GABELLI EQUITY SERIES FUNDS INC, 497, 1996-02-02

GABELLI EQUITY SERIES FUNDS INC
497, 1996-02-02

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The Gabelli Equity Income Fund
One Corporate Center
Rye, New York 10580-1434
Telephone: 1-800-GABELLI (1-800-422-3554)

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PROSPECTUS
January 30, 1996

The Gabelli Equity Income Fund (the "Fund") is a series of Gabelli Equity Series
Funds, Inc., a Maryland corporation (the "Corporation"). The Fund is an
open-end, diversified, management investment company whose investment objective
is to seek a high level of total return on its assets with an emphasis on
income. The Fund has a distribution plan which permits it to pay up to .25% per
year of its average daily net assets for marketing and shareholder services and
expenses. The Fund seeks to achieve its investment objective through a
combination of capital appreciation and current income by investing primarily in
income producing equity securities.

The minimum initial investment is $1,000. A maximum sales charge of 4.50% will
be imposed on the purchases of Fund shares for new accounts. Shareholder
purchases made in accounts established prior to September 30, 1993 will never be
subject to a sales charge. (See "Purchase of Shares"). For further information,
contact Gabelli & Company, Inc. at the address or telephone number shown above.

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This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Fund. A Statement of Additional Information
dated January 30, 1996 (the "Additional Statement") containing additional
information about the Fund has been filed with the Securities and Exchange
Commission and is incorporated by reference into this Prospectus. For a free
copy, write or call the Fund at the telephone number or address set forth above.

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This Prospectus should be retained
by investors for future reference.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

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PROSPECTUS SUMMARY
------------------

The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus.

The Fund: The Gabelli Equity Income Fund is an open-end, diversified,
management investment company.

Investment Objective: The Fund's investment objective is to seek a high level of
total return on its assets with an emphasis on income. The Fund will seek
to achieve this objective through a combination of capital appreciation and
current income by investing primarily in income producing equity
securities. The Fund's investment adviser will look for such securities
that have a better yield than the average of the Standard & Poor's 500
Stock Index, as well as capital gains potential. Although the Fund may also
invest in any type of debt instrument and may use various special
investment techniques, under normal market conditions the Fund will invest
at least 65% of its total assets in income producing equity securities
(which include common stocks, preferred stocks and securities convertible
into or exchangeable for common and preferred stock). See "Investment
Objective and Policies and Related Risk Factors" and "Other Investment
Techniques and Related Risk Factors."

Thereis no assurance that the Fund will achieve its investment objective. The
investment objective of the Fund and its investment restrictions described
in the Additional Statement are fundamental and may not be changed without
shareholder approval. Its other investment policies may be changed by the
Board of Directors without shareholder approval.

Management and Fees: Gabelli Funds, Inc. (the "Adviser") serves as the Fund's
investment adviser and is compensated for its services and its related
expenses at an annual rate of 1.00% of the Fund's average daily net assets.
This fee is higher than that paid by most mutual funds. Gabelli & Company,
Inc. (the "Distributor"), will act as distributor for Fund shares. The Fund
has a distribution plan which permits it to pay the Distributor and others
up to .25% per year of its average daily net assets for marketing and
shareholder services and expenses. See "Management of the Fund" and
"Distribution Plan."

How to Purchase Shares: Shares of the Fund may be purchased through certain
registered brokers at the net asset value per share next determined after
receipt of an order by the Fund's Distributor or transfer agent in proper
form with accompanying check or other bank wire payment arrangements
satisfactory to the Fund. The minimum initial investment is $1,000. There
is no minimum for subsequent investments. Investments through an Individual
Retirement Account or other retirement plans, however, have different
requirements. See "Purchase of Shares" and "Retirement Plans." A maximum
sales charge of 4.50% will be imposed on the purchase of Fund shares for
new accounts. Shareholder accounts established prior to September 30, 1993
may continue to purchase additional shares at net asset value.

How to Sell Shares: Shares of the Fund may be redeemed through certain
registered brokers and the transfer agent by the shareholder at any time at
the net asset value per share next determined after the redemption request
is received by the Fund's Distributor or transfer agent in proper order.
See "Redemption of Shares."

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Dividends and Reinvestment: Each dividend and capital gains distribution, if
any, declared by the Fund on its outstanding shares will, unless a
shareholder elects otherwise, be paid on the payment date in additional
shares of the Fund having an aggregate net asset value as of the
ex-dividend date of such dividend or distribution equal to the cash amount
of such distribution. An election may be changed by notifying the Fund in
writing at any time prior to the record date for a particular dividend or
distribution. There are no sales or other charges in connection with the
reinvestment of dividends and capital gains distributions. There is no
fixed dividend rate, and there can be no assurance that the Fund will pay
any dividends or realize any capital gains. However, the Fund currently
intends to pay dividends quarterly and capital gains distributions, if any,
on an annual basis. See "Dividends, Distributions and Taxes."

Risk Factors: Investors should consider the risks associated with equity
securities. See "Investment Objective and Policies and Related Risk Factors
-- Equity Securities." The Fund has reserved the right to borrow money from
time to time to provide greater liquidity for redemptions or to make
additional portfolio investments. If the Fund were to borrow money for
additional investments, and such additional investments failed to cover
their cost (including interest costs on such borrowings) the Fund's
performance would be poorer than would otherwise be the case. Furthermore,
if the Fund were to borrow money and the value of its assets were to fall
below the statutory coverage requirement of the Investment Company Act of
1940, the Fund would have to take corrective action to achieve compliance
within three business days and accordingly might be required to sell a
portion of its securities at a time when such sale might be
disadvantageous. The Fund may use various investment practices that also
involve special risks. For a discussion of these practices and the
associated risks, see "Other Investment Techniques and Related Risk
Factors."

<TABLE>
<CAPTION>
TABLE OF FEES AND EXPENSES
--------------------------
Shareholder Transaction Expenses:
<S> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price) (a) ................... 4.50%
Maximum Sales Load Imposed on Reinvested Dividends ................................................ None
Deferred Sales Load ............................................................................... None
Redemption Fees ................................................................................... None
Exchange Fees ..................................................................................... None

Annual Fund Operating Expenses (as a percentage of average net assets):
Management Fees (b) ............................................................................... 1.00%
12b-1 Expenses (c) ................................................................................ .25

Other Expenses (d) ................................................................................ .58%
-------
Total Operating Expenses ...................................................................... 1.83%
=======

</TABLE>

Example:** 1 year 3 years 5 years 10 years
- -------- ----- ------ ------ --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return at the end of each period $64.72 $101.85 $141.38 $251.70
If you do not pay a sales load, you would pay the following expenses,
whether or not you fully redeem at the end of each time period,
on a $1,000 investment, assuming a 5% annual return $18.59 $57.56 $99.03 $214.79

</TABLE>
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The amounts listed in this example should not be considered as representative of
future expenses since actual expenses
may be greater or less than those indicated. Moreover, while the example assumes
a 5% annual return, the Fund's actual performance will vary and may result in an
actual return greater or less than 5%.
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The foregoing table is to assist you in understanding the various direct and
indirect costs and expenses that an investor in the Fund would bear.
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(a) See "Purchase of Shares."
(b) Subject to potential reduction as a result of the Adviser's expense
reimbursement obligations. See "Management of the Fund."
(c) See "Distribution Plan."
(d) Such expenses include custodian and transfer agency fees and other
customary Fund expenses.

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Management's Discussion and Analysis of the Fund's performance during the fiscal
year ended September 30, 1995 is included in the Fund's Annual Report to
Shareholders dated September 30, 1995. The Fund's Annual Report to Shareholders
may be obtained upon request and without charge by writing or calling the Fund
at the address or telephone number listed on the Prospectus cover.

FINANCIAL HIGHLIGHTS

The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors, whose unqualified report thereon appears in the Statement
of Additional Information:

<TABLE>
<CAPTION>
Selected data for a share of capital stock outstanding throughout each period ending September 30:

1995 1994 1993 1992+
------ ------ ------ -------
<S> <C> <C> <C> <C>
Operating Performance:
Net asset value, beginning of period $11.54 $12.15 $10.40 $10.00
Net investment income 0.29 0.30 0.29 0.21
Net realized and unrealized gain on securities 1.77 0.08 1.81 0.37
------ ------ ------ -------
Total from investment operations 2.06 0.38 2.10 0.58
Less Distributions:
Dividends from net investment income (0.29) (0.31) (0.29) (0.18)
Distributions from net realized gain on
investments (0.66) (0.68) (0.06) --
------ ------ ------ -------
Net asset value, end of period $12.65 $11.54 $12.15 $10.40
====== ====== ====== =======
Total Return (not reflecting sales load) 19.24% 3.3% 20.5% 5.8%
Ratios to average net
assets/supplemental data:
Net assets, end of period
(in thousands) $54,806 $50,191 $54,585 $44,940
Ratio of operating
expenses to average
net assets 1.83% 1.81% 1.78% 1.93%*
Ratio of net investment
income to average net
assets 2.50% 2.58% 2.62% 2.65%*
Portfolio turnover rate 30% 20% 76% 22%

</TABLE>
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* Annualized
+ Fund commenced operations on January 2, 1992.

INVESTMENT OBJECTIVE AND POLICIES
AND RELATED RISK FACTORS

The Fund's investment objective is to seek a high level of total return on its
assets with an emphasis on income, through a combination of capital appreciation
and current income by investing primarily in income producing equity securities
including securities convertible into common stock. The Adviser will look for
such securities that have a better yield than the average of the Standard &
Poor's 500 Stock Index, as well as capital gains potential. Although the Fund
may also invest in any type of debt instrument and may use various special
investment techniques, under normal market conditions the Fund will invest at
least 65% of its total assets in income producing equity securities (which
include common stocks, preferred stocks and securities convertible into or
exchangeable for common and preferred stock). Risks inherent in the Fund's
investment objective and policies are discussed below.

Equity Securities

Common stocks represent the residual ownership interest in the issuer and are
entitled to the income and increase in the value of the assets and business of
the entity after all of its obligations and preferred stock are satisfied.
Common stocks generally have voting rights. Common stocks fluctuate in price in

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response to many factors including historical and prospective earnings of the
issuer, the value of its assets, general economic conditions, interest rates,
investor perceptions and market liquidity.

Equity securities also include preferred stock (whether or not convertible into
common stock) and debt securities convertible into or exchangeable for common or
preferred stock. Preferred stock has a preference over common stock in
liquidation (and generally dividends as well) but is subordinated to the
liabilities of the issuer in all respects. As a general rule the market value of
preferred stock with a fixed dividend rate and no conversion element varies
inversely with interest rates and perceived credit risk, while the market price
of convertible preferred stock generally also reflects some element of
conversion value. Because preferred stock is junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the issuer
will cause greater changes in the value of a preferred stock than in a more
senior debt security with similarly stated yield characteristics. Debt
securities that are convertible into or exchangeable for preferred common stock
are liabilities of the issuer but are generally subordinated to more senior
elements of the issuer's balance sheet. Although such securities also generally
reflect an element of conversion value, their market value also varies with
interest rates and perceived credit risk.

The Adviser believes that opportunities for capital appreciation may also be
found in the preferred stock and convertible securities of companies. This is
particularly true in the case of companies that have performed below
expectations at the time the preferred stock or convertible security was issued.
If the company's performance has been poor enough, its preferred stock and
convertible debt securities will trade more like the common stock than like a
fixed income security and may result in above average appreciation once it
becomes apparent that performance is improving. Even if the credit quality of
the company is not in question, the market price of the convertible security
will often reflect little or no element of conversion value if the price of its
common stock has fallen substantially below the conversion price. This leads to
the possibility of capital appreciation if the price of the common stock
recovers. Preferred stocks and convertible securities have many of the same
characteristics and risks as nonconvertible debt securities described below.

Many convertible securities are not investment grade, that is, not rated BBB or
better by Standard & Poor's Corporation ("S&P") or Baa or better by Moody's
Investors Service ("Moody's") and not considered by the Adviser to be of similar
quality.

The Fund may invest up to 35% of its assets in convertible and nonconvertible
fixed income securities rated, at the time of investment, less than BBB by S&P
or Baa by Moody's or are unrated but of comparable quality in the judgment of
the Adviser. Securities which are not investment grade are viewed by the rating
agencies as being predominantly speculative in character and are characterized
by substantial risk concerning payments of interest and principal, sensitivity
to economic conditions and changes in interest rates, as well as by market price
volatility and/or relative lack of secondary market trading among other risks
and may involve major risk exposure to adverse conditions or be in default.
However, the Fund does not expect to invest more than 5% of its assets in
securities which are in default at the time of investment and will invest in
such securities only when the Adviser expects that the securities will
appreciate in value. There is no minimum rating of securities in which the Fund
may invest. Securities rated less than BBB by S&P or Baa by Moody's or
comparable unrated securities are typically referred to in the financial press
as "junk bonds." For further information regarding lower rated securities and
the risks associated therewith, see "Other Investment Techniques" in the
Additional Statement and the Description of Corporate Bond, Corporate Debt and
Preferred Stock Ratings attached hereto as an Appendix.

Nonconvertible Debt Securities

Under normal market conditions, the Fund may invest up to 35% of its assets in
fixed income securities which are not convertible or exchangeable for common

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stock. These securities include preferred stocks, bonds, debentures, notes,
asset and mortgage backed securities and money market instruments such as
commercial paper and bankers acceptances. There is no minimum credit rating for
these securities in which the Fund may invest. Accordingly, the Fund could
invest in securities in default although the Fund will not invest more than 5%
of its assets in such securities. See "Equity Securities" for a discussion of
credit considerations. Preferred stocks are subject to the same types of risks
as are debt instruments. In addition, because preferred stock is junior to debt
securities and other obligations of the issuer, deterioration in the credit
quality of the issuer will cause greater changes in the value of a preferred
stock than in a more senior debt security with similar yield characteristics.

Asset-Backed and Mortgage-Backed
Securities

Prepayments of principal may be made at any time on the obligations underlying
asset and mortgage backed securities and are passed on to the holders of the
asset and mortgage backed securities. As a result, if the Fund purchases such a
security at a premium, faster than expected prepayments will reduce and slower
than expected prepayments will increase yield to maturity. Conversely, if the
Fund purchases these securities at a discount, faster than expected prepayments
will increase, while slower than expected prepayments will reduce, yield to
maturity.

For temporary defensive purposes the Fund may invest up to 100% of its assets in
nonconvertible fixed income securities or high quality money market instruments.

OTHER INVESTMENT TECHNIQUES
AND RELATED RISK FACTORS

Foreign Securities

The Fund may invest up to 35% of its total assets in the securities of non-U.S.
issuers. These investments involve certain risks not ordinarily associated with
investments in securities of domestic issuers. These risks include fluctuations
in foreign exchange rates (which the Fund will not seek to hedge), future
political and economic developments, and the possible imposition of exchange
controls or other foreign governmental laws or restrictions. In addition, with
respect to certain countries, there is the possibility of expropriation of
assets, confiscatory taxation, political or social instability or diplomatic
developments which could adversely affect investments in those countries.

There may be less publicly available information about a foreign company than
about a U.S. company, and foreign companies may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to or as
uniform as those of U.S. companies. Non-U.S. securities markets, while growing
in volume, have, for the most part, substantially less volume than U.S. markets,
and securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable U.S. companies. Transaction costs of
investing in non-U.S. securities markets are generally higher than in the U.S.
There is generally less government supervision and regulation of exchanges,
brokers and issuers than there is in the U.S. The Fund might have greater
difficulty taking appropriate legal action in non-U.S. courts. Non-U.S. markets
also have different clearance and settlement procedures which in some markets
have at times failed to keep pace with the volume of transactions, thereby
creating substantial delays and settlement failures that could adversely affect
the Fund's performance.

Dividend and interest income from non-U.S. securities will generally be subject
to withholding taxes by the country in which the issuer is located and may not
be recoverable by the Fund or the investor.

Corporate Reorganizations

Subject to the Fund's policy of investing at least 65% of its assets in income
producing equity securities, the Fund may invest without limit in securities for
which a tender or exchange offer has been made or announced and in securities of

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companies for which a merger, consolidation, liquidation or similar
reorganization proposal has been announced if, in the judgment of the Adviser,
there is a reasonable prospect of capital appreciation significantly greater
than the added portfolio turnover expenses inherent in the short term nature of
such transactions. The principal risk is that such offers or proposals may not
be consummated within the time and under the terms contemplated at the time of
the investment, in which case, unless such offers or proposals are replaced by
equivalent or increased offers or proposals which are consummated, the Fund may
sustain a loss. For further information on such investments, see "Other
Investment Techniques" in the Additional Statement.

Options

The Fund may purchase or sell options on individual securities as well as on
indices of securities as a means of achieving additional return or of hedging
the value of the Fund's portfolio.

A call option is a contract that gives the holder of the option the right, in
return for a premium paid, to buy from the seller the security underlying the
option at a specified exercise price at any time during the term of the option
or, in some cases, only at the end of the term of the option. The seller of the
call option has the obligation upon exercise of the option to deliver the
underlying security upon payment of the exercise price. A put option is a
contract that gives the holder of the option the right, in return for a premium
paid, to sell to the seller the underlying security at a specified price. The
seller of the put option, on the other hand, has the obligation to buy the
underlying security upon exercise at the exercise price.

If the Fund has sold an option, it may terminate its obligation by effecting a
closing purchase transaction. This is accomplished by purchasing an option of
the same series as the option previously sold. There can be no assurance that a
closing purchase transaction can be effected when the Fund so desires.

The purchaser of an option risks a total loss of the premium paid for the option
if the price of the underlying security does not increase or decrease
sufficiently to justify exercise. The seller of an option, on the other hand,
will recognize the premium as income if the option expires unrecognized but
forgoes any capital appreciation in excess of the exercise price in the case of
a call option and may be required to pay a price in excess of current market
value in the case of a put option. Options purchased and sold other than on an
exchange in private transactions also impose on the Fund the credit risk that
the counterparty will fail to honor its obligations. The Fund will not purchase
options if, as a result, the aggregate cost of all outstanding options exceeds
10% of the Fund's assets. To the extent that puts, straddles and similar
investment strategies involve instruments regulated by the Commodity Futures
Trading Commission the Fund is limited to an investment not in excess of 5% of
its total assets

Warrants and Rights

The Fund may invest up to 5% of its total assets in warrants or rights (other
than those acquired in units or attached to other securities) which entitle the
holder to buy equity securities at a specific price for or at the end of a
specific period of time. The Fund will not invest more than 2% of its total
assets in warrants or rights which are not listed on recognized stock exchanges.

When Issued, Delayed Delivery
Securities and Forward Commitments

The Fund may enter into forward commitments for the purchase or sale of
securities, including on a "when issued" or "delayed delivery" basis in excess
of customary settlement periods for the type of security involved. In some
cases, a forward commitment may be conditioned upon the occurrence of a
subsequent event, such as approval and consummation of a merger, corporate
reorganization or debt restructuring, i.e., a when, as and if issued security.
When such transactions are negotiated, the price is fixed at the time of the
commitment, with payment and delivery taking place in the future, generally a

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month or more after the date of the commitment. While the Fund will only enter
into a forward commitment with the intention of actually acquiring the security,
the Fund may sell the security before the settlement date if it is deemed
advisable.

Securities purchased under a forward commitment are subject to market
fluctuation, and no interest (or dividends) accrues to the Fund prior to the
settlement date. The Fund will segregate with its Custodian (as hereinafter
defined) cash or liquid high-grade debt securities in an aggregate amount at
least equal to the amount of its outstanding forward commitments. See "When
Issued, Delayed Delivery Securities and Forward Commitments" in the Additional
Statement.

Unseasoned Companies

The Fund may invest in securities of unseasoned companies. In view of the
limited liquidity, more speculative prospects and price volatility, the Fund
will not invest more than 10% of the Fund's assets (at the time of purchase) in
securities of companies (including predecessors) that have operated less than
three years.

Short Sales

The Fund may make short sales of securities. A short sale is a transaction in
which the Fund sells a security it does not own in anticipation that the market
price of that security will decline. The Fund expects to make short sales both
to obtain capital gains from anticipated declines in securities and as a form of
hedging to offset potential declines in long positions in the same or similar
securities. The short sale of a security is considered a speculative investment
technique.

When the Fund makes a short sale, it must borrow the security sold short and
deliver it to the broker-dealer through which it made the short sale in order to
satisfy its obligation to deliver the security upon conclusion of the sale. The
Fund may have to pay a fee to borrow particular securities and is often
obligated to pay over any payments received on such borrowed securities.

The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other highly liquid securities. The Fund will also be required to
deposit similar collateral with its custodian to the extent, if any, necessary
so that the value of both collateral deposits in the aggregate is at all times
equal to the greater of the price at which the security is sold short or 100% of
the current market value of the security sold short. Depending on arrangements
made with the broker-dealer from which it borrowed the security regarding
payment over of any payments received by the Fund on such security, the Fund may
not receive any payments (including interest) on its collateral deposited with
such broker-dealer.

