment performance. One measure of risk-adjusted performance the trustees have historically used in their review of the Funds’ performance is the Sharpe Ratio. The Sharpe Ratio is a risk-adjusted measure of performance developed by Nobel Laureate William Sharpe. It is calculated by dividing a fund’s annualized excess returns by its annualized standard deviation to determine reward per unit of risk. The higher the Sharpe Ratio, the better a fund’s historical risk-adjusted performance. The Board attaches primary importance to risk-adjusted performance over relatively long periods of time, typically three to ten years. The trustees noted that Royce Micro-Cap Portfolio’s Sharpe Ratio for the three-year, five-year and ten-year periods ended December 31, 2006 placed it in the 2nd, 1st and 1st quartile, respectively, among its Morningstar micro-cap fund peer group, and Royce Small-Cap Portfolio placed it in the 1st, 2nd and 1st quartile for the three-year, five-year and ten-year periods within Morningstar’s small blend category.
     The trustees noted that R&A manages a number of funds that invest in small-cap and micro-cap issuers, many of which were outperforming the Russell 2000 Index and their competitors. Although the trustees recognized that past performance is not necessarily an indicator of future results, they found that R&A had the necessary qualifications, experience and track record in managing small-cap and micro-cap securities to manage the Funds. The trustees determined that R&A continued to be an appropriate investment adviser for the Funds and concluded that each Fund’s performance supported the renewal of its Investment Advisory Agreement.
     Cost of the services provided and profits realized by R&A from its relationship with each Fund: The trustees considered the cost of the services provided by R&A and profits realized by R&A from its relationship with each Fund. As part of the analysis, the Board discussed with R&A its methodology in allocating its costs to each Fund and concluded that its allocations were reasonable. The trustees concluded that R&A’s profits were reasonable in relation to the nature and quality of services provided.
     The extent to which economies of scale would be realized as the Funds grow and whether fee levels would reflect such economies of scale: The trustees considered whether there have been economies of scale in respect of the management of the Funds, whether each of the Funds has appropriately benefited from any economies of scale and whether there is potential for realization of any further economies of scale. The trustees noted the time and effort involved in managing portfolios of small- and micro-cap stocks and that they did not involve the same efficiencies as do portfolios of large-cap stocks. The trustees concluded that the current fee structure for each Fund was reasonable, and that no changes were currently necessary.


30  |  Royce Capital Fund 2007 Semiannual Report to Shareholders		  


Comparison of services to be rendered and fees to be paid to those under other investment advisory contracts, such as contracts of the same and other investment advisers or other clients: The trustees reviewed the investment advisory fee paid by each Fund and compared both the services to be rendered and the fees to be paid under the Investment Advisory Agreements to other contracts of R&A and to contracts of other investment advisers to registered investment companies investing in small- and micro-cap stocks, as provided by Morningstar. The trustees noted the importance of the net expense ratio in measuring a fund’s efficiency, particularly in light of the variations in the mutual fund industry as to who is responsible for which expenses. It was noted that Royce Micro-Cap Portfolio placed in the 2nd quartile, respectively, and Royce Small-Cap Portfolio placed in the top quartile, both among its peers.
     The trustees noted that R&A had, from time to time, waived advisory fees in order to maintain expense ratios at competitive levels. The trustees also considered fees charged by R&A to institutional and other clients and noted that the Funds’ advisory fees compared favorably to these other accounts.
     The entire Board, including all the non-interested trustees, approved the renewal of the existing Investment Advisory Agreements, concluding that a contract renewal on the existing terms was in the best interest of the shareholders of each Fund and that each investment advisory fee rate was reasonable in relation to the services provided.

  Royce Capital Fund 2007 Semiannual Report to Shareholders  |  31


Notes to Performance and Other Important Information

The thoughts expressed in this report concerning recent market movements and future prospects for small company stocks are solely the opinion of Royce at June 30, 2007, and, of course, historical market trends are not necessarily indicative of future market movements. Statements regarding the future prospects for particular securities held in the Funds’ portfolios and Royce’s investment intentions with respect to those securities reflect Royce’s opinions as of June 30, 2007 and are subject to change at any time without notice. There can be no assurance that securities mentioned in this report will be included in any Royce-managed portfolio in the future.

    The Russell 2000, Russell 2000 Value, Russell 2000 Growth, Nasdaq Composite, S&P SmallCap 600, and S&P 500 are unmanaged indices of domestic common stocks. Returns for the market indices used in this report were based on information supplied to Royce by Frank Russell. Royce has not independently verified the above described information. The Royce Funds is a service mark of The Royce Funds. Distributor: Royce Fund Services, Inc.

