It was a poignant and peculiar spectacle.

An audience of 200 authors, literary patrons and assorted luminaries had gathered Saturday night in the sumptuous wood-paneled hush of the Folger Library's Reading Room. As a bearded giant of a man began making his way to the rostrum, the fidgeting creak of folding chairs and rustle of programs subsided. And the crowd turned its rapt attention to one of America's most genuinely obscure men of letters: Toby Olson, who was accepting the third annual PEN/Faulkner Award for Fiction.

At 6-foot-4, his ruddy face enwreathed in a golden mane, Olson looked like some victorious siege lord out of a Norse saga. But in fact for two decades, the 45-year-old professor from Temple University had labored mightily in near oblivion. After 20 marginally successful books of poetry, his first novel sank with barely a ripple. And his second, "Seaview," had been printed in only 2,500 paperbound copies by New Directions, ignored by reviewers and, as of a week ago, seemed doomed to the pulp mills.

Yet here he was, head bowed, fumbling with his eyeglasses before the convened admiration of award chairman Mary Lee Settle, fellow nominees Bobbie Ann Mason ("Shiloh and Other Stories"), Maureen Howard ("Grace Abounding") and William S. Wilson ("Birthplace"), judges Richard Price and Walter Abish, a covey of writers as diverse as Doris Grumbach, Susan Shreve, Peter Taylor, Dan Moldea and Richard Bausch, and sundry grandees from Roger Mudd to Folger director O.B. Hardison.

In the beleaguered brotherhood of poetry magazines and small presses, "I have felt a sense of literary community before," Olson said throatily. "Only this time the community is standing in the world and not against it."

It was a welcome high point in a ceremony that had gotten off to a rather muddled start. Two nominees--George Steiner ("The Portage to San Cristobal of A.H.") and Anne Tyler ("Dinner at the Homesick Restaurant")--did not attend.

Settle, with customary effervescence, opened the program by tracing the history of the award, sponsored by PEN, the national writers' and editors' organization, and the PEN/South chapter, from its origins in Charlottesville, Va., after the demise of the National Book Awards. "I was going to say I whelped it," Settle said, "but that has unfortunate connotations. So let's say I'm its midwife." And since the prize office moved to the Folger last year, "the baby is now in school, and has become the national award we all wanted it to be." She then introduced Hardison, noting that he had just received the Order of the British Empire for his Shakespearean endeavors.

"My wife told me," Hardison said, " 'You were born O.B., and now you've finally gotten to be O.B.E.' 'Yes,' I said. 'The only thing left is obit.' "

Hardison then introduced the judges, and the affair took a temporary turn for the dismal. Price ("The Wanderers," "The Breaks") and Abish (1980 PEN/Faulkner winner for "How German Is It?") were to read the judges' citation for each nominated book before Hardison presented $1,000 to each of the nominees and $5,000 to Olson. Price, who complemented his jacket and tie with jeans, tennis shoes and diamond earring in the left ear, speed-muttered through the citations like he was reading the back of a parking ticket. And Abish, a compact man with a patch over one eye and a fierce intensity in the other, intoned the prose as if he had been kept after school and forced to write it 100 times on the blackboard. "Well," a white-haired matron in the audience whispered loudly, "they may be able to write, but they certainly can't SPEAK!"

Finally, Richard Gilman, a Yale professor and president of the PEN/American Center in New York, presented the prize to Olson and the grateful crowd exited to a lavish buffet reception. Conversational eddies swirled around Price, now living in Greenwich Village and writing screenplays: "It takes me two years between books anyway, so I might as well make a lot of dough." A short man with a dark mat of slicked-back hair, Price said, "You don't realize until you've read the year's books that there's such unbelievable s--- getting published." Not only in commercial properties--"you know, 'Garfield Gets Altered,' that kind of stuff"--but also among the nearly 300 novels the judges considered. "It's abominable. Tried-and-true subjects, thrillers, schlock books." Price said he chose "Seaview" because of its quality and because "all things being equal, it should go to somebody who needs the attention. We don't want to pin another medal on somebody's chest who's already the Omar Bradley of literature."

Abish, whose novel has sold about 16,000 copies in the United States and has been printed in nine countries since winning the award, said that "compared to books written 15 years ago, the writers are far more competent--writing classes have had a certain effect--but there's a sort of formulaic element to them. They're well-written but thin." Finding Olson's unheralded novel in that pile, he said, "is itself an achievement. Especially since the critical establishment generally disregards both small presses and paperbacks. ("I never saw the book," said author/critic Grumbach. "But if I had, would I have reviewed it? I really don't know.")

A native of Illinois, Olson grew up on the road, migrating to the Southwest as his father, a victim of progressive arthritis, sought new climates and cures. His father died when Olson was 17, and for 10 years he traveled and served in the Navy before finishing his education. Seven colleges later, he had accumulated a wife, a master's degree in English and a lifelong love of Lawrence and Faulkner: "Maybe what I admire most is the obsessiveness--the desire to get to something that can't be said." So it is with "Seaview," about the transcontinental odyssey of a golf hustler and his wife who is dying of cancer. It came as easily as the transition from poetry to prose, Olson said. "I deal a lot with death. It comes naturally when you reach a certain age and your relatives are dying." He said he had never intended to write a commercially successful book. "Absolutely not! I don't want to sound self-righteous. But after thinking of myself as a poet all these years, it just isn't important," and he said he would have gone on working with the same obstinate integrity whether "Seaview" disappeared or not.

Which it didn't. And that, for Settle, is the award's pragmatic bottom line: "I like to imagine that someplace in a publishing house somewhere, an editor picks up a novel" long since published, and says to his colleague, " 'It's time to shred this book.' And the other one says, 'Damn it, we can't. There's that damn PEN/Faulkner Award!' "