If the price of the security sold short increases between the time of the short
sale and the time the Fund replaces the borrowed security, the Fund will incur a
loss; conversely, if the price declines, the Fund will realize a capital gain.
Any gain will be decreased, and any loss increased, by the transaction costs
described above. Although the Fund's gain is limited to the price at which it
sold the security short, its potential loss is theoretically unlimited.

The market value of the securities sold short of any one issuer will not exceed
either 5% of the Fund's total assets or 5% of such issuer's voting securities.
The Fund will not make a short sale, if, after giving effect to such sale, the
market value of all securities sold short exceeds 25% of the value of its assets
or the Fund's aggregate short sales of a particular class of securities exceeds
25% of the outstanding securities of that class. The Fund may also make short
sales "against the box" without respect to such limitations. In this type of
short sale, at the time of the sale, the Fund owns or has the immediate and
unconditional right to acquire at no additional cost the identical security.

Restricted and Illiquid Securities

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restrictions. The sale of illiquid securities often requires more time and
results in higher brokerage charges or dealer discounts and other selling
expenses than does the sale of securities eligible for trading on national
securities exchanges or in the over-the-counter markets. Restricted securities
may sell at a price lower than similar securities that are not subject to
restrictions on resale. Securities freely salable among qualified institutional
investors under special rules adopted by the Securities and Exchange Commission
may be treated as liquid if they satisfy liquidity standards established by the
Board of Directors. The continued liquidity of such securities is not as well
assured as that of publicly traded securities, and accordingly the Board of
Directors will monitor their liquidity.

Repurchase Agreements

The Fund may invest in repurchase agreements, which are agreements pursuant to
which securities are acquired by the Fund from a third party with the
understanding that they will be repurchased by the seller at a fixed price on an
agreed date. These agreements may be made with respect to any of the portfolio
securities in which the Fund is authorized to invest. Repurchase agreements may
be characterized as loans secured by the underlying securities. The Fund may
enter into repurchase agreements with (i) member banks of the Federal Reserve
System having total assets in excess of $500 million and (ii) securities
dealers, provided that such banks or dealers meet the creditworthiness standards
established by the Fund's Board of Directors ("Qualified Institutions"). The
Adviser will monitor the continued creditworthiness of Qualified Institutions,
subject to the supervision of the Fund's Board of Directors. The resale price
reflects the purchase price plus an agreed upon market rate of interest which is
unrelated to the coupon rate or date of maturity of the purchased security. The
collateral is marked-to-market daily. Such agreements permit the Fund to keep
all its assets earning interest while retaining "overnight" flexibility in
pursuit of investments of a longer-term nature.

The use of repurchase agreements involves certain risks. For example, if the
seller of securities under a repurchase agreement defaults on its obligation to
repurchase the underlying securities, as a result of its bankruptcy or
otherwise, the Fund will seek to dispose of such securities, which action could
involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization under applicable bankruptcy or other laws, the
Fund's ability to dispose of the underlying securities may be restricted.
Finally, it is possible that the Fund may not be able to substantiate its
interest in the underlying securities. To minimize this risk, the securities
underlying the repurchase agreement will be held by the Fund's Custodian at all
times in an amount at least equal to the repurchase price, including accrued
interest. If the seller fails to repurchase the securities, the Fund may suffer
a loss to the extent proceeds from the sale of the underlying securities are
less than the repurchase price. The Fund will not enter into repurchase
agreements of a duration of more than seven days if taken together with all
other illiquid securities in the Fund's portfolio, more than 10% of its total
assets would be so invested.

Loans of Portfolio Securities

To increase income, the Fund may lend its portfolio securities to securities
broker-dealers or financial institutions if (1) the loan is collateralized in
accordance with applicable regulatory requirements including collateralization
continuously at no less than 100% by marking to market daily, (2) the loan is
subject to termination by the Fund at any time, (3) the Fund receives reasonable
interest or fee payments on the loan, (4) the Fund is able to exercise all
voting rights with respect to the loaned securities and (5) the loan will not
cause the value of all loaned securities to exceed 33% of the value of the
Fund's assets.

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risks of delay in recovery and in some cases even loss of rights in collateral
should the borrower of the securities fail financially.

Borrowing

The Fund may not borrow money except for (1) short-term credits from banks as
may be necessary for the clearance of portfolio transactions, and (2) borrowings
from banks for temporary or emergency purposes, including the meeting of
redemption requests, which would otherwise require the untimely disposition of
its portfolio securities. Borrowing may not, in the aggregate, exceed 15% of
assets after giving effect to the borrowing and borrowing for purposes other
than meeting redemptions may not exceed 5% of the value of the Fund's assets
after giving effect to the borrowing. The Fund will not make additional
investments when borrowings exceed 5% of assets. The Fund may mortgage, pledge
or hypothecate assets to secure such borrowings.

Portfolio Turnover

The investment policies of the Fund may lead to frequent changes in investments,
particularly in periods of rapidly fluctuating interest or currency exchange
rates. The portfolio turnover is expected to be less than 100%.

Portfolio turnover generally involves some expense to the Fund, including
brokerage commissions or dealer mark-ups and other transaction costs on the sale
of securities and reinvestment in other securities. Rapid turnover makes it more
difficult to qualify as a regulated investment company for Federal tax purposes,
in view of the requirement that, in order to so qualify, the Fund must derive
less than 30% of its gross income in any tax year from gains on the sale of
securities held less than three months. Failure to qualify as a regulated
investment company would result in Federal taxation of the Fund's income at the
standard corporate rate of 35%. The portfolio turnover rate is computed by
dividing the lesser of the amount of the securities purchased or securities sold
by the average monthly value of securities owned during the year (excluding
securities whose maturities at acquisition were one year or less).

MANAGEMENT OF THE FUND
The Fund's Board of Directors (who, with its officers, are described in the
Additional Statement) has overall responsibility for the management of the Fund.
The Board of Directors decides upon matters of general policy and reviews the
actions of Gabelli & Company, Inc. (the "Distributor"), the Adviser and the
Administrator (as defined below). Pursuant to an Investment Advisory Contract
with the Fund on behalf of the Fund, the Adviser under the supervision of the
Fund's Board of Directors, provides a continuous investment program for the
Fund's portfolio; provides investment research and makes and executes
recommendations for the purchase and sale of securities and the exercise of all
voting and other rights appertaining thereto; provides facilities and personnel
required for the Fund's administrative management; supervises the performance of
administrative and professional services provided by others; and pays the
compensation of the Administrator and all officers and directors of the Fund who
are its affiliates. Mr. Mario J. Gabelli -- Portfolio Manager, will be primarily
responsible for the day-to-day management of the Gabelli Equity Income Fund. Mr.
Gabelli is Chairman, President and Chief Executive Officer and a Director of the
Adviser. As compensation for its services and the related expenses borne by the
Adviser, the Fund pays the Adviser a fee, computed daily and payable monthly,
equal, on an annual basis, to 1.00% of the Fund's average daily net assets,
which is higher than that paid by most mutual funds. For the period from January
2, 1992 (commencement of operations) through September 30, 1992 and for the

fiscal years ended September 30, 1993, September 30, 1994 and September 30, 1995
the Adviser received fees of $261,845, $516,970, $520,763 and $512,370
respectively, representing an annualized fee of 1.00% of average net assets.
The Adviser is located at One Corporate Center, Rye, New York 10580-1434.

The Adviser was formed in 1980 and as of December 31, 1995 acts as investment

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adviser to the following funds with aggregate assets in excess of $4.0 billion:

Net Assets
Open-end funds: 12/31/95
- --------------- --------
(in millions)
The Gabelli Asset Fund $1,090
The Gabelli Growth Fund 526
Gabelli Gold Fund, Inc. 15
The Gabelli Value Fund Inc. 486
The Gabelli Small Cap Growth Fund 229
The Gabelli Equity Income Fund 56
The Gabelli U.S. Treasury Money Market Fund 236
The Gabelli ABC Fund 21
The Gabelli Global Telecommunications Fund 123
The Gabelli Global Interactive
Couch Potato(R) Fund 31
The Gabelli Global Convertible Securities Fund 16
Gabelli International Growth Fund, Inc. 2
Gabelli Capital Asset Fund 26

Closed-end funds:
The Gabelli Convertible Securities Fund, Inc. 89
The Gabelli Equity Trust Inc. 1,034
The Gabelli Global Multimedia Trust Inc. 90

Gabelli & Company, Inc., the Distributor of each open-end fund's respective
shares, is an indirect majority owned subsidiary of the Adviser. GAMCO
Investors, Inc, ("GAMCO"), a majority owned subsidiary of the Adviser, acts as
investment adviser for individuals, pension trusts, profit sharing trusts and
endowments. As of December 31, 1995, GAMCO had aggregate assets in excess of $5
billion under its management. Teton Advisers LLC is an affiliated Investment
Adviser to the Westwood Funds with aggregate assets in excess of $38 million.
Mr. Mario J. Gabelli may be deemed a "controlling person" of the Adviser and the
Distributor on the basis of his ownership of stock of the Adviser.

In addition to the fees of the Adviser, the Fund is responsible for the payment
of all its other expenses incurred in the operation of the Fund, which include,
among other things, expenses for legal and independent auditors' services, costs
of printing all materials sent to shareholders, charges of State Street Bank and
Trust Company (the "Custodian", "Transfer Agent" and dividend paying agent) and
any other persons hired by the Fund, Securities and Exchange Commission fees,
fees and expenses of unaffiliated directors, accounting and printing costs for
reports and similar materials sent to shareholders, the Fund's pro rata portion
of membership fees in trade organizations, fidelity bond coverage for the Fund's
officers and employees, interest, brokerage and other trading costs, taxes,
expenses of qualifying the Fund for sale in various jurisdictions, expense of
the Fund's distribution plan adopted under Rule 12b-1, expenses of personnel
performing shareholder servicing functions, litigation and other extraordinary
or non-recurring expenses and other expenses properly payable by the Fund.

The Additional Statement contains further information about the Investment
Advisory Contract including a more complete description of the advisory and
expense arrangements, and administrative provisions.

Administrator

The Adviser has entered into an Administration Contract with Furman Selz LLC
("Furman Selz" or the "Administrator") pursuant to which the Administrator
provides certain administrative services necessary for the Fund's operations.
These services include the preparation and distribution of materials for
meetings of the Fund's Board of Directors, compliance testing of Fund activities
and assistance in the preparation of proxy statements, reports to shareholders
and other documentation. The Administrator's services do not include the
investment advisory and portfolio management services of the Adviser. For the
services and the related expenses borne by Furman Selz, the Adviser pays it a
monthly fee at the annual rate of .10% of the average net assets (with a minimum
annual fee of $40,000 per portfolio) on the first $350 million of funds advised
by the Adviser and administered by Furman Selz; 0.075% of any assets above $350
million and .06% of any assets above $600 million which, together with the
services to be rendered, are subject to negotiation between the parties and both
parties retain the right unilaterally to terminate the arrangement on not less
than 60 days' notice.

Furman Selz has its principal office at 237 Park Avenue, New York, New York

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10017. Furman Selz is primarily an institutional brokerage firm with membership
on the New York, American, Boston, Philadelphia, Midwest and Pacific Stock
Exchanges.

DISTRIBUTION PLAN

The Board of Directors of the Fund has approved as being in the best interests
of the Fund and its shareholders a Distribution Plan which authorizes payments
by the Fund in connection with the distribution of its shares at an annual rate,
as determined from time to time by the Board of Directors, of up to .25% of the
Fund's average daily net assets. Payments may be made in subsequent years for
expenses incurred in prior years. The potential for such subsequent payments is
a contingent liability for which no amount is currently being recorded because
the Fund does not have a reasonable basis on which to conclude that the Board of
Directors will approve such payment.

Payments may be made by the Fund under the Distribution Plan for the purpose of
financing any activity primarily intended to result in the sale of shares of the
Fund as determined by the Board of Directors. Such activities typically include
advertising; compensation for sales and sales marketing activities of the
Distributor and other banks, broker-dealers and service providers; shareholder
account servicing; production and dissemination of prospectuses and sales and
marketing materials; and capital or other expenses of associated equipment,
rent, salaries, bonuses, interest and other overhead. To the extent any activity
is one which the Fund may finance without a Distribution Plan, the Fund may also
make payments to finance such activity outside of the Plan and not subject to
its limitations.

The Plan has been implemented by written agreements between the Fund and/or the
Distributor and each person (including the Distributor) to which payments may be
made. Administration of the Plan is regulated by Rule 12b-1 under the Investment
Company Act of 1940 which includes requirements that the Board of Directors
receive and review, at least quarterly, reports concerning the nature and
qualification of expenses for which payments are made, that the Board of
Directors approve all agreements implementing the Plan and that the Plan may be
continued from year to year only if the Board of Directors concludes, at least
annually, that continuation of the Plan is likely to benefit shareholders.

The Board of Directors has initially implemented the Plan by having the
Corporation enter into an agreement with the Distributor authorizing
reimbursement of expenses (including overhead) incurred by the Distributor and
its affiliates up to the .25% rate authorized by the Plan for distribution
activities of the types listed above. To the extent any of these payments are
based on allocations by the Distributor, the Fund may be considered to be
participating in joint distribution activities with other funds distributed by
the Distributor. Any such allocations would be subject to approval by the Fund's
non-interested Directors and would be based on such factors as the net assets of
each Fund, the number of shareholder inquiries and similar pertinent criteria.
For the fiscal years ended September 30, 1993, September 30, 1994 and September
30, 1995, the Fund incurred distribution costs payable to the Adviser of
$129,230, $130,199, and $128,073, respectively, or 25% of average net assets
under the Plan.

PURCHASE OF SHARES

Shares of the Fund are currently offered with a maximum sales load of 4.50%. The
minimum initial investment is $1,000. There is no minimum for subsequent
investments. Shares of the Fund are sold at the public offering price based on
the net asset value per share next determined after receipt of an order by the
Fund's Distributor or Transfer Agent in proper form with accompanying check or
bank wire payments arrangements satisfactory to the Fund. Although most
shareholders elect not to receive stock certificates, certificates for whole
shares only can be obtained on specific written request to the Transfer Agent.

Shares of the Fund may be purchased through registered broker-dealers. Such
broker-dealers may charge the investor a fee for their services. Such fees may

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vary among broker-dealers, and such broker-dealers may impose higher initial or
subsequent investment requirements than those established by the Fund. Services
provided by broker-dealers may include allowing the investor to establish a
margin account and to borrow on the value of the Fund's shares in that account.

Prospectuses, sales material and applications may be obtained from the
Distributor. The Fund and its Distributor reserve the right in their sole
discretion (1) to suspend the offerings of the Fund's shares and (2) to reject
purchase orders when, in the judgment of the Fund's management, such rejection
is in the best interest of the Fund. The net asset value per share of the Fund
is determined as of the close of the regular session of the New York Stock
Exchange, which is generally 4:00 p.m., New York City time, on each day that
trading is conducted on the New York Stock Exchange by dividing the value of the
Fund's net assets (i.e., the value of its securities and other assets less its
liabilities, including expenses payable or accrued but excluding capital stock
and surplus) by the number of shares outstanding at the time the determination
is made. Portfolio securities for which market quotations are readily available
are valued at market value as determined by the last quoted sale price prior to
the valuation time on the valuation date in the case of securities traded on
securities exchanges or other markets for which such information is available.
Other readily marketable securities are valued at the average of the latest bid
and asked quotations for such securities prior to the valuation time. Debt
securities with remaining maturities of 60 days or less are valued at amortized
cost. All other assets are valued at fair value as determined by or under the
supervision of the Board of Directors of the Fund. See "Determination of Net
Asset Value" in the Additional Statement.

Mail

To make an initial purchase by mail, send a completed subscription order form
with a check for the amount of the investment payable to "The Gabelli Equity
Income Fund" to:

The Gabelli Funds
P.O. Box 8308
Boston, MA 02266-8308

Subsequent purchases do not require a completed application and can be made by
(1) mailing a check to the same address noted above or by (2) bank wire, as
indicated below. The exact name and number of the shareholder's account should
be clearly indicated.

Checks will be accepted if drawn in U.S. currency on a domestic bank for less
than $100,000. U.S. dollar checks drawn against a non-U.S. bank may be subject
to collection delays and will be accepted only upon actual receipt of funds by
the Transfer Agent. Bank collection fees may apply. Bank or certified checks for
investments of $100,000 or more will be required unless the investor elects to
invest by bank wire as described below. The Fund reserves the right to reject
purchases by check made payable to someone other than the Fund.

Bank Wire

To initially purchase shares of the Fund using the wire system for transmittal
of money among banks, an investor should first telephone the Fund at
1-800-422-3554 to obtain a new account number. The investor should then instruct
a Federal Reserve System member bank to wire funds to:

State Street Bank and Trust Company
ABA # 011-0000-28 REF DDA # 99046187
Attn: Shareholder Services
Re: The Gabelli Equity Income Fund

A/C # ________________________________________________
Account of (Registered Owner)
-----------------------------------------
225 Franklin Street, Boston, MA 02110

For initial purchases, the investor should promptly complete and mail the
subscription order form to the address shown above for mail purchases. There may
be a charge by your bank for transmitting the money by bank wire but State
Street Bank and Trust Company does not charge investors in the Fund for the
receipt of wire transfers. If you are planning to wire funds, it is suggested
that you instruct your bank early in the day so the wire transfer can be
accomplished the same day.

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Personal Delivery

Deliver a check made payable to "The Gabelli Equity Income Fund" along with a
completed subscription order form to:

The Gabelli Funds
The BFDS Building, 6th Floor
Two Heritage Drive
North Quincy, MA 02171

Telephone Investment Plan

You may purchase additional shares of the Fund by telephone through the
Automated Clearing-house (ACH) system as long as your bank is a member of the
ACH system and you have a completed, approved investment plan application on
file with our Transfer Agent. The funding for your purchase will be
automatically deducted from the ACH eligible account you designate on the
application. Your investment will normally be credited to your mutual fund
account on the first business day following your telephone request. Your request
must be received no later than 4:00 p.m. eastern time. There is a minimum of
$100 for each telephone investment. Any subsequent changes in banking
information must be submitted in writing and accompanied by a sample voided
check. To initiate an ACH purchase, please call 1-800-GABELLI (422-3554) or
1-800-872-5365. Fund shares purchased through the Telephone or Automatic
Investment Plan will not be available for redemption for up to fifteen (15) days
following the purchase date.

Automatic Investment Plan

The Fund offers an automatic monthly investment plan, details of which can be
obtained from the Distributor. There is no minimum initial investment for
accounts establishing an Automatic Investment Plan.

Systematic Withdrawal Plan

The Fund offers a systematic withdrawal program for shareholders whereby they
can authorize an automatic redemption on a monthly, quarterly or annual basis.
Details can be obtained from the Distributor.

Other Investors

No minimum initial investment is required for officers, directors or full-time
employees of the Fund, other investment companies managed by the Adviser, the
Adviser, the Administrator, the Distributor or their affiliates, including
members of the "immediate family" of such individuals and retirement plans and
trusts for their benefit. The term "immediate family" refers to spouses,
children and grandchildren (adopted or natural), parents, grandparents,
siblings, a spouse's siblings, a sibling's spouse and a sibling's children.

Sales Charges

Shares of the Fund are offered at a price equal to their net asset value plus a
sales charge, as described below, on a continuous basis through (1) securities
brokers that are members of the National Association of Securities Dealers, Inc.
and have entered into selected broker agreements with the Distributor ("selected
brokers"), (2) banks and other depository institutions, or their affiliates,
that have entered into selected agent agreements with the Distributor ("selected
agents") and/or (3) the Distributor.

Shares issued pursuant to the automatic reinvestment of income dividends or
capital gains are not subject to any sales charges. The Fund would receive the
entire net asset value of its shares sold to investors through reinvestment. The
Distributor's commission is the sales charge shown below less any applicable
discount "reallowed" to selected brokers and agents. Normally, the Distributor
will reallow discounts to selected brokers and agents in the amounts indicated
in the table below. From time to time, however, the Distributor may elect to
reallow the entire sales charge to selected brokers or agents for all sales with
respect to which orders are placed with the Distributor during a particular
period. A selected broker who receives reallowance equal to or in excess of such
a sales charge may be deemed an "Underwriter" under the Securities Act of 1933.

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Discount or
Sales Charge as Commission to
a Percentage of Dealers or
---------------------------- Agents as a
Net Amount Public Offering % of Public
Amount Invested Invested Price Offering Price
--------------- -------- ----- --------------
$49,999 or less 4.71% 4.50% 4.00%
$50,000 but less than $200,000 3.09% 3.00% 2.50%
$200,000 or more 1.52% 1.50% 1.00%

Reduced Sales Charges

A reduction of sales charge rates in the tables above may be obtained as
follows:

Right of Accumulation

A "single purchaser" (as defined below) is entitled to a reduced sales charge
and will be credited with amounts currently and previously paid to purchase
shares (sold subject to a sales charge) of the Fund. The Right of Accumulation
is illustrated by the following example: if a previous purchase currently valued
in the amount of $45,000 had been made subject to a sales charge and the shares
are still held, a current purchase of $6,000 will qualify for a 3.00% sales
charge. The reduced sales charge is applicable only to current purchases.