    The Funds invest primarily in securities of mid-, small- and/or micro-cap companies that may involve considerably more risk than investments in securities of larger-cap companies (see “Primary Risks for Fund Investors” in the prospectus). Please read the prospectus carefully before investing or sending money. A copy of the Funds’ current prospectus and Statement of Additional Information may be obtained by calling 1-800-221-4268, or by visiting www.roycefunds.com. All publicly released material Fund information is always disclosed by the Funds on their website at www.roycefunds.com.

 
Forward-Looking Statements
This material contains forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve risks and uncertainties, including, among others, statements as to:

•    the Funds’ future operating results,

•    the prospects of the Funds’ portfolio companies,

•    the impact of investments that the Funds have made or may make,
•    the dependence of the Funds’ future success on the general economy and its impact on the companies and industries in which the Funds invest, and

•    the ability of the Funds’ portfolio companies to achieve their objectives.

      This review and report use words such as “anticipates,” “believes,” “expects,” “future,” “intends,” and similar expressions to identify forward-looking statements. Actual results may differ materially from those projected in the forward looking statements for any reason.

      The Royce Funds have based the forward-looking statements included in this review and report on information available to us on the date of the report, and we assume no obligation to update any such forward-looking statements. Although The Royce Funds undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make through future shareholder communications or reports.

     
     
  Proxy Voting
A copy of the policies and procedures that The Royce Funds use to determine how to vote proxies relating to portfolio securities and information regarding how each of The Royce Funds voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available, without charge, on The Royce Funds’ website at www.roycefunds.com, by calling 1-800-221-4268 (toll-free) and on the website of the Securities and Exchange Commission (“SEC”), at www.sec.gov.
  
     
  Form N-Q Filing
The Funds file their complete schedules of investments with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Funds’ Forms N-Q are available on The Royce Funds’ website at www.roycefunds.com and on the SEC’s website at www.sec.gov. The Funds’ Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. To find out more about this public service, call the SEC at 1-202-942-8090. The Funds’ complete schedules of investments are updated quarterly, and are available at www.roycefunds.com.
  
     
     

32  |  Royce Capital Fund 2007 Semiannual Report to Shareholders


Postscript: Tastes Great

Our taste buds know what’s good. Just as important, they know it in an absolute sense. Whether we go for haute cuisine, burgers and fries, or both, we know what we like, and we like it for its own sake. Although everyone’s taste is subjective, when we sit down anticipating a great meal, we’re not thinking in relative terms. If we love Italian food, it’s not because it’s so enjoyable relative to French or Indian or Chinese or Tex-Mex. We simply enjoy it on its own merits. We may prefer it to other cuisines, just as we may prefer veal piccata to linguine and clams, but that’s not quite the same thing as enjoying something on a relative basis.

  

overlooked and—in our view, anyway—the undervalued. This can create performance disparities with our benchmark (as well as other small-cap indices), as well as the occasional bout of indigestion when the Funds experience relative underperformance. We accept these hiccups and attempt to stick to a steady diet of long-term above-average returns. Hopefully, our shareholders share our taste for the importance of absolute performance.

     So when Chuck Royce first began to say, “You can’t eat from the table of relative returns, only from the table of absolute performance,” he may have been closer than he initially imagined to describing why absolute performance goals are so critical to us at The Royce Funds. For each of our portfolios, we seek strong absolute returns over market cycle and other long-term periods.

     Of course, we understand that there will be times when this is not the case. Particularly during periods of relative underperformance, we expect to hear questions about what’s on our small-cap menu, about why we’re not beating our small-cap benchmark, or why we’re not using another index as a benchmark that happens to be doing better than our Funds are at the time. These criticisms are something of an occupational hazard and thus explain why we choose to discuss performance in both relative and absolute terms.

(This is consistent with our goal of doubling our money in four to five years with any stock that we select for our portfolios.) We may not always meet the mark, but the salient point is that we have established a target for our portfolios that’s based squarely on long-term, absolute results.

 

When Chuck Royce first began to say, “You can’t eat from the table of relative returns, only from the table of absolute performance,” he may have been closer than he initially imagined to describing why absolute performance goals are so critical to us at The Royce Funds. For each of our portfolios, we seek strong absolute returns over market cycle and other long-term periods.