The term "single purchaser" refers to (1)an individual, (2) an individual and
spouse purchasing shares of the Fund for their own account or for trust or
custodial accounts for their minor children, or (3) a trustee or other fiduciary
purchasing for any one trust, estate, or fiduciary account (including a pension,
profit sharing or other employee benefit trust created pursuant to a plan
qualified under Sections 401 or 403 of the Internal Revenue Code of 1986 (the
"Code") but not for a group formed to acquire shares). To be entitled to a
reduced sales charge for shares already owned, the investor must notify the
Distributor or the Transfer Agent at the time of the purchase that he wishes to
take advantage of such entitlement, and give the numbers of his accounts, and
those accounts held in the name of his spouse or for minor children, the age of
any such child and the specific relationship of each such person to the
investor.

Letter of Intent

By initially investing at least $1,000 and submitting a Letter of Intent to the
Distributor, a "single purchaser" may make purchases of shares of the Fund
during a 13-month period at the reduced sales charge rates applicable to the
aggregate amount of the intended purchases stated in the Letter. The Letter may
apply to purchases made up to 90 days before the date of the Letter.

Other Circumstances

No sales charge is imposed on shares of the Fund in the following circumstances:
(1) sold to persons described under "Purchase of Shares -- Other Investors" with
respect to whom no minimum investment is required; (2) issued in plans of
reorganization, such as mergers, asset acquisitions and exchange offers, to
which the Corporation is a party; (3) sold to employees of selected brokers; (4)
purchased by charities and endowments and other tax-exempt organizations
enumerated in Section 501(c)(3) of the Code if, giving effect to the purchase,
the net asset value of the account is $50,000 or more; (5) sold to employee
participants of organizations adopting the 401(k) Plan sponsored by the Adviser;
(6) sold to financial institutions purchasing the Fund for clients participating
in a fee based asset allocation program or wrap fee program which has been
approved by the Distributor; (7) sold to qualified employee benefit plans having
more than 100 eligible employees and $1 million in plan assets invested in the
Fund (Plan sponsors must notify the Fund's Distributor when they first satisfy
these requirements); (8) purchased by registered investment advisors or
financial planners who place trades for their own accounts or the accounts of
their clients and who charge a management, consulting or other fee for their
services; and clients of such investment advisors or financial planners who
place trades for their own accounts if the accounts are linked to the master
account of such investment advisor or financial planner on the books and records
of a broker agent; and (9) sold to accounts existing before September 30,
1993 and in accounts established by such shareholders after that date.

REDEMPTION OF SHARES

Upon receipt by the Distributor or the Transfer Agent of a redemption request in
proper form, shares of the Fund will be redeemed at their next determined net

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asset value. Redemption requests received after the time as of which the Fund's
net asset value is determined on a particular day will be redeemed at the net
asset value of the Fund determined on the next day that net asset value is
determined. Checks for redemption proceeds will normally be mailed to the
shareholder's address of record within seven days, but will not be mailed until
all checks in payment for the purchase of the shares to be redeemed have been
honored, which may take up to 15 days. Redemption requests may be made by letter
to the Transfer Agent, specifying the name of the Fund, the dollar amount or
number of shares to be redeemed, and the account number. The letter must be
signed in exactly the same way the account is registered (if there is more than
one owner of the shares, all must sign) and, if any certificates for the shares
to be redeemed are outstanding, presentation of such certificates properly
endorsed is also required. Signatures on a redemption request and/or
certificates must be guaranteed by an "eligible guarantor institution" as such
term is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, which
includes certain banks, brokers, dealers, credit unions, securities exchanges
and associations, clearing agencies and savings associations (signature
guarantees by notaries public are not acceptable). Shareholders may also redeem
Fund shares through certain registered broker-dealers, who have made
arrangements with the Fund permitting them to redeem shares by telephone or
facsimile transmission and who may charge shareholders a fee for this service if
they have not received any payments under the Distribution Plan.

Further documentation, such as copies of corporate resolutions and instruments
of authority, are normally requested from corporations, administrators,
executors, personal representatives, trustees or custodians to evidence the
authority of the person or entity making the redemption request.

If the Board of Directors should determine that it would be detrimental to the
remaining shareholders of the Fund to make payment wholly or partly in cash, the
Fund may pay the redemption price in whole or in part by a distribution in kind
of securities from the portfolio of the Fund, in lieu of cash, in conformity
with applicable rules of the Securities and Exchange Commission. Under such
circumstances, shareholders of the Fund receiving distributions in kind of
securities will incur brokerage commissions when they dispose of the securities.

The Fund may suspend the right of redemption or postpone the date of payment for
more than seven days during any period when (1) trading on the New York Stock
Exchange is restricted or the Exchange is closed, other than customary weekend
and holiday closings; (2) the Securities and Exchange Commission has by order
permitted such suspension or (3) an emergency, as defined by rules of the
Securities and Exchange Commission, exists making disposal of portfolio
investments or determination of the value of the net assets of the Fund not
reasonably practicable.

To minimize expenses, the Fund reserves the right to redeem, upon not less than
30 days notice, all shares of the Fund in an account (other than an IRA) which
as a result of shareholder redemption has a value below $500. However, a
shareholder will be allowed to make additional investments prior to the date
fixed for redemption to avoid liquidation of the account.

Telephone Redemption
By Check

The Fund accepts telephone requests for redemption of unissued shares, subject
to a $25,000 limitation. By calling either 1-800-GABELLI (422-3554) or
1-800-872-5365, you may request that a check be mailed to the address of record
on the account, provided that the address has not changed within thirty (30)
days prior to your request. The check will be made payable to the person in
whose name the account is registered and will normally be mailed within seven
(7) days.

By Bank Wire

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signature guaranteed. The Fund accepts signature guaranteed written requests for
redemption by bank wire without limitation. The proceeds are normally wired on
the following business day. Your bank must be either a member of the Federal
Reserve System or have a correspondent bank which is a member. Any change to the
banking information made at a later date must be submitted in writing with a
signature guarantee.

Requests for telephone redemption must be received between 9:00 a.m. and 4:00
p.m. eastern time. If your telephone call is received after this time or on a
day when the New York Stock Exchange is not open, a new request will be required
the following business day. Shares are redeemed at the net asset value next
determined following your request. Fund shares purchased by check or through the
automatic purchase plan will not be available for redemption for up to fifteen
(15) days following the purchase. Shares held in certificate form must be
returned to the Transfer Agent for redemption of shares. Telephone redemption is
not available for IRAs. The proceeds of a telephone redemption may be directed
to an existing account in another mutual fund advised by the Adviser, provided
the account is registered in the redeeming shareholder's name. Such purchase
will be made at the respective net asset value plus applicable sales charge, if
any, with credit for any sales charge previously charged by the Distributor.

The Fund and its Transfer Agent will not be liable for following telephone
instructions reasonably believed to be genuine. In this regard, the Fund and its
Transfer Agent require personal identification information before accepting a
telephone redemption. If the Fund or its Transfer Agent fail to use reasonable
procedures, the Fund might be liable for losses due to fraudulent instructions.

RETIREMENT PLANS

The Fund has available a form of Individual Retirement Account ("IRA") for
investment in Fund shares which may be obtained from the Distributor. The
minimum investment required to open an IRA for investment in shares of the Fund
is $1,000 for an individual except that both the individual and his or her
spouse may establish separate IRAs if their combined investment is $1,250. There
is no minimum for additional investment in an IRA account.

Investors who are self-employed may purchase shares of the Fund through
tax-deductible contributions to retirement plans for self-employed persons,
known as Keogh or H.R. 10 plans. The Fund does not currently act as Sponsor for
such plans. Fund shares may also be a suitable investment for other types of
qualified pension or profit-sharing plans which are employer-sponsored,
including deferred compensation or salary reduction plans known as "401(k)
Plans" which give participants the right to defer portions of their compensation
for investment on a tax-deferred basis until distributions are made from the
plans. The minimum initial investment for an individual under such plans is
$1,000 and there is no minimum for additional investments. Under the Code,
individuals may make wholly or partly tax deductible IRA contributions of up to
$2,000 annually, depending on whether they are active participants in an
employer-sponsored retirement plan and on their income level. However, dividends
and distributions held in the account are not taxed until withdrawn in
accordance with the provisions of the Code. An individual with a non-working
spouse may establish a separate IRA for the spouse under the same conditions and
contribute a maximum of $2,250 annually to either or both IRAs provided that no
more than $2,000 may be contributed to the IRA of either spouse.

Investors should be aware that they may be subject to penalties or additional
tax on contributions or withdrawals from IRAs or other retirement plans which
are not permitted by the applicable provisions of the Code. Persons desiring
information concerning investments through IRA accounts or other retirement
plans should write or telephone the Distributor.

DIVIDENDS, DISTRIBUTIONS AND TAXES

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Fund having an aggregate net asset value as of the ex-dividend date of such
dividend or distribution equal to the cash amount of such distribution. An
election to receive dividends and distributions may be changed by notifying the
Fund in writing at any time prior to the record date for a particular dividend
or distribution. There are no sales or other charges in connection with the
reinvestment of dividends and capital gains distributions. There is no fixed
dividend rate, and there can be no assurance that the Fund will pay any
dividends or realize any capital gains. However, the Fund currently intends to
pay dividends quarterly and capital gains distributions, if any, on an annual
basis.

The Fund has qualified and intends to continue to qualify as a "Regulated
Investment Company" under the Code and thus is not subject to Federal income tax
on that portion of its net investment income and realized capital gain that it
pays out to its shareholders.

To qualify, the Fund must meet certain relatively complex tests, including the
requirement that less than 30% of its gross income (exclusive of losses) must be
derived from the sale or other disposition of securities held for less than
three months. The loss of such status would result in the Fund being subject to
Federal income tax on its taxable income and gains.

A redemption of shares will generally result in the recognition of gain or loss
for income tax purposes equal to the difference between the proceeds of the
redemption and the shareholder's basis in the shares redeemed.

Dividends from net investment income and distributions from realized short-term
capital gains are taxable to the recipient shareholders as ordinary income,
whether paid in cash or in additional Fund shares. In the case of corporate
shareholders, the portion of the Fund's distributions attributable to dividends
received by the Fund on its investments in common or preferred stock may be
eligible for the dividends received deduction as long as certain requirements
are satisfied by the shareholder. Distributions out of long-term capital gains
are taxable to the recipient as long-term capital gains. Dividends and
distributions declared by the Fund may also be subject to state and local taxes.
Prior to investing in shares of the Fund, prospective shareholders may wish to
consult their tax advisers concerning the Federal, state and local tax
consequences of such investment.

GENERAL INFORMATION

Description of Shares, Voting Rights
and Liabilities

The Fund is a series of Gabelli Equity Series Funds, Inc., (the "Corporation")
which was incorporated in Maryland on July 25, 1991. The authorized capital
stock consists of one billion shares of stock having a par value of one tenth of
one cent ($.001) per share, one hundred million of which have been initially
classified as Fund shares. The Corporation is not required, and does not intend,
to hold regular annual shareholder meetings, but may hold special meetings for
consideration of proposals requiring shareholder approval, such as changing
fundamental policies or upon the written request of 10% of the Fund's shares to
replace its Directors. The Corporation's Board of Directors is authorized to
divide the unissued shares into separate series of stock, each series
representing a separate, additional portfolio. The Board currently has
authorized the division of the unissued shares into two series each having a
separate portfolio. Shares of all series will have identical voting rights,
except where by law, certain matters must be approved by a majority of the
shares of the affected series. Each share of any series of shares when issued
has equal dividend, liquidation (see "Redemption of Shares") and voting rights
within the series for which it was issued and each fractional share has those
rights in proportion to the percentage that the fractional share represents of a
whole share. Shares will be voted in the aggregate.

There are no conversion or preemptive rights in connection with any shares of
the Fund. All shares, when issued in accordance with the terms of the offering,
will be fully paid and nonassessable. Shares will be redeemed at net asset
value, at the option of the shareholder.

The Fund sends semi-annual and annual reports to all of its shareholders which
include a list of portfolio securities and the Fund's financial statements which

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18
<PAGE>

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shall be audited annually. Unless it is clear that a shareholder is a nominee
for the account of an unrelated person or a shareholder otherwise specifically
requests in writing, the Fund may send a single copy of semi-annual, annual and
other reports to shareholders to all accounts at the same address and all
accounts of any person at that address.

The shares of the Fund have noncumulative voting rights which means that the
holders of more than 50% of the shares can elect 100% of the directors if the
holders choose to do so, and, in that event, the holders of the remaining shares
will not be able to elect any person or persons to the Board of Directors.
Unless specifically requested by an investor who is a shareholder of record, the
Fund does not issue certificates evidencing Fund shares.

Shareholder Approval

Other than elections of Directors, which is by plurality, any matter for which
shareholder approval is required by the Investment Company Act of 1940 requires
the affirmative vote of at least a "majority" (as defined by the Investment
Company Act of 1940) of the outstanding voting securities of the Fund or the
Corporation at a meeting called for the purpose of considering such approval. A
majority of the Fund's outstanding securities is the lesser of (1) 67% of the
shares represented at a meeting at which more than 50% of the outstanding shares
are present in person or by proxy or (2) more than 50% of the outstanding
shares.

Performance Information

The Fund may furnish data about its investment performance in advertisements,
sales literature and reports to shareholders. "Total return" represents the
annual percentage change in value of $1,000 invested at the maximum public
offering price for the one, five and ten year periods (if applicable) and the
life of the Fund through the most recent calendar quarter, assuming reinvestment
of all dividends and distributions. Quotations of "yield" will be based on the
investment income per share earned during a particular 30 day period, less
expenses accrued during the period, with the remainder being divided by the
maximum offering price per share on the last day of the period. The Fund may
also furnish total return and yield calculations for other periods based on
investments at various sales charge levels or net asset values.

Custodian, Transfer Agent and
Dividend Disbursing Agent

State Street Bank and Trust Company is the Custodian for the Fund's cash and
securities as well as the Transfer and Dividend Disbursing Agent for its shares.
Boston Financial Data Services, Inc., an affiliate of State Street Bank and
Trust Company performs the shareholder services on behalf of State Street and is
located at The BFDS Building, Two Heritage Drive, North Quincy, MA 02171. State
Street Bank and Trust Company does not assist in and is not responsible for
investment decisions involving assets of the Fund.

Independent Auditors

Ernst & Young LLP has been appointed independent auditors for the Fund, and is
located at 787 7th Ave., New York, NY 10019.

Information for Shareholders

All shareholder inquiries regarding administrative procedures including the
purchase and redemption of shares should be directed to the Distributor, Gabelli
& Company, Inc., One Corporate Center, Rye, New York 10580-1434. For assistance,
call 1-800-GABELLI (1-800-422-3554).

Upon request, Gabelli & Company, Inc. will provide without charge, a paper copy
of this Prospectus to investors or their representatives who received this
Prospectus in an electronic format.

This Prospectus omits certain information con- tained in the Registration
Statement filed with the Securities and Exchange Commission. Copies of the
Registration Statement including items omitted herein, may be obtained from the
Commis-sion by paying the charges prescribed under its rules and regulations.
The Statement of Additional Information included in such Registration Statement
may be obtained without charge from the Fund or its Distributor.

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19
<PAGE>

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TABLE OF CONTENTS
Page
----
Prospectus Summary ......................... 2

Table of Fees and Expenses ................. 3

Financial Highlights ....................... 4

Investment Objective and Policies and
Related Risk Factors ..................... 4

Other Investment Techniques and
Related Risk Factors ..................... 6

Management of the Fund ..................... 10

Distribution Plan .......................... 12

Purchase of Shares ......................... 12

Redemption of Shares ....................... 15

Retirement Plans ........................... 17

Dividends, Distributions and Taxes ......... 17

General Information ........................ 18

- --------------------------------------------------------------------------------
No dealer, salesman or other person has been authorized to give any information
or to make any representation other than those contained in this Prospectus, and
if given or made, such information or representation may not be relied upon as
being authorized by the Fund, the Adviser, the Administrator, the Distributor or
any affiliate thereof. This Prospectus does not constitute an offer to sell or a
solicitation of any offer to buy in any state to any person to whom it is
unlawful to make such offer in such state.
- --------------------------------------------------------------------------------

The
Gabelli
Equity
Income
Fund

PROSPECTUS
January 30, 1996

GABELLI FUNDS, INC.
Investment Adviser

GABELLI & COMPANY, INC.
Distributor

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<PAGE>

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THE GABELLI EQUITY INCOME FUND
One Corporate Center
Rye, New York 10580-1434
Telephone 1-800-GABELLI (1-800-422-3554)

STATEMENT OF ADDITIONAL INFORMATION

January 30, 1996

This Statement of Additional Information ("Additional Statement") relates to The
Gabelli Equity Income Fund (the "Fund") which is a series of The Gabelli Equity
Series Funds, Inc., a Maryland corporation (the "Corporation"), and is not a
prospectus and is only authorized for distribution when preceded or accompanied
by the Fund's prospectus dated January 30, 1996, as supplemented from time to
time (the "Prospectus"). This Statement of Additional Information contains
additional and more detailed information than that set forth in the Prospectus
and should be read in conjunction with the Prospectus, additional copies of
which may be obtained without charge by writing or telephoning the Fund at the
address and telephone number set forth above.

TABLE OF CONTENTS

Page
----
Other Investment Techniques ................... B-2
The Adviser ................................... B-5
The Distributor ............................... B-6
Directors and Officers ........................ B-7
Investment Restrictions ....................... B-10
Portfolio Transactions and Brokerage .......... B-11
Purchase and Redemption of Shares ............. B-13
Determination of Net Asset Value .............. B-13
Dividends, Distributions and Taxes ............ B-13
Investment Performance Information ............ B-16
Appendix to Statement of Additional Information B-17
Financial Statements .......................... B-20

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<PAGE>

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OTHER INVESTMENT TECHNIQUES

Securities Subject to Reorganization

Subject to the Fund's policy of investing at least 65% of its assets in
income producing equity securities the Fund may invest without limit in
securities for which a tender or exchange offer has been made or announced and
in securities of companies for which a merger, consolidation, liquidation or
reorganization proposal has been announced if, in the judgment of Gabelli Funds,
Inc. (the "Adviser"), there is a reasonable prospect of capital appreciation
significantly greater than the brokerage and other transaction expenses
involved. (See "Other Investment Techniques and Related Risk Factors" in the
Prospectus.)

In general, securities which are the subject of such an offer or proposal
sell at a premium to their historic market price immediately prior to the
announcement of the offer or may also discount what the stated or appraised
value of the security would be if the contemplated transaction were approved or
consummated. Such investments may be advantageous when the discount
significantly overstates the risk of the contingencies involved; significantly
undervalues the securities, assets or cash to be received by shareholders of the
prospective portfolio company as a result of the contemplated transaction; or
fails adequately to recognize the possibility that the offer or proposal may be
replaced or superseded by an offer or proposal of greater value. The evaluation
of such contingencies requires unusually broad knowledge and experience on the
part of the Adviser which must appraise not only the value of the issuer and its
component businesses as well as the assets or securities to be received as a
result of the contemplated transaction but also the financial resources and
business motivation of the offeror and the dynamics and business climate when
the offer of proposal is in process. In making the investments the Fund will not
violate any of its investment restrictions (see below, "Investment
Restrictions") including the requirement that, (a) as to 75% of its total
assets, it will not invest more than 5% of its total assets in the securities of
any one issuer and (b) it will not invest more than 25% of its total assets in
any one industry. Since such investments are ordinarily short-term in nature,
they will tend to increase the turnover ratio of the Fund thereby increasing its
brokerage and other transaction expenses as well as making it more difficult for
the Fund to meet the tests for favorable tax treatment as a "Regulated
Investment Company" under the Internal Revenue Code of 1986 (the "Code") (see
"Dividends, Distributions and Taxes" in the Prospectus). The Adviser intends to
select investments of the type described which, in its view, have a reasonable
prospect of capital appreciation which is significant in relation to both risk
involved and the potential of available alternate investments as well as to
monitor the effect of such investments on the tax qualification test of the
Code.

Nonconvertible Debt Securities

As disclosed in the Prospectus, up to 35% of the Fund's assets may be
invested in lower quality nonconvertible debt securities. The market values of
lower quality fixed income securities tend to be less sensitive to changes in
prevailing interest rates than higher-quality securities but more sensitive to
individual corporate developments than higher-quality securities. Such
lower-quality securities also tend to be more sensitive to economic conditions
than are higher-quality securities. Accordingly, these lower-quality securities
are considered predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligation and will generally involve more credit risk than securities in the
higher-quality categories. Even securities rated Baa or BBB by Moody's and S&P

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B-2

<PAGE>

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respectively, which ratings are considered investment grade, possess some
speculative characteristics. There are risks involved in applying credit ratings
as a method for evaluating high yield obligations in that credit ratings
evaluate the safety of principal and interest payments, not market value risk.
In addition, credit rating agencies may not change credit ratings on a timely
basis to reflect changes in economic or company conditions that affect a
security's market value. The Fund will rely on the Adviser's judgment, analysis
and experience in evaluating the creditworthiness of an issuer. In this
evaluation, the Adviser will take into consideration, among other things, the
issuer's financial resources and ability to cover its interest and fixed
charges, factors relating to the issuer's industry and its sensitivity to
economic conditions and trends, its operating history, the quality of the
issuer's management and regulatory matters.

The risk of loss due to default by the issuer is significantly greater for
the holders of lower quality securities because such securities are generally
unsecured and are often subordinated to other obligations of the issuer. During
an economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of lower quality securities may experience financial stress
and may not have sufficient revenues to meet their interest payment obligations.
An issuer's ability to service its debt obligations may also be adversely
affected by specific corporate developments, its inability to meet specific
projected business forecasts, or the unavailability of additional financing.

Factors adversely affecting the market value of high yield and other
securities will adversely affect the Fund's net asset value. In addition, the
Fund may incur additional expenses to the extent it is required to seek recovery
upon a default in the payment of principal of or interest on its portfolio
holdings.

From time to time, proposals have been discussed regarding new legislation
designed to limit the use of certain high yield debt securities by issuers in
connection with leveraged buy-outs, mergers and acquisitions, or to limit the
deductibility of interest payments on such securities. Such proposals, if
enacted into law, could reduce the market for such debt securities generally,
could negatively affect the financial condition of issuers of high yield
securities by removing or reducing a source of future financing, and could
negatively affect the value of specific high yield issues and the high yield
market in general. For example, under a provision of the Code enacted in 1989, a
corporate issuer may be limited from deducting all of the original issue
discount on high-yield discount obligations (i.e., certain types of debt
securities issued at a significant discount to their face amount). The
likelihood of passage of any additional legislation or the effect thereof is
uncertain.

The secondary trading market for lower-quality fixed income securities is
generally not as liquid as the secondary market for higher-quality securities
and is very thin for some securities. The relative lack of an active secondary
market may have an adverse impact on market price and the Fund's ability to
dispose of particular issues when necessary to meet the Fund's liquidity needs
or in response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. The relative lack of an active secondary market
for certain securities may also make it more difficult for the Fund to obtain
accurate market quotations for purposes of valuing the Fund's portfolio. Market
quotations are generally available on many high yield issues only from a limited
number of dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales. During such times, the responsibility of the Fund's
Board of Directors to value the securities becomes more difficult and judgment
plays a greater role in valuation because there is less reliable, objective data
available.

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B-3

<PAGE>

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Hedging Transactions

Futures Contracts. The Fund may enter into futures contracts only for
certain bona fide hedging, yield enhancement and risk management purposes. The
Fund may enter into futures contracts for the purchase or sale of debt
securities, debt instruments, or indices of prices thereof, stock index futures,
other financial indices, and U.S. Government Securities.

A "sale" of a futures contract (or a "short" futures position) means the
assumption of a contractual obligation to deliver the securities underlying the
contract at a specified price at a specified future time. A "purchase" of a
futures contract (or a "long" futures position) means the assumption of a
contractual obligation to acquire the securities underlying the contract at a
specified price at a specified future time.

Certain futures contracts are settled on a net cash payment basis rather
than by the sale and delivery of the securities underlying the futures
contracts. U.S. futures contracts have been designed by exchanges that have been
designated as "contract markets" by the Commodity Futures Trading Commission
(the "CFTC"), an agency of the U.S. Government, and must be executed through a
futures commission merchant (i.e., a brokerage firm) which is a member of the
relevant contract market. Futures contracts trade on these contract markets and
the exchange's affiliated clearing organization guarantees performance of the
contracts as between the clearing members of the exchange.

These contracts entail certain risks, including but not limited to the
following: no assurance that futures contracts transactions can be offset at
favorable prices, possible reduction of the Fund's yield due to the use of
hedging, possible reduction in value of both the securities hedged and the
hedging instrument, possible lack of liquidity due to daily limits on price
fluctuation, imperfect correlation between the contracts and the securities
being hedged, and potential losses in excess of the amount invested in the
futures contracts themselves.

Currency Transactions. The Fund may enter into various currency
transactions, including forward foreign currency contracts, currency swaps,
foreign currency or currency index futures contracts and put and call options on
such contracts or on currencies. A forward foreign currency contract involves an
obligation to purchase or sell a specific currency for a set price at a future
date. A currency swap is an arrangement whereby each party exchanges one
currency for another on a particular date and agrees to reverse the exchange on
a later date at a specific exchange rate. Forward foreign currency contracts and
currency swaps are established in the interbank market conducted directly
between currency traders (usually large commercial banks or other financial
institutions) on behalf of their customers. Futures contracts are similar to
forward contracts except that they are traded on an organized exchange and the
obligations thereunder may be offset by taking an equal but opposite position to
the original contract, with profit or loss determined by the relative prices
between the opening and offsetting positions. The Fund expects to enter into
these currency contracts and swaps in primarily the following circumstances: to
"lock in" the U.S. dollar equivalent price of a security a Series is
contemplating to buy or sell that is denominated in a non-U.S. currency; or to
protect against a decline against the U.S. dollar of the currency of a
particular country to which the Series' portfolio has exposure. The Fund
anticipates seeking to achieve the same economic result by utilizing from time
to time for such hedging a currency different from the one of the given
portfolio security as long as, in the view of the Adviser, such currency is
essentially correlated to the currency of the relevant portfolio security based
on historic and expected exchange rate patterns.

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B-4

<PAGE>

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Although the Adviser has no current intention of using such instruments on
behalf of the Fund, it may choose to do so at a future date depending upon
market conditions prevailing at such time and the perceived investment needs of
the Fund.

THE ADVISER

The Adviser is a New York corporation with principal offices located at One
Corporate Center, Rye, New York 10580-1434.

Pursuant to an Investment Advisory Contract which was approved by the
Fund's sole shareholder on December 9, 1991 the Adviser furnishes a continuous
investment program for the Fund's portfolio, makes the day-to-day investment
decisions for the Fund, arranges the portfolio transactions for the Fund and
generally manages the Fund's investments in accordance with the stated policies
of the Fund, subject to the general supervision of the Board of Directors of the
Fund.

Under the Investment Advisory Contract, the Adviser also (1) provides the
Fund with the services of persons competent to perform such supervisory,
administrative, and clerical functions as are necessary to provide efficient
administration of the Fund, including maintaining certain books and records and
overseeing the activities of the Fund's Custodian and Transfer Agent; (2)
oversees the performance of administrative and professional services provided to
the Fund by others, including the Fund's Custodian, Transfer Agent and Dividend
Disbursing Agent, as well as legal, accounting, auditing and other services
performed for the Fund; (3) provides the Fund, if requested, with adequate
office space and facilities: (4) prepares, but does not pay for, periodic
updating of the Fund's registration statement, Prospectus and Statement of
Additional Information, including the printing of such documents for the purpose
of filings with the Securities and Exchange Commission; (5) supervises the
calculation of the net asset value of shares of the Fund; (6) prepares, but does
not pay for, all filings under state "Blue Sky" laws of such states or countries
as are designated by the Distributor, which may be required to register or
qualify, or continue the registration or qualification, of the Fund and/or its
shares under such laws; and (7) prepares notices and agendas for meetings of the
Fund's Board of Directors and minutes of such meetings in all matters required
by the Investment Company Act of 1940 (the "Act") to be acted upon by the Board.

The Adviser has entered into an Administration Contract with Furman Selz
Incorporated ("Furman Selz" or the "Administrator") 237 Park Avenue, New York,
New York 10017, pursuant to which the Administrator provides certain
administrative services necessary for the Fund's operations but which do not
concern the investment advisory and portfolio management services provided by
the Adviser. For such services and the related expenses borne by Furman Selz,
the Adviser pays a monthly fee at the annual rate of .10% of the average net
assets of the Fund (minimum annual fee of $40,000 per portfolio) on the first
$350 million of funds advised by such Adviser and administered by Furman Selz
and .075% of any net assets above $350 million and .06% of any assets above $600
million which, together with the services to be rendered, is subject to
negotiation between the parties and both parties retain the right unilaterally
to terminate the arrangement on not less than 60 days' notice.

The Investment Advisory Contract provides that absent willful misfeasance,
bad faith, gross negligence or reckless disregard of its duty, the Adviser and
its employees, officers, directors and controlling persons are not liable to the
Fund or any of its investors for any act or omission by the Adviser or for any
error of judgment or for losses sustained by the Fund. However, the Contract
provides that the Fund is not waiving any rights it may have with respect to any
violation of law which cannot be waived. The Contract also provides

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B-5

<PAGE>

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indemnification for the Adviser and each of these persons for any conduct for
which they are not liable to the Fund. The Investment Advisory Contract in no
way restricts the Adviser from acting as adviser to others. The Fund has agreed
by the terms of the Investment Advisory Contract that the word "Gabelli" in its
name is derived from the name of the Adviser which in turn is derived from the
name of Mario J. Gabelli; that such name is the property of the Adviser for
copyright and/or other purposes; and that therefore, such name may freely be
used by the Adviser for other investment companies, entities or products. The
Fund has further agreed that in the event that for any reason, the Adviser
ceases to be its investment adviser, the Fund will, unless the Adviser otherwise
consents in writing, promptly take all steps necessary to change its name to one
which does not include "Gabelli."

The Investment Advisory Contract is terminable without penalty by the
Corporation on not more than sixty days' written notice when authorized by the
Directors of the Corporation, by the holders of a majority, as defined in the
Act, of the outstanding shares of the Corporation, or by the Adviser. The
Investment Advisory Contract will automatically terminate in the event of its
assignment, as defined in the Act and rules thereunder except to the extent
otherwise provided by order of the Commission or any rule under the Act and
except to the extent the Act no longer provides for automatic termination, in
which case the approval of a majority of the disinterested directors is required
for any "assignment." The Investment Advisory Contract provides in effect, that
unless terminated it will remain in effect until December 15, 1993, and from
year to year thereafter, so long as continuance of the Investment Advisory
Contract is approved annually by the Directors of the Fund, or the shareholders
of the Fund and in either case, by a majority vote of the Directors who are not
parties to the Investment Advisory Contract or "interested persons" as defined
in the Act of any such person cast in person at a meeting called specifically
for the purpose of voting on the continuance of the Investment Advisory
Contract.

The Investment Advisory Contract also provides that the Adviser is
obligated to reimburse to the Fund any amount up to the amount of its advisory
fee by which its aggregate expenses including advisory fees payable to the
Adviser (but excluding interest, taxes, Rule 12b-1 expenses, brokerage
commissions, extraordinary expenses and any other expenses not subject to any
applicable expense limitation) during the portion of any fiscal year in which
the Contract is in effect exceed the most restrictive expense limitation imposed
by the securities law of any jurisdiction in which the shares of the Fund are
registered or qualified for sale. Such limitation is currently believed to be
2.5% of the first $30 million of average net assets, 2.0% of the next $70
million of average net assets and 1.5% of average net assets in excess of $100
million. For purposes of this expense limitation Fund expenses are accrued
monthly and the monthly fee otherwise payable to the Adviser postponed to the
extent that the includable Fund expenses to date exceed the proportionate amount
of such limitation to date.

THE DISTRIBUTOR

The Fund has entered into a Distribution Agreement with Gabelli & Company,
Inc. (the "Distributor"), a New York corporation which is a subsidiary of
Gabelli Funds, Inc., having principal offices located at One Corporate Center,
Rye, New York 10580-1434. The Distributor acts as agent of the Fund for the
continuous offering of its shares on a best efforts basis.

The Distribution Agreement is terminable by the Distributor or the
Corporation at any time without penalty on not more than sixty nor less than
thirty days' written notice, provided, that termination by the Corporation must
be directed or approved by the Board of Directors of the Corporation, by the

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B-6

<PAGE>

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vote of the holders of a majority of the outstanding securities of the
Corporation, or by written consent of a majority of the directors who are not
interested persons of the Corporation or the Distributor. The Distribution
Agreement will automatically terminate in the event of its assignment, as
defined in the Act.The Distribution Agreement provides that, unless terminated,
it will remain in effect until December 15, 1993 and from year to year
thereafter, so long as continuance of the Distribution Agreement is approved
annually by the Corporation's Board of Directors or by a majority of the
outstanding voting securities of the Corporation, and in either case, also by a
majority of the Directors who are not interested persons of the Corporation or
the Distributor.

DIRECTORS AND OFFICERS

The Directors and Executive Officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with the
Adviser or the Administrator, are shown below. Directors deemed to be
"interested persons" of the Fund for purposes of the Investment Company Act of
1940 are indicated by an asterisk.

<TABLE>
<CAPTION>
Principal Occupations During Last Five Years; Affiliations
Name, Position with Fund and Address with the Adviser or Administrator.
- ------------------------------------ --------------------------------------------------------------------------------
<S> <C>
Mario J. Gabelli* Mr. Gabelli is Chairman, President, Chief Executive Officer and a Director of
President, Director and Gabelli Funds, Inc.; Chief Investment Officer of GAMCO Investors, Inc.;
Chief Investment Officer President and Chairman of The Gabelli Equity Trust Inc.; The Gabelli Global
Age: 53 Multimedia Trust Inc.; President, Chief Investment Officer and Director of The
Gabelli Value Fund Inc., The Gabelli Convertible Securities Fund, Inc., Gabelli
Investor Funds, Inc., Gabelli Capital Asset Fund and Gabelli Global Series
Funds, Inc.; Director of Gabelli International Growth Fund, Inc. and Gabelli
Gold Fund, Inc.; Trustee of The Gabelli Asset Fund, The Gabelli Money Market
Funds; and The Gabelli Growth Fund; Chairman and Director of Lynch Corporation.
Director and Adviser of Gabelli International Ltd. Director of Morgan Group Inc.

James E. McKee Vice President and General Counsel of the Investment Advisory Division of
Secretary Gabelli Funds, Inc.; Secretary of all Funds Advised by Gabelli Funds, Inc. and
Age: 32 Teton Advisers LLC. Secretary of The Westwood Funds since August 1995. Vice
President and General Counsel of GAMCO Investors, Inc. since 1993. Prior to that
date Branch Chief with the U.S. Securities and Exchange Commission in New York
from 1992 through 1993. Staff attorney with the Securities and Exchange
Commission in New York from 1989 through 1992.

Bruce N. Alpert Vice President, Treasurer and Chief Financial Officer of the investment advisory
Vice-President and division of the Adviser; President and Treasurer of The Gabelli Asset Fund and
Treasurer The Gabelli Growth Fund; Vice President and Treasurer of The Gabelli Equity
Age: 44 Trust Inc. and The Gabelli Global Multimedia Trust Inc., The Gabelli Convertible
Securities Fund, Inc., Gabelli Investor Funds, Inc., Gabelli International
Growth Fund, Inc., Gabelli Gold Fund, Inc., Gabelli Capital Asset Fund, and
Gabelli Global Series Funds, Inc. and The Gabelli Money Market Funds, and since
November 1994 Vice President of The Westwood Funds and Manager of Teton Advisers
LLC.

</TABLE>

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B-7

<PAGE>

Felix J. Christiana Formerly Senior Vice President of Dry Dock Savings Bank. Mr. Christiana is also
Director a Director of The Gabelli Value Fund Inc., The Gabelli Convertible Securities
Age: 71 Fund, Inc., Gabelli Investor Funds, Inc., and Gabelli Global Series Funds, Inc.,
The Gabelli Global Multimedia Trust Inc., The Gabelli Equity Trust Inc. and
The Treasurer's Fund, Inc., and a Trustee of The Gabelli Asset Fund and The
Gabelli Growth Fund.

Anthony J. Colavita President and Attorney at Law in the law firm of Anthony J. Colavita, P.C.;
Director Director of The Gabelli Value Fund Inc., and The Gabelli Convertible Securities
Age: 60 Fund Inc., Gabelli Investor Funds Inc., Gabelli International Growth Fund, Inc.,
Gabelli Gold Fund, Inc., Gabelli Capital Series Fund, Inc. and Gabelli Global
Series Funds, Inc.; Trustee of The Gabelli Asset Fund, The Gabelli Growth Fund,
The Gabelli Money Market Funds and The Westwood Funds.

Vincent D. Enright Senior Vice President and Chief Financial Officer of Brooklyn Union Gas Company.
Director Trustee of The Gabelli Money Market Funds. Director of Gabelli Investor Funds,
Age: 54 Inc., and Gabelli Global Series Funds, Inc.

John D. Gabelli* Vice President of Gabelli & Company, Inc., Director of Gabelli Funds, Inc.,
Director Gabelli Investor Funds, Inc., and Gabelli Global Series Funds, Inc. Manager of
Age: 51 Teton Advisers LLC.

Robert J. Morrissey Partner in the law firm of Morrissey & Hawkins. Former partner in the law firm
Director of Withington Cross Park & Groden. Director of The Gabelli Value Fund Inc.
Age: 56

Anthony R. Pustorino Mr. Pustorino is a Professor of Accounting at Pace University. Formerly
Director President and shareholder, Pustorino Puglisi & Co., certified public accountants
Age: 70 (1961-1989). Mr. Pustorino is a Director of The Gabelli Convertible Securities
Fund, Inc., Gabelli Investor Funds, Inc., Gabelli Capital Series Fund, Inc., and
Gabelli Global Series Funds, Inc., The Gabelli Value Fund Inc., The Gabelli
Global Multimedia Trust Inc., The Gabelli Equity Trust Inc., The Treasurer's
Fund, Inc., and a Trustee of The Gabelli Asset Fund and The Gabelli Growth Fund.

Anthonie C. van Ekri Managing Director of Balmac International, Ltd. Director of Stahel Hardmeyer
Director A.Z. (through present); Trustee of The Gabelli Asset Fund, The Gabelli Growth
Age: 61 Fund and The Gabelli Money Market Funds. Director of Gabelli Series Funds, Inc.,
Gabelli International Growth Fund, Inc., Gabelli Investor Funds, Inc., Gabelli
Global Series Funds, Inc. and Gabelli Gold Fund, Inc.

</TABLE>

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B-8

<PAGE>

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<TABLE>
<CAPTION>
Principal Occupations During Last Five Years; Affiliations
Name, Position with Fund and Address with the Adviser or Administrator.
- ------------------------------------ --------------------------------------------------------------------------------
<S> <C>
Karl Otto Pohl* Partner of Sal Oppenheim Jr. & Cie. (private investment bank); Former President
Director of the Deutsche Bundesbank (Germany's Central Bank) and Chairman of its Central
Age: 65 Bank Council (1980-1991); Currently board member of IBM World Trade
Europe/Middle East/Africa Corp.; Bertelsmann AG; Zurich
Versicherungs-Gesellschaft (insurance); the International Advisory Board of
General Electric Company; the International Council for JP Morgan & Co.; the
Board of Supervisory Directors of ROBECo/o Group; and the Supervisory Board of
Royal Dutch (petroleum company); Advisory Director of Unilever N.V. and Unilever
Deutschland; German Governor, International Monetary Fund (1980-1991); Board
Member, Bank for International Settlements (1980-1991); Chairman, European
Economic Community Central Bank Governors (1990-1991); Trustee or Director of
all Funds advised by Gabelli Funds, Inc.

</TABLE>

The Fund pays each Director who is not an employee of the Adviser or an
affiliated company an annual fee of $3,000 and $500 for each meeting of the
Board of Directors attended by the Director, and reimburses Directors for
certain travel and other out-of-pocket expenses incurred by them in connection
with attending such meetings. Directors and officers of the Fund who are
employed by the Adviser or an affiliated company receive no compensation or
expense reimbursement from the Corporation. Messrs. Mario J. Gabelli and John D.
Gabelli are brothers. Mr. Pohl receives fees from the Adviser but has no
obligation to provide any services to the Adviser. Although this relationship
does not appear to require designation of Mr. Pohl as an interested person, the
Fund is currently making such designation in order to avoid the possibility that
Mr. Pohl's independence would be questioned.

The following table sets forth certain information regarding the
compensation of the Fund's directors and officers. Except as disclosed below, no
executive officer or person affiliated with the Fund received compensation from
the Fund for the calendar year ended December 31, 1995 in excess of $60,000.

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

B-9

<PAGE>

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

COMPENSATION TABLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Total Compensation
Aggregate Compensa Pension or Retirement from Registrant and
Name of Person, tion from Registrant Benefits Accrued as Estimated Annual Ben- Fund Complex Paid
Position for Fiscal Year Part of Fund Expenses efits upon Retirement to Directors
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mario J. Gabelli $ 0 N/A N/A $ 0
President, Director and
Chief Investment Officer
Felix J. Christiana
Director 5,000 N/A N/A 71,500 (9)
Anthony J. Colavita
Director 5,000 N/A N/A 65,753 (10)
Vincent D. Enright
Director 5,000 N/A N/A 17,000 (4)
John D. Gabelli
Director 0 N/A N/A 0
Robert J. Morrissey
Director 5,000 N/A N/A 28,500 (3)
Anthony R. Pustorino
Director 5,000 N/A N/A 81,003 (8)
Anthonie C. van Ekris
Director 5,000 N/A N/A 45,253 (8)
Karl Otto Pohl
Director 5,000 N/A N/A 80,253 (12)

</TABLE>

- ----------
* Represents the total compensation paid to such persons during the
calendar year ending December 31, 1995 (and, with respect to the Fund, estimated
to be paid during a full calendar year). The parenthetical number represents the
number of investment companies (including the Fund) from which such person
receives compensation that are considered part of the same fund complex as the
Fund, because, among other things, they have a common investment adviser.