  

     In many ways, we like to think of ourselves as “bench-mark agnostic.” In other words, we select companies for our portfolios based on each business’s absolute return potential, and not because we think that they can beat the return provided by a relevant small-cap index.

     As active small-cap managers, we tend to be less anxious about short-term performance as a whole than those of our peers who may be more focused on beating a benchmark or who seek to replicate an index in terms of portfolio holdings or similar industry and sector weightings. By contrast, we are strictly stock pickers, and thus our sector and industry weightings are byproducts of our focus on individual companies. This bottom-up, business-buyer’s approach tends to make our managers hungry for the

  

Our focus is on security selection, on the search for compelling values in the large and diverse small-cap marketplace. At the same time, however, we recognize the need to frame our Funds’ market cycle and other long-term performance for our investors. The Russell 2000 is thus useful in helping us to chart our progress, but our true appetite is best satisfied by what we love best—strong, absolute returns over the long term.

This page is not part of the 2007 Semiannual Report to Shareholders  


 
 
   
   
   
   
   
   
   
 


Wealth Of Experience
With approximately $32.7 billion in open- and closed-end fund assets under management, Royce & Associates is committed to the same small-company investing principles that have served us well for more than 30 years. Charles M. Royce, our Chief Investment Officer, enjoys one of the longest tenures of any active mutual fund manager. Royce’s investment staff includes eight Portfolio Managers, as well as 11 assistant portfolio managers and analysts, and six traders.


Multiple Funds, Common Focus
Our goal is to offer both individual and institutional investors the best available small-cap value portfolios. Unlike a lot of mutual fund groups with broad product offerings, we have chosen to concentrate on small-company value investing by providing investors with a range of funds that take full advantage of this large and diverse sector.


Consistent Discipline
Our approach emphasizes paying close attention to risk and maintaining the same discipline, regardless of market movements and trends. The price we pay for a security must be significantly below our appraisal of its current worth. This requires a thorough analysis of the financial and business dynamics of an enterprise, as though we were purchasing the entire company.


Co-Ownership Of Funds
It is important that our employees and shareholders share a common financial goal; our officers, employees and their families currently have approximately $122 million invested in The Royce Funds.
   
           
   
  General Information        
  Additional Report Copies        
  and Prospectus Inquiries        
  (800) 221-4268        
           
 
www.roycefunds.com

This review and report must be accompanied or preceded by a current prospectus for the Funds. Please read the prospectus carefully before investing or sending money.
    
   
   
 
   
   
   
   
  TheRoyceFunds
  
RCF-REP-0607
  
   
   
   
   



Item 2. Code(s) of Ethics –  Not applicable to this semi-annual report.

Item 3. Audit Committee Financial Expert – Not applicable to this semi-annual report.

Item 4. Principal Accountant Fees and Services – Not applicable to this semi-annual report.

Item 5. Audit Committee of Listed Registrants – Not applicable.

Item 6. Schedule of Investments – See Item 1.

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies – Not applicable.

Item 8. Portfolio Managers of Closed-End Management Investment Companies – Not applicable.

Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers –  Not applicable.

Item 10. Submission of Matters to a Vote of Security Holders – None.

Item 11. Controls and Procedures.

(a) Disclosure Controls and Procedures. The Principal Executive and Financial Officers concluded that the Registrant’s Disclosure Controls and Procedures are effective based on their evaluation of the Disclosure Controls and Procedures as of a date within 90 days of the filing date of this report.

(b) Internal Control over Financial Reporting. There were no significant changes in Registrant’s internal control over financial reporting or in other factors that could significantly affect this control subsequent to the date of the evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses during the second fiscal quarter of the period covered by this report.




Item 12. Exhibits attached hereto.
(a)(1) Not applicable.

(a)(2) Separate certifications by the Registrant’s Principal Executive Officer and Principal Financial Officer as required by Rule 30a-2(a) under the Investment Company Act of 1940.

(a)(3) Not Applicable

(b) Separate certifications by the Registrant’s Principal Executive Officer and Principal Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(b) under the Investment Company Act of 1940.

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ROYCE CAPITAL FUND
   
BY: /s/ Charles M. Royce
  Charles M. Royce
  President
   
Date: August 29, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

ROYCE CAPITAL FUND     ROYCE CAPITAL FUND
               
BY: /s/Charles M. Royce   BY: /s/John D. Diederich  
  Charles M. Royce       John D. Diederich    
  President       Chief Financial Officer    
               
Date: August 29, 2007     Date: August 29, 2007