INVESTMENT RESTRICTIONS
The Fund's investment objective and the following investment restrictions
are fundamental and cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities (defined in the 1940 Act as
the lesser of (a) more than 50% of the outstanding shares or (b) 67% or more of
the shares represented at a meeting at which more than 50% of the outstanding
shares are represented). All other investment policies or practices are
considered by the Fund not to be fundamental and accordingly may be changed
without stockholder approval. If a percentage restriction on investment or use
of assets set forth below is adhered to at the time a transaction is effected,
later changes in percentage resulting from changing market values or total
assets of the Fund will not be considered a deviation from policy. The Fund may
not:

(1) with respect to 75% of its total assets, invest more than 5% of
the value of its total assets (taken at market value at time of purchase)
in the outstanding securities of any one issuer or own more than 10% of the
outstanding voting securities of any one issuer, in each case other than

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

B-10

<PAGE>

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

securities issued or guaranteed by the U.S. Government or any agency or
instrumentality thereof;

(2) invest 25% or more of the value of its total assets in any one
industry;

(3) issue senior securities (including borrowing money, including on
margin if margin securities are owned and through entering into reverse
repurchase agreements) in excess of 331/3% of its total assets (including
the amount of senior securities issued but excluding any liabilities and
indebtedness not constituting senior securities) except that the Fund may
borrow up to an additional 5% of its total assets for temporary purposes;
or pledge its assets other than to secure such issuances or in connection
with hedging transactions, short sales, when-issued and forward commitment
transactions and similar investment strategies. The Fund's obligations
under the foregoing types of transactions and investment strategies are not
treated as senior securities;

(4) make loans of money or property to any person, except through
loans of portfolio securities, the purchase of fixed income securities or
the acquisition of securities subject to repurchase agreements;

(5) underwrite the securities of other issuers, except to the extent
that in connection with the disposition of portfolio securities or the sale
of its own shares the Fund may be deemed to be an underwriter;

(6) invest for the purpose of exercising control over management of
any company;

(7) purchase real estate or interests therein, including limited
partnerships that invest primarily in real estate equity interests, other
than mortgage-backed securities and similar instruments;

(8) purchase or sell commodities or commodity contracts except for
hedging purposes or invest in any oil, gas or mineral interests.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Adviser is authorized on behalf of the Fund to employ brokers to effect
the purchase or sale of portfolio securities with the objective of obtaining
prompt, efficient and reliable execution and clearance of such transactions at
the most favorable price obtainable ("best execution") at reasonable expense.
Transactions in securities other than those for which a securities exchange is
the principal market are generally done through a principal market maker.
However, such transactions may be effected through a brokerage firm and a
commission paid whenever it appears that the broker can obtain a more favorable
overall price. In general, there may be no stated commission in the case of
securities traded on the over-the-counter markets, but the prices of those
securities may include undisclosed commissions or markups. Options transactions
will usually be effected through a broker and a commission will be charged. The
Fund also expects that securities will be purchased at times in underwritten
offerings where the price includes a fixed amount of compensation generally
referred to as the underwriter's concession or discount.

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B-11

<PAGE>

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

practice of the Adviser and its affiliates to cause purchase and sale
transactions to be allocated among the Fund and others whose assets they manage
in such manner as it deems equitable. In making such allocations among the Fund
and other client accounts, the main factors considered are the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and the opinions of the persons
responsible for managing the portfolios of the Fund and other client accounts.

The policy of the Fund regarding purchases and sales of securities and
options for its portfolio is that primary consideration will be given to
obtaining the most favorable prices and efficient execution of transactions. In
seeking to implement the Fund's policies, the Adviser effects transactions with
those brokers and dealers who the Adviser believes provide the most favorable
prices and are capable of providing efficient executions. If the Adviser
believes such price and execution are obtainable from more than one broker or
dealer, it may give consideration to placing portfolio transactions with those
brokers and dealers who also furnish research and other services to the Fund or
the Adviser of the type described in Section 28(e) of the Exchange Act of 1934.
In doing so, the Fund may also pay higher commission rates than the lowest
available when the Adviser believes it is reasonable to do so in light of the
value of the brokerage and research services provided by the broker effecting
the transaction. Such services may include, but are not limited to, any one or
more of the following: information as to the availability of securities for
purchase or sale: statistical or factual information or opinions pertaining to
investment; wire services; and appraisals or evaluations of portfolio
securities.

The Adviser may also place orders for the purchase or sale of portfolio
securities with Gabelli & Company, Inc. ("Gabelli"), a broker-dealer member of
the National Association of Securities Dealers, Inc. and an affiliate of the
Adviser, when it appears that, as an introducing broker or otherwise, Gabelli
can obtain a price and execution which is at least as favorable as that
obtainable by other qualified brokers. The Adviser may also consider sales of
shares of the Fund and any other registered investment companies managed by the
Adviser and its affiliates by brokers and dealers other than the Distributor as
a factor in its selection of brokers and dealers to execute portfolio
transactions for the Fund. For the fiscal years ended September 30, 1993,
September 30, 1994 and September 30, 1995, the Fund paid a total of $79,791,
$35,227 and $39,037, respectively, in brokerage commissions of which Gabelli &
Company, Inc. received $5,540, $7,796 and $6,176 (or 6.9%, 22.1% and 15.8% of
the total brokerage commission), respectively.

As required by Rule 17e-1 under the Act, the Board of Directors has adopted
"Procedures" which provide that the commissions paid to Gabelli on stock
exchange transactions may not exceed that which would have been charged by
another qualified broker or member firm able to effect the same or a comparable
transaction at an equally favorable price. Rule 17e-1 and the Procedures contain
requirements that the Board, including its independent Directors, conduct
periodic compliance reviews of such brokerage allocations and review such
schedule at least annually for its continuing compliance with the foregoing
standard. The Adviser and Gabelli are also required to furnish reports and
maintain records in connection with such reviews.

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

B-12

<PAGE>

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

transactions are then cleared, confirmed to the Fund for the account of Gabelli,
and settled directly with the Custodian of the Fund by a clearing house member
firm which remits the commission less its clearing charges to Gabelli. Gabelli
may also effect Fund portfolio transactions in the same manner and pursuant to
the same arrangements on other national securities exchanges which adopt direct
access rules similar to those of the New York Stock Exchange.

PURCHASE AND REDEMPTION OF SHARES

Cancellation of purchase orders for Fund shares (as, for example, when
checks submitted to purchase shares are returned unpaid) cause a loss to be
incurred when the net asset value of the Fund shares on the date of cancellation
is less than on the original date of purchase. The investor is responsible for
such loss, and the Fund may reimburse shares from any account registered in that
shareholder's name, or by seeking other redress. If the Fund is unable to
recover any loss to itself, it is the position of the SEC that the Distributor
will be immediately obligated to make the Fund whole.

DETERMINATION OF NET ASSET VALUE

The net asset value per share of the Fund is determined once daily as of
the close of business of the regular trading session of the New York Stock
Exchange, normally 4:00 p.m. New York time, on each day that the New York Stock
Exchange is open and on each other day in which there is a sufficient degree of
trading in the Fund's investments to affect the net asset value, except that the
net asset value may not be computed on a day on which no orders to purchase, or
tenders to sell or redeem, Fund shares have been received, by taking the value
of all assets of the Fund, subtracting its liabilities, dividing by the number
of shares outstanding and adjusting to the nearest cent. The New York Stock
Exchange currently observes the following holidays: New Year's Day; President's
Day; Good Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving Day;
and Christmas Day.

In the calculation of the Fund's net asset value: (1) a portfolio security
listed or traded on the New York or American Stock Exchanges or quoted by
National Association of Securities Dealers Automated Quotations, Inc. ("NASDAQ")
is valued at its last sale price on that exchange (if there were no sales that
day, the security is valued at the average of the bid and asked price); (2) all
other portfolio securities for which over-the-counter market quotations are
readily available are valued at the latest average of the bid and asked price;
and (3) when market quotations are not readily available, portfolio securities
are valued at their fair value as determined in good faith under procedures
established by and under the general supervision of the Fund's Directors.

DIVIDENDS, DISTRIBUTIONS AND TAXES

General

The Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Code. If it so qualifies, the Fund
will not be subject to Federal income tax on its net investment income and net
short-term capital gain, if any, realized during any fiscal year to the extent
that it distributes such income and capital gains to its shareholders.

The Fund will determine either to distribute, or to retain for
reinvestment, all or part of any net long- term capital gain. If any such gains
are retained, the Fund will be subject to a tax of 35% of such amount. In that
event, the Fund expects to designate the retained amount as undistributed
capital gain in a notice to its shareholders, each of whom (1) will be required
to include in income for tax purposes as long-term capital gain its share of
undistributed amount, (2) will be entitled to credit its proportionate share of

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

B-13

<PAGE>

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

the tax paid by the Fund against its Federal income tax liability and to claim
refunds to the extent the credit exceeds such liability, and (3) will increase
its basis in its shares of the Fund by an amount equal to 65% of the amount of
undistributed capital gain included in such shareholder's gross income.

A distribution will be treated as paid during any calendar year if it is
declared by the Fund in October, November or December of the year, payable to
shareholders of record on a date during such month and paid by the Fund during
January of the following year. Any such distributions paid during January of the
following year will be deemed to be received on December 31 of the year the
distributions are declared, rather than when the distributions are received.

Under the Code, amounts not distributed on a timely basis in accordance
with a calendar year distribution requirement are subject to a 4% excise tax. To
avoid the tax, the Fund must distribute during each calendar year, an amount
equal to at least the sum of (1) 98% of its ordinary income (not taking into
account any capital gains or losses) for the calendar year year, (2) 98% of its
capital gains in excess of its capital losses for the twelve-month period ending
on October 31 of the calendar year, (unless an election is made by a fund with a
November or December year-end to use the fund's fiscal year) and (3) all
ordinary income and net capital gains for previous years that were not
previously distributed.

Gains or losses on the sales of securities by the Fund will be long-term
capital gains or losses if the securities have been held by the Fund for more
than twelve months. Gains or losses on the sale of securities held for twelve
months or less will be short-term capital gains or losses.

Certain options, futures contracts and options on futures contracts are
"section 1256 contracts". Any gains or losses on section 1256 contracts are
generally considered 60% long-term and 40% short-term capital gains or losses
("60/40"). Also, section 1256 contracts held by the Fund at the end of each
taxable year are "marked-to-market" with the result that unrealized gains or
losses are treated as though they were realized and the resulting gain or loss
is treated as 60/40 gain or loss.

Hedging transactions undertaken by the Fund may result in "straddles" for
U.S. Federal income tax purposes. The straddle rules may affect the character of
gains (or losses) realized by the Fund.In addition, losses realized by the Fund
on positions that are part of a straddle may be deferred under the straddle
rules, rather than being taken into account in calculating the taxable income
for the taxable year in which such losses are realized. Further, the Fund may be
required to capitalize, rather than deduct currently, any interest expense on
indebtedness incurred or continued to purchase or carry any positions that are
part of a straddle. The Fund may make one or more of the elections available
under the Code which are applicable to straddles. If the Fund makes any of the
elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules that
vary according to the election(s) made. The rules applicable under certain of
the elections accelerate the recognition of gains or losses from the affected
straddle positions. Because application of the straddle rules may affect the
character and timing of gains, losses or deductions from the affected straddle
positions, the amount which must be distributed to shareholders, and which will
be taxed to shareholders as ordinary income or long-term capital gain, may be
increased or decreased substantially as compared to a fund that did not engage
in such heding transactions.

The 30% limitation and the diversification requirements applicable to the
Fund's assets may limit the extent to which the Fund will be able to engage in
transactions in options, futures contracts and options on futures contracts.

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

B-14

<PAGE>

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

Distributions

Distributions of investment company taxable income (which includes taxable
interest income and the excess of net short-term capital gains over long-term
capital losses) are taxable to a U.S. shareholder as ordinary income, whether
paid in cash or in additional Fund shares. Dividends paid by the Fund will
qualify for the 70% deduction for dividends received by corporations to the
extent the Fund's income consists of qualified dividends received from
U.S.corporations. Distributions of net capital gain (which consist of the excess
of long-term capital gains over net short-term capital losses), if any, are
taxable as long-term capital gain, whether paid in cash or in shares, and are
not eligible for the dividends received deduction. Shareholders receiving
distributions in the form of newly issued shares will have a basis in such
shares of the Fund equal to the fair market value of such shares on the
distribution date. If the net asset value of shares is reduced below a
shareholder's cost as a result of a distribution by the Fund, such distribution
may be taxable even though it represents a return of invested capital. The price
of shares purchased at any time may reflect the amount of a forthcoming
distribution. Those purchasing shares just prior to a distribution will receive
a distribution which will be taxable to them, even though the distribution
represents in part a return of invested capital.

Sales of Shares

Upon a sale or exchange of shares, a shareholder will realize a taxable
gain or loss depending upon the basis in the shares. Such gain or loss will be
treated as a long-term capital gain or loss if the shares have been held for
more than one year. Any loss realized on a sale or exchange will be disallowed
to the extent the shares disposed of are replaced within a 61-day period
beginning 30 days before and ending 30 days after the date the shares are
disposed of. In such case, the basis of the shares acquired will be adjusted to
reflect the disallowed loss.

Any loss realized by a shareholder on the sale of Fund shares held by the
shareholder for six months or less will be treated for tax purposes as a
long-term capital loss to the extent of any distributions of net capital gain
received by the shareholder with respect to such shares.

Backup Withholding

The Corporation may be required to withhold Federal income tax at a rate of
31% on all taxable distributions payable to shareholders who fail to provide the
Fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against the shareholder's Federal
income tax liability.

Foreign Withholding Taxes

Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine the rate of foreign tax in
advance since the amount of the Fund's assets to be invested in various
countries is not known. Because the Fund will not have more than 50% of its
total assets invested in securities of foreign governments or corporations, the
Fund will not be entitled to "pass-through" to shareholders the amount of
foreign taxes paid by the Fund.

Corporate Matters

The Corporation reserves the right to create and issue a number of series
shares, in which case the shares of each series would participate equally in the

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B-15

<PAGE>

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

earnings, dividends, and assets of the particular series and would vote
separately to approve management agreements or changes in investment policies,
but shares of all series would vote together in the election or selection of
Directors, principal underwriters and auditors and on any proposed material
amendment to the Corporation's Certificate of Incorporation.

Upon liquidation of the Corporation or any series, shareholders of the
affected series would be entitled to share pro rata in the net assets of their
respective series available for distribution to such shareholders.

INVESTMENT PERFORMANCE INFORMATION

Quotations of yield will be based on the investment income per share earned
during a particular 30 day period, less expenses accrued during the period ("net
investment income") and will be computed by dividing net investment income by
the maximum offering price per share on the last day of the period, according to
the following formula:

YIELD=2[((A-B)/(CD)+1)^6-1]

where A = dividends and interest earned during the period, B = expenses accrued
for the period (net of any reimbursements), C = the average daily number of
shares outstanding during the period that were entitled to receive dividends,
and D = the maximum offering price per share on the last day of the period.

For the 30 day period ended October 31, 1995, the Fund's annualized yield was
- -1.03%.

Quotations of total return will reflect only the performance of a
hypothetical investment in the Fund during the particular time period shown. The
Fund's total return and current yield may vary from time to time depending on
market conditions, the compositions of the Fund's portfolio and operating
expenses. These factors and possible differences in the methods used in
calculating yield should be considered when comparing the Fund's current yield
to yields published for other investment companies and other investment
vehicles. Total return and yield should also be considered relative to change in
the value of the Fund's shares and the risks associated with the Fund's
investment objectives and policies. At any time in the future, total returns and
yield may be higher or lower than past total returns and yields and there can be
no assurance that any historical return or yield will continue.

From time to time evaluations of performance are made by independent
sources that may be used in advertisements concerning the Fund. These sources
include: Lipper Analytical Services, Weisenberger Investment Company Service,
Barron's, Business Week, Financial World, Forbes, Fortune, Money, Personal
Investor, Sylvia Porter's Personal Finance, Bank Rate Monitor, Morningstar and
The Wall Street Journal.

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B-16

<PAGE>

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other unmanaged indexes which may assume reinvestment of dividends but generally
do not reflect deductions for administrative and management costs.

Quotations of the Fund's total return will represent the average annual
compounded rate of return of a hypothetical investment in the Fund over periods
of 1, 5, and 10 years (up to the life of the Fund), and are calculated pursuant
to the following formula:

T=(ERV/P)^(1/n)-1

(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the redeemable value at the end
of the period of a $1,000 payment made at the beginning of the period). Total
return figures will reflect the deduction of Fund expenses (net of certain
expenses reimbursed by the Adviser) on an annual basis, and will assume that all
dividends and distributions are reinvested and will deduct the maximum sales
charge, if any is imposed.

For the period from January 2, 1992 (commencement of operations) through
September 30, 1995, the Fund's cumulative total return was 57.1% and the average
annual total return for the period from January 2, 1992 (commencement of
operations) through September 30, 1995 was 12.8% and for the 12 months ended
September 30, 1995 it was 19.2%. Assuming deduction of the maximum 4.50% sales
charge the total return for the respective periods noted herein would have been
11.4% and 13.9%, respectively.

SHARES OF BENEFICIAL INTEREST

As of January 22, 1996, there were no shareholders owning 5% or more of the
Fund.

As of the date of this Statement of Additional Information the Directors
and Officers of the Fund as a group owned less than 1% of the outstanding shares
of the Fund.

APPENDIX TO STATEMENT OF ADDITIONAL INFORMATION

Description of Moody's Investors Service, Inc.'s ("Moody's") Corporate Bond
Ratings

Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues. Aa: Bonds which are rated Aa
are judged to be of high quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which made the long term risks appear
somewhat larger than in Aaa securities. A: Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future. Baa: Bonds which are rated Baa are considered
as medium grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack

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B-17

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outstanding investment characteristics and in fact have speculative
characteristics as well. Ba: Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class. B: Bonds which are
rated B generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small. Caa: Bonds which are rated Caa are of
poor standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest. Ca: Bonds which are rated Ca
represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings. C: Bonds which are rated C
are the lowest rated class of bonds and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.

Note: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.

Description of Standard & Poor's Corporation's ("S&P's") Corporate Debt Ratings

AAA: Debt rated AAA has the highest rating assigned by S&P's. Capacity to
pay interest and repay principal is extremely strong. AA: Debt rated AA has a
very strong capacity to pay interest and repay principal and differs from the
highest rated issues only in small degree. A: Debt rated A has a strong capacity
to pay interest and repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
debt in higher rated categories. BBB: Debt rated BBB is regarded as having
adequate capacity to pay interest and repay principal. Whereas it normally
exhibits protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than for debt in higher rated
categories. BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions. CI: The rating CI is reserved for income bonds on which no interest
is being paid. D: Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.

Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.

Description of Moody's Preferred Stock Ratings

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B-18

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which is rated a is considered to be an upper medium grade preferred stock.
While risks are judged to be somewhat greater than in the aaa and aa
classifications, earnings and asset protection are, nevertheless expected to be
maintained at adequate levels. baa: An issue which is rated baa is considered to
be medium grade, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time. ba: An issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class. b: An
issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small. caa: An issue which is rated
caa is likely to be in arrears on dividend payments. This rating designation
does not purport to indicate the future status of payment. ca: An issue which is
rated ca is speculative in a high degree and is likely to be in arrears on
dividends with little likelihood of eventual payment. c: This is the lowest
rated class of preferred or preference stock. Issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.

Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "aa" through "b" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.

Description of S&P's Preferred Stock Ratings

AAA: This is the highest rating that may be assigned by S&P's to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations. AA: A preferred stock issue rated AA also qualifies
as a high-quality fixed income security. The capacity to pay preferred stock
obligations is very strong, although not as overwhelming as for issues rated
AAA. A: An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effect of changes in circumstances and economic conditions. BBB: An issue rated
BBB is regarded as backed by an adequate capacity to pay the preferred stock
obligations. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to make payments for a preferred stock in this category than
for issues in the A category. BB, B, CCC: Preferred stock rated BB, B, and CCC
are regarded, on balance, as predominantly speculative with respect to the
issuer's capacity to pay preferred stock obligations. BB indicates the lowest
degree of speculation and CCC the highest degree of speculation. While such
issues will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CC: The rating CC is reserved for a preferred stock in arrears on dividends or
sinking fund payments but that is currently paying. C: A preferred stock rated C
is a non-paying issue. D: A preferred stock rated D is a non-paying issue with
the issuer in default on debt instruments.

Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

FINANCIAL STATEMENTS

The Fund's Financial Statements for the period January 2, 1992
(commencement of operations) through September, 1995 including the Report of
Ernst &Young LLP, independent accountants, are included herein.

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

B-19

<PAGE>

The Gabelli Equity Income Fund
Portfolio of Investments -- September 30, 1995

================================================================================

Market
Shares Cost Value
------ ---- -----
COMMON STOCKS -- 85.00%
AUTOMOTIVE -- 1.40%
6,500 Ford Motor Company .............. $ 153,183 $ 202,313
12,000 General Motors
Corporation ................... 447,738 562,500
----------- -----------
600,921 764,813
----------- -----------
AUTOMOTIVE: PARTS AND ACCESSORIES -- 1.39%
15,000 GenCorp Inc. .................... 184,500 159,375
15,000 Genuine Parts Company ........... 532,441 601,875
----------- -----------
716,941 761,250
----------- -----------
AVIATION: PARTS AND ACCESSORIES -- 2.52%
7,500 Boeing Co. ...................... 473,679 511,875
15,000 Curtiss-Wright Corp. ............ 444,138 663,750
5,000 General Motors Corporation
Cl. H ......................... 174,000 205,000
----------- -----------
1,091,817 1,380,625
----------- -----------
BUSINESS SERVICES -- 4.41%
10,000 Dun & Bradstreet Corp. .......... 580,250 578,750
9,000 Honeywell, Inc. ................. 388,245 385,875
12,000 International Business
Machines Corporation ........ 615,237 1,132,500
17,000 Landauer, Inc. .................. 263,787 323,000
--------- ---------
1,847,519 2,420,125
--------- ---------
CONSUMER PRODUCTS -- 8.31%
40,000 American Brands, Inc. ........... 1,510,750 1,690,000
7,000 Eastman Kodak Company ........... 413,935 414,750
14,000 General Electric Company ........ 680,310 892,500
8,000 Gillette Company ................ 202,038 381,000
8,000 National Presto Industries, Inc. 360,167 359,000
2,000 Philip Morris Companies Inc. .... 93,100 167,000
5,000 Procter & Gamble Company ........ 250,322 385,000
6,000 Tambrands Inc. .................. 255,066 263,250
----------- -----------
3,765,688 4,552,500
----------- -----------
DIVERSIFIED INDUSTRIAL -- 3.44%
27,000 Minnesota Mining and Manu-
facturing Company ............. 1,502,588 1,525,500
18,000 Thomas Industries Inc. .......... 205,380 362,250
----------- -----------
1,707,968 1,887,750
----------- -----------
ENERGY - ELECTRIC -- 1.46%
1,000 FPL Group, Inc. ................. 28,613 40,875
40,000 PacifiCorp ...................... 817,938 760,000
----------- -----------
846,551 800,875
----------- -----------
ENERGY - NATURAL GAS -- 8.31%
20,000 Bay State Gas Company ........... 474,425 485,000
3,000 Brooklyn Union Gas Company ...... 74,900 73,875
20,000 Colonial Gas Company ............ 401,940 400,000
13,000 Commonwealth Energy System ...... 511,537 563,875
70,000 Eastern Enterprises Inc. ........ 1,900,018 2,248,750
50,000 Southwest Gas Corporation ....... 771,275 781,250
----------- -----------
4,134,095 4,552,750
----------- -----------
ENERGY - OIL -- 17.84%
14,500 Atlantic Richfield Company ...... 1,611,435 1,556,937
20,000 British Petroleum Company,
plc ADR ....................... 878,500 1,797,500
24,000 Burlington Resources Inc. ....... 1,017,019 930,000
30,000 Chevron Corporation ............. 984,813 1,458,750
30,000 Exxon Corporation ............... 1,850,512 2,167,500
11,000 Halliburton Company ............. 485,582 459,250
10,000 Pennzoil Company ................ 453,000 438,750
15,000 Texaco Inc. ..................... 938,375 969,375
----------- -----------
8,219,236 9,778,062
----------- -----------
ENTERTAINMENT -- 1.77%
10,000 CBS Inc. ........................ 800,500 798,750
2,000 Polygram NV ADR ................. 58,725 130,500
1,000 Time Warner Inc. ................ 25,888 39,750
----------- -----------
885,113 969,000
----------- -----------
FINANCIAL SERVICES -- 11.08%
60,000 American Express Company ........ 1,259,331 2,662,503
10,000 Banco Santander SA ADR .......... 448,234 416,250
5,000 BankAmerica Corporation ......... 211,500 299,375
12,500 Commerzbank AG Spons
ADR ........................... 480,411 570,998
12,000 Deutsche Bank AG ADR ............ 546,888 573,710
11,000 Morgan (J.P.) & Co. .............
Incorporated .................. 685,500 851,125
1,500 Northern Trust Company .......... 60,300 69,000
6,000 SunTrust Banks Inc. ............. 251,737 396,750
1,991 Transamerica Corporation ........ 96,835 141,859
2,000 U.S. Trust Corporation .......... 47,394 93,000
----------- -----------
4,088,130 6,074,570
----------- -----------

FOOD AND BEVERAGE -- 1.52%
5,000 Kellogg Company ................. 257,694 361,875
20,000 Rykoff-Sexton, Inc. ............. 258,437 472,500
----------- -----------
516,131 834,375
----------- -----------
HEALTH CARE -- 1.15%
8,500 Johnson & Johnson ............... 340,855 630,062
----------- -----------
INDUSTRIAL EQUIPMENT AND SUPPLIES -- 4.10%
2,400 Caterpillar Inc. ................ 56,973 136,500
10,000 Deere & Company ................. 415,575 813,750
12,000 Ingersoll Rand Co. .............. 467,350 450,000
4,000 Minerals Technologies Inc. ...... 100,688 150,500
9,000 Tenneco Inc. .................... 360,616 416,250

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

B-20

<PAGE>

The Gabelli Equity Income Fund
Portfolio of Investments -- September 30, 1995 (Continued)

================================================================================

Principal
Amount or Market
Shares Cost Value
------ ---- -----

7,000 Union Carbide Corporation ....... $ 106,725 $ 278,250
----------- -----------
1,507,927 2,245,250
----------- -----------
METALS AND MINING -- 1.49%
2,400 Freeport-McMoRan Copper &
Gold Inc. Cl. A ............... 50,935 61,500
22,455 Freeport-McMoRan Copper &
Gold Inc. Cl. B+ .............. 436,032 575,409
32,000 Freeport-McMoRan Inc. ........... 116,861 180,000
----------- -----------
603,828 816,909
----------- -----------
PUBLISHING -- 0.20%
2,500 Reader's Digest Association,
Inc. Cl. B .................... 92,668 108,125
----------- -----------
RETAIL -- 0.13%
2,000 Sears, Roebuck and Co. .......... 51,241 73,750
----------- -----------
SPECIALTY CHEMICALS -- 1.88%
15,000 E.I. du Pont de Nemours and
Company ....................... 979,800 1,031,250
----------- -----------
TELECOMMUNICATIONS -- 12.60%
5,000 ALLTEL Corporation .............. 120,500 149,375
15,000 BC TELECOM Inc. ................. 264,354 262,668
30,000 BCE Inc. ........................ 1,018,084 1,001,250
10,000 British Telecommunications
plc ADR ....................... 643,460 626,250
7,500 Cable & Wireless plc ADR ........ 147,710 147,188
5,000 Cincinnati Bell Inc. ............ 80,250 135,000
40,000 GTE Corporation ................. 1,341,375 1,570,000
10,000 Hong Kong Telecom-
munications Ltd. ADR .......... 139,671 182,500
1,500 Motorola, Inc. .................. 40,894 114,562
10,000 NYNEX Corporation ............... 392,863 477,500
5,000 Pacific Telesis Group Inc. ...... 135,659 153,750
25,000 Southern New England
Telecommunications
Corporation ................... 866,964 884,375
200,000 Telecom Italia Mobile SpA+ ...... 185,802 334,058
5,000 Telefonica de Espana ADR ........ 165,812 206,875
14,000 US WEST, Inc. ................... 574,825 659,750
----------- -----------
6,118,223 6,905,101
----------- -----------
TOTAL COMMON STOCKS ............. 38,114,652 46,587,142
----------- -----------

CONVERTIBLE CORPORATE BONDS -- 8.29%
AUTOMOTIVE: PARTS AND ACCESSORIES -- 0.68%
$ 375,000 GenCorp Inc. Sub. Deb. Cv.
8.00%, 08/01/02 ............... 369,998 373,125
----------- -----------
Principal
Amount
------
BUILDING AND CONSTRUCTION -- 0.19%
S 100,000 Medusa Corporation Sub. Notes
Cv. 6.00%, 01/15/03 ........... 97,327 103,875
----------- -----------
CONSUMER PRODUCTS -- 0.92%
600,000 Fieldcrest Cannon, Inc. Sub. Deb.
Cv. 6.00%, 03/15/12 ........... 447,397 504,000
----------- -----------
ENERGY - OIL -- 0.32%
150,000 Pennzoil Company Sub. Deb.
Cv. 6.50%, 01/15/03 ........... 150,000 175,125
----------- -----------
ENTERTAINMENT -- 2.30%
150,000 Savoy Pictures Entertainment,
Inc. Sub. Deb. Cv.
7.00%, 07/01/03 ............... 129,020 115,500
1,096,600 Time Warner Inc.
Sub. Deb. Cv.
8.75%, 01/10/15 ............... 1,163,572 1,145,947
----------- -----------
1,292,592 1,261,447
----------- -----------
FOOD AND BEVERAGE -- 0.46%
350,000 Flagstar Companies, Inc.
Sub. Deb. Cv.
10.00%, 11/01/14 .............. 312,743 253,750
----------- -----------
INDUSTRIAL EQUIPMENT AND SUPPLIES -- 1.61%
500,000 Cooper Industries, Inc. Sub.
Deb. Cv. 7.05%, 01/01/15 ...... 500,606 505,625
335,000 Kollmorgen Corporation
Sub. Deb. Cv.
8.75%, 05/01/09 ............... 272,833 328,300
50,000 Unifi, Inc. Sub. Deb. Cv.
6.00%, 03/15/02 ............... 50,000 50,188
----------- -----------
823,439 884,113
----------- -----------
PUBLISHING -- 0.18%
100,000 News American Holdings
Incorporated Sub. Deb.
Cv. Zero Cpn., 03/31/02 ....... 61,004 96,000
----------- -----------
REAL ESTATE DEVELOPMENT -- 0.18%
100,000 Continental Homes Holding
Corp. Sub. Deb. Cv.
6.875%, 03/15/02 .............. 92,649 100,812
----------- -----------
RETAIL -- 0.69%
400,000 General Host Corporation
Sub. Deb. Cv.
8.00%, 02/15/02 ............... 392,765 376,000
----------- -----------
TRANSPORTATION -- 0.34%
250,000 Greyhound Lines, Inc. Sub. Deb.
Cv. 8.50%, 03/31/07 ........... 140,704 185,625
----------- -----------

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

B-21

<PAGE>

The Gabelli Equity Income Fund
Portfolio of Investments -- September 30, 1995 (Continued)

================================================================================

Principal
Amount or Market
Shares Cost Value
------ ---- -----

WIRELESS COMMUNICATIONS -- 0.42%
$ 300,000 COMCAST Cellular Communica-
tions Inc. Redeemable Notes,
Zero Cpn., 03/05/00 ........... $ 188,650 $ 229,500
----------- -----------
TOTAL CONVERTIBLE
CORPORATE BONDS ............... 4,369,268 4,543,372
----------- -----------

CONVERTIBLE PREFERRED STOCKS -- 2.68%
AIRLINES -- 0.60%
2,500 AMR Corporation $3.00 Cv.
Pfd. Ser. A (a) ............... 124,125 126,875
3,600 Delta Air Lines, Inc. $3.50 Cv.
Pfd. Ser. C ................... 191,253 204,300
----------- -----------
315,378 331,175
----------- -----------
AUTOMOTIVE -- 0.24%
2,000 General Motors Corporation
$3.25 Cv. Pfd. Ser. C ......... 100,000 129,750
----------- -----------
CONSUMER PRODUCTS -- 0.05%
1,500 Kerr Group, Inc. Cl. B $1.70
Cv. Pfd. Ser. D ............... 27,075 29,906
----------- -----------
DIVERSIFIED INDUSTRIAL -- 0.39%
3,500 GATX Corporation $3.875
Cv. Pfd. ...................... 164,025 211,750
----------- -----------
INDUSTRIAL EQUIPMENT AND SUPPLIES -- 0.92%
10,000 Flagstar Companies, Inc.
$2.25 Cv. Pfd. Ser. A ......... 248,000 183,750
2,500 Navistar International
Corporation $6.00 Cv.
Pfd. Ser. G ................... 68,625 136,563
3,000 Sequa Corporation
$5.00 Cv. Pfd. ................ 191,475 186,000
----------- -----------
508,100 506,313
----------- -----------
METALS AND MINING -- 0.48%
5,000 Freeport-McMoRan Copper &
Gold Inc. 5.00% Cv. Pfd. ...... 106,500 128,750
2,000 Magma Copper Company
5.625% Cv. Pfd. Ser. D ........ 102,488 132,500
----------- -----------
208,988 261,250
----------- -----------
TOTAL CONVERTIBLE
PREFERRED STOCKS .............. 1,323,566 1,470,144
----------- -----------
Principal
Amount
------
U.S. GOVERNMENT OBLIGATIONS -- 4.83%
$ 2,660,000 U.S. Treasury Bills, 5.12%
to 5.30%, due 10/05/95
to 11/16/95 ................... 2,645,137 2,645,137
----------- -----------
TOTAL U.S. GOVERNMENT
OBLIGATIONS ................... 2,645,137 2,645,137
----------- -----------
TOTAL INVESTMENTS
-- 100.80% .................... $46,452,623* 55,245,795
===========
Liabilities, in excess of
Other Assets -- (0.80%) .......... (440,232)
-----------

NET ASSETS -- 100.00%
(4,332,773 shares outstanding) .. $54,805,563
===========

Net Asset Value And
Redemption Price Per Share .... $ 12.65
===========
MAXIMUM PUBLIC OFFERING
PRICE PER SHARE
($12.65 / .955 Based on
a maximum sales charge
of 4.5%) ...................... $ 13.25
===========
- ----------
* For Federal income purposes:

Aggregate cost ................ $46,452,623
===========

Gross unrealized appreciation . $ 9,230,300
Gross unrealized depreciation . (537,128)
-----------

Net unrealized appreciation ... $ 8,793,172
===========
+ Non-income producing security
ADR -- American Depositary Receipt
(a) Security exempt from registration under Rule 144A of the Securities Act of
1933. This security may be resold in transactions exempt from registration,
normally to qualified institutional buyers. At September 30, 1995, Rule
144A security amounted to $126,875, or 0.2% of net assets.

- --------------------------------------------------------------------------------
Top Ten Holdings
September 30, 1995
------------------

American Express Company GTE Corporation
Eastern Enterprises Inc. Atlantic Richfield Company
Exxon Corporation Minnesota Mining and Manufacturing Company
British Petroleum Company, plc Chevron Corporation
American Brands, Inc. Time Warner Inc.

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

B-22

<PAGE>

The Gabelli Equity Income Fund

Statement of Assets and Liabilities
September 30, 1995

================================================================================

Assets:
Investments in securities, at value
(Cost $46,452,623) (Note 1) ........................... $ 55,245,795
Cash .................................................... 62,784
Receivable for Fund shares sold ......................... 16,407
Receivable for investments sold ......................... 279,016
Dividends receivable .................................... 135,381
Accrued interest receivable ............................. 86,859
Other assets ............................................ 22,152
Deferred organizational expenses (Note 5) ............... 20,829
------------
Total Assets .......................................... 55,869,223
------------
Liabilities:
Payable to Advisor (Note 4) ............................. 44,948
Payable for distribution fees (Note 6) .................. 22,962
Payable for investments purchased ....................... 942,575
Payable for Fund shares redeemed ........................ 29,078
Income dividend payable ................................. 20,843
Other accrued liabilities ............................... 3,254
------------
Total Liabilities ..................................... 1,063,660
------------
Net Assets (applicable to 4,332,773
shares outstanding) (Note 2) .......................... $ 54,805,563
------------
Net asset value and redemption
price per share ..................................... $ 12.65
------------
Maximum Offering Price Per Share
($12.65 /.955 Based on a maximum
sales charge of 4.5%) ............................... $ 13.25
------------
Net Assets Consist of:
Capital Stock, at par value (Note 2) .................... $ 4,333
Additional paid-in capital .............................. 43,452,317
Accumulated undistributed net investment income ......... 25,010
Accumulated undistributed net realized gain on
investments and futures transactions .................. 2,530,589
Net unrealized appreciation on investments
and assets and liabilities denominated
in foreign currencies ................................. 8,793,314
------------
Net Assets ............................................ $ 54,805,563
============

Statement of Operations
Year Ended September 30, 1995

================================================================================

Investment Income:
Dividends (net of foreign taxes of $41,159) ............. $ 1,636,339
Interest ................................................ 580,010
------------
Total Income .......................................... 2,216,349
------------
Expenses:
Investment advisory fee (Note 4) ........................ 512,370
Transfer and shareholder servicing agent ................ 130,957
Distribution expenses (Note 6) .......................... 128,073
Directors' fees ......................................... 35,029
Custodian fees and expenses ............................. 30,489
Legal and audit fees .................................... 29,998
Printing and mailing .................................... 28,405
Registration fee ........................................ 21,612
Amortization of organization expenses
(Note 5) ............................................... 13,388
Miscellaneous ........................................... 7,258
------------
Total expenses ........................................ 937,579
------------
Investment income - net ................................. $ 1,278,770
------------
Net Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency
Transactions:
Net realized gain (loss) on:
Investments and foreign currency
transactions ........................................ 2,788,574
Futures contracts (Note 3) ............................ (83,041)
Net change in unrealized appreciation ................... 5,063,872
------------
Net gain on investments ............................... 7,769,405
------------
Net increase in net assets resulting from
operations .............................................. $ 9,048,175
============

<TABLE>
<CAPTION>
Statement of Changes in Net Assets

====================================================================================================================================

Year Ended September 30,
-------------------------------------
1995 1994
------------ ------------
<S> <C> <C>
Increase (decrease) in Net Assets:
Investment income - net ...................................................... $ 1,278,770 $ 1,346,113
Net realized gain (loss) on:
Investments and foreign currency transactions .............................. 2,788,574 3,161,892
Futures contracts .......................................................... (83,041) 190,309
Net change in unrealized appreciation ........................................ 5,063,872 2,995,681)
------------ ------------
Net increase in net assets resulting from operations ....................... 9,048,175 1,702,633
------------ ------------
Distributions to shareholders from:
Net investment income ...................................................... (1,270,183) (1,358,471)
Net realized gains ......................................................... (2,774,449) (3,003,967)
------------ ------------
Total Distributions to Shareholders .............................................. (4,044,632) (4,362,438)
------------ ------------
Share transactions - net (Note 2) ............................................ (388,680) (1,734,213)
------------ ------------
Net increase (decrease) in net assets ...................................... 4,614,863 (4,394,018)
Net Assets:
Beginning of period .......................................................... 50,190,700 54,584,718
------------ ------------
End of period (including undistributed net investment
income of $25,010 and $16,425, respectively) ............................... $ 54,805,563 $ 50,190,700
============ ============

</TABLE>

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

B-23

<PAGE>

The Gabelli Equity Income Fund
Notes to Financial Statements

================================================================================

1. Significant Accounting Policies. The Gabelli Equity Income Fund (the "Fund")
is a series of Gabelli Equity Series Funds, Inc. (the "Corporation"). The Fund
is an open-end, diversified management investment company and one of two
separately managed portfolios of the Corporation. The Corporation was
incorporated in Maryland on July 25, 1991. Prior to January 2, 1992
(commencement of operations), the Fund had no operations other than the sale of
10,000 shares of common stock at $10.00 per share to Gabelli Funds, Inc., the
Fund's advisor, on November 12, 1991. The following is a summary of significant
accounting policies followed by the Fund:

Security Valuation. Portfolio securities listed or traded on the New York or
American Stock Exchanges or quoted by the National Association of Securities
Dealers Automated Quotations, Inc. ("NASDAQ") are valued at the last sale price
on that exchange (if there were no sales that day, the security is valued at the
average of the bid and asked price). All other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest average of the bid and asked price. When market quotations are not
readily available, portfolio securities are valued at their fair value as
determined in good faith under procedures established by and under the general
supervision of the Corporation's Directors. Short-term debt securities with
remaining maturities of 60 days or fewer are valued at amortized cost, unless
the Directors determine such does not reflect the securities' fair value, in
which case these securities will be valued at their fair value as determined by
the Directors. Options are valued at the last sale price on the exchange on
which they are listed, unless no sales of such options have taken place that
day, in which case they will be valued at the mean between their closing bid and
asked prices.

Foreign Currency Transactions. The books and records of the Fund are maintained
in U.S. dollars as follows:

(i) market value of investment securities and other assets and liabilities are
translated at the exchange rate on the valuation date.

(ii) purchases and sales of investment securities, income and expenses are
translated at the exchange rate prevailing on the respective date of such
transactions.

The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments. Net
realized and unrealized foreign exchange gains and losses which arise from
changes in exchange rates involving assets and liabilities other than
investments in securities were immaterial for the year ended September 30, 1995.

Forward Foreign Currency Contracts. The Fund may hold currencies to meet
settlement requirements for foreign securities and may engage in currency
exchange transactions to hedge against changes in exchange rates. Forward
foreign currency contracts are valued at the forward rate and are
marked-to-market daily. The change in market value is recorded by the Fund as an
unrealized gain or loss. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.

The use of forward foreign currency contracts does not eliminate fluctuations in
the underlying prices of the Fund's portfolio securities, but it does establish
a rate of exchange that can be be achieved in the future. Although forward
foreign currency contracts limit the risk of loss due to a decline in the value
of the hedged currency, they also limit any potential gain that might result
should the value of the currency increase. In addition, the Fund could be

B-24

<PAGE>

The Gabelli Equity Income Fund
Notes to Financial Statements (Continued)

================================================================================

exposed to risks if the counterparties to the contracts are unable to meet the
terms of their contracts.

At September 30, 1995 there were no forward foreign currency contracts
outstanding.

Security Transactions and Investment Income. Security transactions are accounted
for on the dates the securities are purchased or sold (the trade dates), with
realized gain or loss on investments determined by using specific identification
as the cost method. Interest income (including amortization of premium and
discount) is recorded as earned. Dividend income and dividend and capital gain
distributions to shareholders are recorded on the ex-dividend date.

Federal Income Taxes. The Fund intends to continue to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986 and
distribute all of its taxable income to its shareholders. Therefore, no Federal
income tax provision is required.

2. Capital Stock Transactions. The Articles of Incorporation, dated July 25,
1991, permit the Fund to issue 100,000,000 shares (par value $0.001) of capital
stock. Transactions in shares of capital stock were as follows:

<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1995 1994
------------------------------- -------------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ............................................ 515,300 $ 6,046,383 781,758 $ 9,229,265
Shares issued upon reinvestment of dividends ........... 347,341 3,817,233 359,558 4,136,099
Shares redeemed ........................................ (877,751) (10,252,296) (1,285,105) (15,099,577)
------------ ------------ ------------ ------------
Net decrease ......................................... (15,110) $ (388,680) (143,789) $ (1,734,213)
============ ============ ============ ============
</TABLE>

3. Purchases and Sales of Securities. Purchases and sales of securities for the
year ended September 30, 1995, other than U.S. Government obligations and
short-term securities, aggregated $14,770,832 and $16,315,106, respectively.

Futures Contracts. The Fund may engage in futures contracts for the purpose
of hedging against changes in the value of its portfolio securities and in the
value of securities it intends to purchase. Upon entering into a futures
contract, the Fund is required to deposit cash or pledge securities in an amount
equal to a certain percentage of the purchase price indicated in the futures
contract (initial margin). Subsequent payments, which are dependent on the daily
fluctuations in the value of the underlying security, are made or received by
the Fund each day (variation margin) and are recorded as unrealized gains or
losses until the contracts are closed, at which time the Fund recognizes a
realized gain or loss. The Fund sold long futures contracts aggregating
$2,643,250; closed long futures contracts aggregating $2,638,085; sold short
futures contracts aggregating $43,206,820 and closed short futures contracts
aggregating $43,284,696 during the year ended September 30, 1995.

There are several risks in connection with the use of futures contracts as a
hedging device. The change in value of futures contracts primarily corresponds
with the value of their underlying instruments, which may not correlate with the
change in value of the hedged investments. In addition, there is the risk that
the Fund may not be able to enter into a closing transaction because of an
illiquid secondary market.

Short Selling. The Fund is authorized to engage in short-selling which
obligates the Fund to replace the security borrowed by purchasing the security
at current market value. The Fund would incur a loss if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security. The Fund would realize a gain if the price
of the security declines between those dates. Until the Fund replaces the
borrowed security, the Fund will maintain daily, a segregated account with cash

B-25

<PAGE>

The Gabelli Equity Income Fund
Notes to Financial Statements (Continued)

================================================================================

and/or U.S. Government securities sufficient to cover its short position. At
September 30, 1995, there were no short positions.

4. Investment Advisory Contract. The Fund employs Gabelli Funds, Inc. (the
"Advisor") to provide a continuous investment program for the Fund's portfolio,
provide all facilities and personnel, including officers, required for its
administrative management, and to pay the compensation of all officers and
Directors of the Fund who are its affiliates. As compensation for the services
rendered and related expenses borne by the Advisor, the Fund pays the Advisor a
fee, computed and accrued daily and payable monthly, equal to 1.00% per annum of
the Fund's average daily net assets. The Advisor is obligated to reimburse the
Fund in the event the Fund's expenses exceed certain prescribed limits. No such
reimbursement was required during the year ended September 30, 1995.

5. Organization Expenses. The organization expenses of the Fund are being
amortized on a straight-line basis over a period of 60 months. The Advisor has
agreed that in the event that any of the initial 10,000 shares it owns are
redeemed during the period of amortization of the Fund's organization expenses,
the redemption proceeds will be reduced by any such unamortized organization
expenses in the same proportion as the number of initial shares being redeemed
bears to the number of initial shares outstanding at the time of redemption.

6. Distribution Plan. The Fund's Board of Directors has adopted a distribution
plan (the "Plan") under Section 12(b) of the Investment Company Act of 1940 and
Rule 12b-1 thereunder. For the year ended September 30, 1995, the Fund has
reimbursed distribution costs incurred by Gabelli & Company, Inc., an affiliate
of the Advisor, of $128,073, or 0.25% of average net assets, the annual
limitation under the Plan. The Board of Directors has approved that Distribution
costs incurred by Gabelli & Company, Inc., totalling $261,514, which are in
excess of the 0.25% limitation may be recovered from the Fund in future periods.

7. Transactions with Affiliates. The Fund paid brokerage commissions to Gabelli
& Company, Inc., an affiliate of the Advisor, during the year ended September
30, 1995 of $6,176. Gabelli & Company, Inc. has informed the Fund that the
amount of sales charges and underwriting fees earned during the year ended
September 30, 1995 was $8,582.

B-26

<PAGE>

<TABLE>
<CAPTION>
The Gabelli Equity Income Fund
Financial Highlights

====================================================================================================================================

Selected data for a share of capital stock outstanding throughout each period:

Year Ended September 30,
-------------------------------------------------------------
1995 1994 1993 1992 (a)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating Performance:
Net asset value, beginning of period ........................ $ 11.54 $ 12.15 $ 10.40 $ 10.00
---------- ---------- ---------- ----------
Net investment income ....................................... 0.29 0.30 0.29 0.21
Net realized and unrealized gain on securities .............. 1.77 0.08 1.81 0.37
---------- ---------- ---------- ----------
Total from investment operations ............................ 2.06 0.38 2.10 0.58
---------- ---------- ---------- ----------
Less Distributions:
Dividends from net investment income ........................ (0.29) (0.31) (0.29) (0.18)
Distributions from net realized gain on investments ......... (0.66) (0.68) (0.06) --
---------- ---------- ---------- ----------
Net asset value, end of period .............................. $ 12.65 $ 11.54 $ 12.15 $ 10.40
========== ========== ========== ==========

Total Return (not reflecting sales load) (b) .................. 19.24% 3.30% 20.50% 5.80%

Ratios to average net assets/supplemental data:
Net assets, end of period (in thousands) .................... $ 54,806 $ 50,191 $ 54,585 $ 44,940
Ratio of operating expenses to average net assets ........... 1.83% 1.81% 1.78% 1.93%*
Ratio of net investment income to average net assets ........ 2.50% 2.58% 2.62% 2.65%*
Portfolio turnover rate ..................................... 30.11% 20.00% 76.00% 22.00%

</TABLE>

- ----------
* Annualized
(a) Fund commenced operations on January 2, 1992.
(b) Total return is calculated assuming a purchase of shares at the net asset
value on the first day and a sale on the last day of each year reported and
includes reinvestment of dividends and distributions.

B-27

<PAGE>

The Gabelli Equity Income Fund
Report of Ernst & Young LLP, Independent Auditors

================================================================================

Shareholders and Board of Directors
The Gabelli Equity Income Fund

We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Gabelli Equity Income Fund (a series of
Gabelli Equity Series Funds, Inc.) as of September 30, 1995, and the related
statement of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the financial
highlights for each of the periods indicated therein. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1995 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Gabelli Equity Income Fund at September 30, 1995, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the indicated
periods, in conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP

New York, New York
November 7, 1995

B-28

<PAGE>

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

The Gabelli Small Cap Growth Fund

One Corporate Center
Rye, New York 10580-1434
Telephone: 1-800-GABELLI (1-800-422-3554)

================================================================================

PROSPECTUS

January 30, 1996

The Gabelli Small Cap Growth Fund (the "Fund") is a series of Gabelli Equity
Series Funds, Inc., a Maryland corporation (the "Corporation"). The Fund is an
open-end, diversified, management investment company whose investment objective
is to seek a high level of capital appreciation on its assets. The Fund has a
distribution plan which permits it to pay up to .25% per year of its average
daily net assets for marketing and shareholder services and expenses. The Fund
seeks to achieve its investment objective by investing primarily in the equity
securities of smaller companies (those with market values at the time of
investment of less than $500 million) which the Fund's investment adviser
believes are likely to have rapid growth in revenue and/or earnings and
potential for above average capital appreciation.

The minimum initial investment is $1,000. A maximum sales load of 4.50% will be
imposed on purchases (4.71% of the amount invested). Additionally, accounts
establishing an Automatic Investment Plan do not require any minimum initial
investment. (See "Purchase of Shares"). For further information, contact Gabelli
& Company, Inc. at the address or telephone number shown above.

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

This Prospectus should be retained
by investors for future reference.

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

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

<PAGE>

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

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus.

The Fund: The Gabelli Small Cap Growth Fund is an open-end, diversified,
management investment company.

Investment Objective: The Fund's investment objective is to seek a high level of
capital appreciation on its assets. The Fund will seek to achieve this
objective by investing primarily in equity securities of smaller companies
(those with total market values at the time of investment of less than $500
million) which the Fund's investment adviser believes are likely to have
rapid growth in revenues and/or earnings and potential for above average
capital appreciation. Although the Fund may also invest in any type of
fixed income instrument and may use various special investment techniques,
under normal market conditions the Fund will invest at least 65% of its
total assets in the equity securities of smaller growth companies (as
defined above). Equity securities include common stock, preferred stock and
securities convertible into or exchangeable for common or preferred stock.
See "Investment Objective and Policies and Related Risk Factors" and "Other
Investment Techniques and Related Risk Factors." There is no assurance that
the Fund will achieve its investment objective. The investment objective of
the Fund and its investment restrictions described in the Additional
Statement are fundamental and may not be changed without shareholder
approval. Its other investment policies may be changed by the Board of
Directors without shareholder approval.

There is no assurance that the Fund will achieve its investment objective.
The investment objective of the Fund and its investment restrictions
described in the Additional Statement are fundamental and may not be
changed without shareholder approval. Its other investment policies may be
changed by the Board of Directors without shareholder approval.

How to Purchase Shares: Shares of the Fund may be purchased through certain
registered brokers at the public offering price based on the net asset
value per share next determined after receipt of an order by the Fund's
Distributor or transfer agent in proper form with accompanying check or
other bank wire payment arrangements satisfactory to the Fund. A maximum
sales charge of 4.50% will be imposed on purchases (4.71% of the amount
invested). The minimum initial investment is $1,000. There is no minimum
for subsequent investments. Investment through an Individual Retirement
Account, other retirement plans and Uniform Gift to Minors Act Accounts,
however, have different requirements. There is no minimum initial
investment requirement for accounts establishing an Automatic Investment
Plan. See "Purchase of Shares" and "Retirement Plans."

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

<PAGE>

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

Dividends and Reinvestment: Each dividend and capital gains distribution, if
any, declared by the Fund on its outstanding shares will, unless a
shareholder elects otherwise, be paid on the payment date in additional
shares of the Fund having an aggregate net asset value as of the
ex-dividend date of such dividend or distribution equal to the cash amount
of such distribution. An election may be changed by notifying the Fund in
writing at any time prior to the record date for a particular dividend or
distribution. There are no sales or other charges in connection with the
reinvestment of dividends and capital gains distributions. There is no
fixed dividend rate, and there can be no assurance that the Fund will pay
any dividends or realize any capital gains. However, the Fund currently
intends to pay dividends and capital gains distributions, if any, on an
annual basis. See "Dividends, Distributions and Taxes."

Risk Factors: Investors should consider the risks associated with smaller growth
companies. See "Investment Objective and Policies and Related Risk Factors
-- Equity Securities." The Fund has reserved the right to borrow money from
time to time to provide greater liquidity for redemptions or to make
additional portfolio investments. If the Fund were to borrow money for
additional investments, and such additional investments failed to cover
their cost (including interest costs on such borrowings) the Fund's
performance would be poorer than would otherwise be the case. Furthermore,
if the Fund were to borrow money and the value of its assets were to fall
below the statutory coverage requirement of the Investment Company Act of
1940, the Fund would have to take corrective action to achieve compliance
within three business days and accordingly might be required to sell a
portion of its securities at a time when such sale might be
disadvantageous. The Fund may use various investment practices that also
involve special risks. For a discussion of these practices and the
associated risks, see "Other Investment Techniques and Related Risk
Factors."

<TABLE>
<CAPTION>
TABLE OF FEES AND EXPENSES
--------------------------
Shareholder Transaction Expenses:
- ---------------------------------
<S> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price) (a) .................. 4.50%
Maximum Sales Load Imposed on Reinvested Dividends ............................................... None
Deferred Sales Load .............................................................................. None
Redemption Fees .................................................................................. None
Exchange Fees .................................................................................... None

Annual Fund Operating Expenses (as a percentage of average net assets):
- ------------------------------
Management Fees (b) .............................................................................. 1.00%
12b-1 Expenses (c) ............................................................................... .25
Other Expenses (d) ............................................................................... .29%
-----
Total Fund Operating Expenses ................................................................ 1.54%
=====
</TABLE>

<TABLE>
<CAPTION>
Example: 1 year 3 years 5 years 10 years
- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return at the end of each period ............................................. $61.93 $93.36 $127.00 $221.83
If you do not pay a sales load, you would pay the following expenses, whether or not
you fully redeem at the end of each time period, on a $1,000 investment,
assuming a 5% annual return ......................................................... $15.67 $48.64 $83.94 $183.45
</TABLE>

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

The amounts listed in this example should not be considered as representative of
future expenses since actual expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, the Fund's
actual performance will vary and may result in an actual return greater or less
than 5%.

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

The foregoing table is to assist you in understanding the various direct and
indirect costs and expenses that an investor in the Fund would bear.

- -----------
(a) See "Purchase of Shares."
(b) Subject to potential reduction as a result of the Adviser's expense
reimbursement obligations. See "Management of the Fund."
(c) See "Distribution Plan."
(d) Such expenses include custodian and transfer agency fees and other
customary Fund expenses.

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

<PAGE>

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

FINANCIAL HIGHLIGHTS

The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors, whose unqualified report thereon appears in the Statement
of Additional Information:

Selected data for a share of capital stock outstanding throughout each period
ending September 30:

Operating Performance:
Net asset value, beginning of period $17.24 $16.90 $13.10 $10.00
Net investment income (loss) (0.04) (0.05) 0.01 0.04
Net realized and unrealized gain on securities 3.17 0.81 3.98 3.14
------ ------ ------ -------
Total from investment operations 3.13 0.76 3.99 3.18
Less Distributions:
Dividends from net investment income -- -- (0.03) (0.01)
Distributions from net realized gain on
investments (1.03) (0.42) (0.16) (0.07)
------ ------ ------ -------
Net asset value, end of period $19.34 $17.24 $16.90 $13.900
====== ====== ====== =======
Total Return (not reflecting sales load) 19.47% 4.48% 30.65% 31.86%
Ratios to average net
assets/supplemental data:
Net assets, end of period
(in thousands) $231,156 $205,699 $204,617 $94,864
Ratio of operating expenses to
average net assets 1.54% 1.54% 1.64% 1.97%*
Ratio of net investment income
to average net assets (0.24)% (0.28)% 0.03% 0.32%*
Portfolio turnover rate 17.22% 18.66% 13.69% 16.35%

</TABLE>

- ----------
* Annualized
+ For the period October 22, 1991 (commencement of operations) through September
30, 1992.

INVESTMENT OBJECTIVE AND POLICIES
AND RELATED RISK FACTORS

The Fund's investment objective is to seek a high level of capital appreciation
on its assets by investing primarily in the equity securities of smaller
companies (those with total market values at the time of investment of less than
$500 million) which the Adviser believes are likely to have rapid growth in
revenues and earnings and potential for above average capital appreciation.
Although the Fund may also invest in any type of fixed income instrument and may
use various hedging techniques, under normal market conditions the Fund will
invest at least 65% of its total assets in the equity securities of smaller
growth companies (as defined above). Equity securities include common stock,
preferred stock and securities convertible into or exchangeable for common or
preferred stock. Risks inherent in the Fund's investment objective and policies
are discussed below.

Equity Securities

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

<PAGE>

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

issuer, the value of its assets, general economic conditions, interest rates,
investor perceptions and market liquidity.

Smaller growth companies may offer greater potential for capital appreciation
than larger companies. Smaller growth companies usually have new products or
technologies, new distribution methods, rapid changes in industry conditions due
to regulatory or other developments, changes in management or similar
characteristics that may result not only in the expected growth in revenues but
in an accelerated or above average rate of earnings growth, which would usually
be reflected in capital appreciation. In addition, because they are less
actively followed by stock analysts and less information is available on which
to base stock price evaluations, the market may overlook favorable trends in
particular smaller growth companies, and then adjust its valuation more quickly
once investor interest is gained. Smaller growth companies may also be more
subject to a valuation catalyst (such as increased investor attention, takeover
efforts or a change in management) than larger companies.

On the other hand, higher market risks are often associated with smaller growth
companies. They may have limited product lines, markets, market share and
financial resources, or they may be dependent on a small or inexperienced
management team. In addition, their stocks may trade less frequently and in more
limited volume and be subject to greater and more abrupt price swings than
stocks of larger companies.

The Adviser believes that opportunities for capital appreciation may also be
found in the preferred stock and convertible securities of smaller growth
companies. This is particularly true in the case of companies that have
performed below expectations at the time the preferred stock or convertible
security was issued. If the company's performance has been poor enough, its
preferred stock and convertible debt securities will trade more like the common
stock than like a fixed income security and may result in above average
appreciation once it becomes apparent that performance is improving. Even if the
credit quality of the company is not in question, the market price of the
convertible security will often reflect little or no element of conversion value
if the price of its common stock has fallen substantially below the conversion
price. This leads to the possibility of capital appreciation if the price of the
common stock recovers. Although the Adviser believes that capital appreciation
opportunities may be found in these securities, it does not expect them to
constitute a major portion of the Fund's portfolio. Preferred stocks and
convertible securities have many of the same characteristics and risks as
nonconvertible debt securities described below. There is no minimum credit
rating for these securities in which the Fund may invest.

Nonconvertible Debt Securities

Under normal market conditions, the Fund may invest in nonconvertible debt
securities. These securities include bonds, debentures, notes, asset and
mortgage backed securities and money market instruments such as commercial paper

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

<PAGE>

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

and bankers acceptances. There is no minimum credit rating for these securities
in which the Fund may invest. Accordingly, the Fund could invest in securities
in default although the Fund will not invest more than 5% of its assets in such
securities. Fixed income securities rated, at the time of investment, less than
BBB by Standard & Poor's Corporation ("S&P") or Baa by Moody's Investor Service
("Moody's") or which are unrated but of comparable quality in the judgment of
the Adviser, are not investment grade and are viewed by the rating agencies as
being predominantly speculative in character and are characterized by
substantial risk concerning payments of interest and principal, sensitivity to
economic conditions and changes in interest rates, as well as by market price
volatility and/or relative lack of secondary market trading, among other risks.
For further information regarding lower rated securities, which are often known
as "junk bonds", and the risks associated therewith, see "Other Investment
Techniques" and the Description of Corporate Bond, Corporate Debt and Preferred
Stock Ratings attached in the Additional Statement as an Appendix.

Asset-Backed and Mortgage-Backed
Securities

For temporary defensive purposes the Fund may invest up to 100% of its assets in
fixed income securities of high quality money market instruments.

OTHER INVESTMENT TECHNIQUES
AND RELATED RISK FACTORS

Foreign Securities

The Fund may invest up to 35% of its total assets in the securities of non-U.S.
issuers. These investments involve certain risks not ordinarily associated with
investments in securities of domestic issuers. These risks include fluctuations
in foreign exchange rates, future political and economic developments, and the
possible imposition of exchange controls or other foreign governmental laws or
restrictions. In addition, with respect to certain countries, there is the
possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.

Corporate Reorganizations

Subject to the Fund's policy of investing at least 65% of its assets in equity
securities of smaller companies, the Fund may invest without limit in securities
for which a tender or exchange offer has been made or announced and in
securities of companies for which a merger, consolidation, liquidation or
similar reorganization proposal has been announced if, in the judgment of the
Adviser, there is a reasonable prospect of capital appreciation significantly

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

<PAGE>

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

greater than the added portfolio turnover expenses inherent in the short term
nature of such transactions. The principal risk is that such offers or proposals
may not be consummated within the time and under the terms contemplated at the
time of the investment, in which case, unless such offers or proposals are
replaced by equivalent or increased offers or proposals which are consummated,
the Fund may sustain a loss. For further information on such investments, see
"Other Investment Techniques" in the Additional Statement.

Options

The Fund may purchase or sell options on individual securities as well as on
indices of securities as a means of achieving additional return or of hedging
the value of the Fund's portfolio.

A call option is a contract that gives the holder of the option the right, in
return for a premium paid, to buy from the seller the security underlying the
option at a specified exercise price at any time during the term of the option
or, in some cases, only at the end of the term of the option. The seller of the
call option has the obligation upon exercise of the option to deliver the
underlying security upon payment of the exercise price. A put option is a
contract that gives the holder of the option the right, in return for a premium
paid, to sell to the seller the underlying security at a specified price. The
seller of the put, on the other hand, has the obligation to buy the underlying
security upon exercise at the exercise price.

The purchaser of an option risks a total loss of the premium paid for the option
if the price of the underlying security does not increase or decrease
sufficiently to justify exercise. The seller of an option, on the other hand,
will recognize the premium as income if the option expires unrecognized but
foregoes any capital appreciation in excess of the exercise price in the case of
a call option and may be required to pay a price in excess of current market
value in the case of a put option. Options purchased and sold other than on an
exchange in private transactions also impose on the Fund the credit risk that
the counterparty will fail to honor its obligations. The Fund will not purchase
options if, as a result, the aggregate cost of all outstanding options exceeds
10% of the Fund's assets. To the extent that puts, calls, straddles and similar
investment strategies involve instruments regulated by the Commodity Futures
Trading Commission, the Fund is limited to an investment not in excess of 5% of
its total assets.

Other Investment Companies

The Fund may invest up to 10% of its total assets in other investment companies
(not more than 5% of the Fund's total assets may be invested in any one
investment company and the Fund may not invest in more than 3% of the securities
of any one investment company).

Warrants and Rights

The Fund may invest up to 5% of its total assets in warrants or rights (other
than those acquired in units or attached to other securities) which entitle the
holder to buy equity securities at a specific price during or at the end of a
specific period of time. The Fund will not invest more than 2% of its total
assets in warrants or rights which are not listed on recognized stock exchanges.

Unseasoned Companies

The Fund may invest insecurities of unseasoned companies. In view of the limited
liquidity, more speculative prospects and more volatile pricing attributes, the
Fund will not invest more than 10% of the Fund's assets (at the time of
purchase) in equity securities of non-investment companies (including
predecessors) that have operated less than three years.

When Issued, Delayed Delivery
Securities and Forward Commitments

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

<PAGE>

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

subsequent event, such as approval and consummation of a merger, corporate
reorganization or debt restructuring, i.e., a when, as and if issued security.
When such transactions are negotiated, the price is fixed at the time of the
commitment, with payment and delivery taking place in the future, generally a
month or more after the date of the commitment. While the Fund will only enter
into a forward commitment with the intention of actually acquiring the security,
the Fund may sell the security before the settlement date if it is deemed
advisable.

Short Sales

The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other highly liquid securities. The Fund will also be required to
deposit similar collateral with its Custodian to the extent, if any, necessary
so that the value of both collateral deposits in the aggregate is at all times
equal to the greater of the price at which the security is sold short or 100% of
the current market value of the security sold short. Depending on arrangements
made with the broker-dealer from which it borrowed the security regarding
payment over of any payments received by the Fund on such security, the Fund may
not receive any payments (including interest) on its collateral deposited with
such broker-dealer.

Restricted and Illiquid Securities

The Fund may invest up to 10% of its net assets in securities the markets for
which are illiquid. Illiquid securities include most of the securities the
disposition of which is subject to substantial legal or contractual
restrictions. The sale of illiquid securities often requires more time and
results in higher brokerage charges or dealer discounts and other selling
expenses than does the sale of securities eligible for trading on national
securities exchanges or in the over-the-counter markets. Restricted securities

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

<PAGE>

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

may sell at a price lower than similar securities that are not subject to
restrictions on resale. Securities freely salable among qualified institutional
investors under special rules adopted by the Securities and Exchange Commission
may be treated as liquid if they satisfy liquidity standards established by the
Board of Directors. The continued liquidity of such securities is not as well
assured as that of publicly traded securities, and accordingly the Board of
Directors will monitor their liquidity.

Repurchase Agreements

The Fund may invest in repurchase agreements, which are agreements pursuant to
which securities are acquired by the Fund from a third party with the
understanding that they will be repurchased by the seller at a fixed price on an
agreed date. These agreements may be made with respect to any of the portfolio
securities in which the Fund is authorized to invest. Repurchase agreements may
be characterized as loans secured by the underlying securities. The Fund may
enter into repurchase agreements with (i) member banks of the Federal Reserve
System having total assets in excess of $500 million and (ii) securities
dealers, provided that such banks or dealers meet the creditworthiness standards
established by the Fund's Board of Directors ("Qualified Institutions"). The
Adviser will monitor the continued creditworthiness of Qualified Institutions,
subject to the supervision of the Fund's Board of Directors. The resale price
reflects the purchase price plus an agreed upon market rate of interest which is
unrelated to the coupon rate or date of maturity of the purchased security. The
collateral is marked to market daily. Such agreements permit the Fund to keep
all its assets earning interest while retaining "overnight" flexibility in
pursuit of investments of a longer-term nature.

The use of repurchase agreements involves certain risks. For example, if the
seller of securities under a repurchase agreement defaults on its obligation to
repurchase the underlying securities, as a result of its bankruptcy or
otherwise, the Fund will seek to dispose of such securities, which action could
involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization under applicable bankruptcy or other laws, the
Fund's ability to dispose of the underlying securities may be restricted.
Finally, it is possible that the Fund may not be able to substantiate its
interest in the underlying securities. To minimize this risk, the securities
underlying the repurchase agreement will be held by the Fund's Custodian at all
times in an amount at least equal to the repurchase price, including accrued
interest. If the seller fails to repurchase the securities, the Fund may suffer
a loss to the extent proceeds from the sale of the underlying securities are
less than the repurchase price. The Fund will not enter into repurchase
agreements of a duration of more than seven days if, taken together with all
other illiquid securities in the Fund's portfolio, more than 10% of its total
assets would be so invested.

Loans of Portfolio Securities

If the borrower fails to maintain the requisite amount of collateral, the loan
automatically terminates and the Fund could use the collateral to replace the
securities while holding the borrower liable for any excess of replacement cost
over the value of the collateral. As with any extension of credit, there are
risks of delay in recovery and in some cases even loss of rights in collateral
should the borrower of the securities fail financially.

Borrowing

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

<PAGE>

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

redemption requests, which would otherwise require the untimely disposition of
its portfolio securities. Borrowing may not, in the aggregate, exceed 15% of
assets after giving effect to the borrowing and borrowing for purposes other
than meeting redemptions may not exceed 5% of the value of the Fund's assets
after giving effect to the borrowing. The Fund will not make additional
investments when borrowings exceed 5% of assets. The Fund may mortgage, pledge
or hypothecate assets to secure such borrowings.

Portfolio Turnover

Portfolio turnover generally involves some expense to the Fund, including
brokerage commissions or dealer mark-ups and other transaction costs on the sale
of securities and reinvestment in other securities. Rapid turnover makes it more
difficult for the Fund to qualify as a regulated investment company for Federal
tax purposes, in view of the requirement that, in order to so qualify, the Fund
must derive less than 30% of its gross income in any tax year from gains on the
sale of securities held less than three months. Failure to qualify as a
regulated investment company would result in Federal taxation of the Fund's
income at the standard corporate rate of 35%. The portfolio turnover rate is
computed by dividing the lesser of the amount of the securities purchased or
securities sold by the average monthly value of securities owned during the year
(excluding securities whose maturities at acquisition were one year or less).

MANAGEMENT OF THE FUND

The Fund's Board of Directors (who, with its officers, are described in the
Additional Statement) has overall responsibility for the management of the Fund.
The Board of Directors decides upon matters of general policy and reviews the
actions of Gabelli & Company, Inc. (the "Distributor"), the Adviser and the
Administrator (as defined below). Pursuant to an Investment Advisory Contract
with the Fund, the Adviser under the supervision of the Fund's Board of
Directors, provides a continuous investment program for the Fund's portfolio;
provides investment research and makes and executes recommendations for the
purchase and sale of securities and the exercise of all voting and other rights
appertaining thereto; provides facilities and personnel required for the Fund's
administrative management; supervises the performance of administrative and
professional services provided by others, and pays the compensation of the
Administrator and all officers and directors of the Fund who are its affiliates.
Mr. Mario J. Gabelli -- Portfolio Manager, will be primarily responsible for the
day-to-day management of the Gabelli Small Cap Growth Fund. Mr. Gabelli is
Chairman, President and Chief Executive Officer and a Director of the Adviser.
As compensation for its services and the related expenses borne by the Adviser,
the Fund pays the Adviser a fee, computed daily and payable monthly, equal, on
an annual basis, to 1.00% of the Fund's average daily net assets, which is
higher than that paid by most mutual funds. For the fiscal years ended September
30, 1993, September 30, 1994 and September 30, 1995, the Adviser received fees
of $1,628,596, $2,102,245 and $2,112,855, respectively, representing an
annualized fee of 1.00% of average net assets. The Adviser is located at One
Corporate Center, Rye, New York 10580-1434.

The Adviser was formed in 1980 and as of December 31, 1995 acts as investment
adviser to the following funds with aggregate assets in excess of $4.0 billion:

Net Assets
Open-end funds: 12/31/95
- -------------- -------
(in millions)
The Gabelli Asset Fund $1,090
The Gabelli Growth Fund 526
Gabelli Gold Fund, Inc. 15
The Gabelli Value Fund Inc. 486
The Gabelli Small Cap
Growth Fund 229
The Gabelli Equity Income Fund 56
The Gabelli U.S. Treasury
Money Market Fund 236
The Gabelli ABC Fund 21

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<PAGE>

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

Net Assets
Open-end funds: 12/31/95
- -------------- -------
The Gabelli Global
Telecommunications Fund 123
The Gabelli Global Interactive
Couch Potato(R) Fund 31
The Gabelli Global Convertible
Securities Fund 16
Gabelli International Growth Fund, Inc. 2
Gabelli Capital Asset Fund 26
Closed-end funds:
The Gabelli Convertible
Securities Fund, Inc. 89
The Gabelli Equity Trust Inc. 1,034
The Gabelli Global Multimedia
Trust Inc. 90

Gabelli & Company, Inc., the Distributor of each open-end fund's respective
shares, is an indirect majority owned subsidiary of the Adviser. GAMCO
Investors, Inc. ("GAMCO"), a majority owned subsidiary of the Adviser, acts as
investment adviser for individuals, pension trusts, profit sharing trusts and
endowments. As of December 31, 1995, GAMCO had aggregate assets in excess of $5
billion under its management. Teton Advisors LLC is an affiliated Investment
Adviser to the Westwood Funds with aggregate assets in excess of $38 million.
Mr. Mario J. Gabelli may be deemed a "controlling person" of the Adviser and the
Distributor on the basis of his ownership of stock of the Adviser.

In addition to the fees of the Adviser, the Fund is responsible for the payment
of all its other expenses incurred in the operation of the Fund, which include,
among other things, expenses for legal and independent auditor's services, costs
of printing all materials sent to shareholders, charges of State Street Bank and
Trust Company (the "Custodian", "Transfer Agent" and dividend paying agent), and
any persons hired by the Fund, Securities and Exchange Commission fees, fees and
expenses of unaffiliated directors, accounting and printing costs for reports
and similar materials sent to shareholders, the Fund's pro rata portion of
membership fees in trade organizations, fidelity bond coverage for the Fund's
officers and employees, interest, brokerage and other trading costs, taxes,
expenses of qualifying the Fund for sale in various jurisdictions, expense of
the Fund's distribution plan adopted under Rule 12b-1, expenses of personnel
performing shareholder servicing functions, litigation and other extraordinary
or non-recurring expenses and other expenses properly payable by the Fund.

Administrator

The Adviser has entered into an Administration Contract with Furman Selz LLC
("Furman Selz" or the "Administrator") pursuant to which the Administrator
provides certain administrative services necessary for the Fund's operations.
These services include the preparation and distribution of materials for
meetings of the Fund's Board of Directors, compliance testing of Fund activities
and assistance in the preparation of proxy statements, reports to shareholders
and other documentation. The Administrator's services do not include the
investment advisory and portfolio management services provided by the Adviser.
For the services and related expenses borne by Furman Selz, the Adviser pays it
a monthly fee at the annual rate of .10% of the average net assets of all the
funds advised by such Adviser, (with a minimum annual fee of $40,000 per
portfolio) on the first $350 million of funds advised by the Adviser and
administered by Furman Selz and 0.075% of any net assets above $350 million, and
.06% of any assets above $600 million, which, together with the services to be
rendered, are subject to negotiation between the parties and both parties retain
the right unilaterally to terminate the arrangement on not less than 60 days'
notice.

Furman Selz has its office at 230 Park Avenue, New York, New York 10169. Furman
Selz is primarily an institutional brokerage firm with membership on the New
York, American, Boston, Philadelphia, Midwest and Pacific Stock Exchanges.

DISTRIBUTION PLAN

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<PAGE>

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

expenses incurred in prior years. The potential for such subsequent payments is
a contingent liability for which no amount is currently being recorded because
the Fund does not have a reasonable basis on which to conclude that the Board of
Directors will approve such payment.

The Plan has been implemented by written agreements between the Fund and/or the
Distributor and each person (including the Distributor) to which payments may be
made. Administration of the Plan is regulated by Rule 12b-1 under the Investment
Company Act of 1940, which includes requirements that the Board of Directors
receive and review, at least quarterly, reports concerning the nature and
qualification of expenses for which payments are made, that the Board of
Directors approve all agreements implementing the Plan and that the Plan may be
continued from year to year only if the Board of Directors concludes, at least
annually, that continuation of the Plan is likely to benefit shareholders.

The Board of Directors has initially implemented the Plan by having the
Corporation enter into an agreement with the Distributor authorizing
reimbursement of expenses (including overhead) incurred by the Distributor and
its affiliates up to the .25% rate authorized by the Plan for distribution
activities of the types listed above. To the extent any of these payments are
based on allocations by the Distributor, the Fund may be considered to be
participating in joint distribution activities with other funds distributed by
the Distributor. Any such allocations would be subject to approval by the Fund's
non-interested Directors and would be based on such factors as the net assets of
each Fund, the number of shareholder inquiries and similar pertinent criteria.
For the fiscal years ended September 30, 1993, September 30, 1994 and September
30, 1995, the Fund incurred distribution costs payable to the Adviser, of
$407,166, $525,520 and $528,080, respectively, or 0.25% of average net assets,
under the Plan.

PURCHASE OF SHARES

Shares of the Fund are offered with a maximum sales charge of 4.50%. The minimum
initial investment is $1,000. There is no minimum initial investment for
accounts establishing an Automatic Investment Plan. Custodial accounts for minor
children require only $1,000. There is no minimum for subsequent investments.
Shareholders with accounts established prior to February 28, 1993 and accounts
established between October 22, 1994 and April 30, 1995 may continue to acquire
shares of the Fund without a sales charge. Shares of the Fund are sold at the
public offering price based on the net asset value per share next determined
after receipt of an order by the Fund's Distributor or Transfer Agent in proper
form with accompanying check or bank wire payments arrangements satisfactory to
the Fund. Although most shareholders elect not to receive stock certificates,
certificates for whole shares only can be obtained on specific written request
to the Transfer Agent.

Shares of the Fund may be purchased through registered broker-dealers. Certain
broker-dealers may impose the respective sales charge or otherwise may charge
the investor a fee for their services. Such fees may vary among broker-dealers,
and such broker-dealers may impose higher initial or subsequent investment
requirements than those established by the Fund. Services provided by
broker-dealers may include allowing the investor to establish a margin account
and to borrow on the value of the Fund's shares in that account.

Prospectuses, sales material and applications may be obtained from the

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<PAGE>

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

Distributor. The Fund and its Distributor reserve the right in their sole
discretion (1) to suspend the offerings of the Fund's shares and (2) to reject
purchase orders when, in the judgment of the Fund's management, such rejection
is in the best interest of the Fund. The net asset value per share of the Fund
is determined as of the close of the regular session of the New York Stock
Exchange, which is generally 4:00 p.m., New York City time, on each day that
trading is conducted on the New York Stock Exchange by dividing the value of the
Fund's net assets (i.e., the value of its securities and other assets less its
liabilities, including expenses payable or accrued but excluding capital stock
and surplus) by the number of shares outstanding at the time the determination
is made. Portfolio securities for which market quotations are readily available
are valued at market value as determined by the last quoted sale price prior to
the valuation time on the valuation date in the case of securities traded on
securities exchanges or other markets for which such information is available.
Other readily marketable securities are valued at the average of the latest bid
and asked quotations for such securities prior to the valuation time. Debt
securities with remaining maturities of 60 days or less are valued at amortized
cost. All other assets are valued at fair value as determined by or under the
supervision of the Board of Directors of the Fund. See "Determination of Net
Asset Value" in the Additional Statement.

Mail

To make an initial purchase by mail, send a completed subscription order form
with a check for the amount of the investment payable to "The Gabelli Small Cap
Growth Fund" to:

The Gabelli Funds
P.O. Box 8308
Boston, MA 02266-8308

Bank Wire

State Street Bank and Trust Company
ABA 011-0000-28 REF DDA 9904-6187
Attn: Shareholder Services
Re: The Gabelli Small Cap Growth Fund

A/C # ________________________________________________
Account of (Registered Owner)
-----------------------------------------
225 Franklin Street, Boston, MA 02110

Personal Delivery

Deliver a check made payable to "The Gabelli Small Cap Fund" along with a
completed subscription order form to:

The Gabelli Funds
The BFDS Building, 6th Floor
Two Heritage Drive
North Quincy, MA 02171

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<PAGE>

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

Telephone Investment Plan

Automatic Investment Plan

Systematic Withdrawal Plan

Other Investors

Sales Charges

Discount or
Sales Charge as Commission to
a Percentage of Dealers or
---------------------------- Agents as a
Net Amount Public Offering % of Public
Amount Invested Invested Price Offering Price
--------------- -------- ----- --------------
$49,999 or less 4.71% 4.50% 4.00%
$50,000 but less than
$200,000 3.09% 3.00% 2.50%
$200,000 or more 1.52% 1.50% 1.00%

Reduced Sales Charges

A reduction of sales charge rates in the tables above may be obtained as
follows:

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<PAGE>

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

Right of Accumulation

Letter of Intent

Other Circumstances

No sales charge is imposed on shares of the Fund in the following circumstances:
(1) sold to persons described under "Purchase of Shares -- Other Investors" with
respect to whom no minimum investment is required; (2) issued in plans of
reorganization, such as mergers, asset acquisitions and exchange offers, to
which the Corporation is a party; (3) sold to employees of selected brokers; (4)
purchased by charities and endowments and other tax-exempt organizations
enumerated in Section 501(c)(3) of the Code if, giving effect to the purchase,
the net asset value of the account is $50,000 or more; (5) sold to employee
participants of organizations adopting the 401(k) Plan sponsored by the Adviser;
(6) sold to financial institutions purchasing the Fund for clients participating
in a fee based asset allocation program or wrap fee program which has been
approved by the Distributor; (7) sold to qualified employee benefit plans having
more than 100 eligible employees and $1 million in plan assets invested in the
Fund (Plan sponsors must notify the Fund's Distributor when they first satisfy
these requirements); (8) purchased by registered investment advisors or
financial planners who place trades for their own accounts or the accounts of
their clients and who charge a management, consulting or other fee for their
services; and clients of such investment advisors or financial planners who
place trades for their own accounts if the accounts are linked to the master
account of such investment advisor or financial planner on the books and records
of a broker agent; and (9) sold to accounts established between October 22,1994
and April 30, 1995 and sold to accounts existing before September 30, 1993
and in accounts established by such shareholders after that date.

REDEMPTION OF SHARES

Upon receipt by the Distributor or the Transfer Agent of a redemption request in
proper form, shares of the Fund will be redeemed at their next determined net
asset value. Redemption requests received after the time as of which the Fund's
net asset value is determined on a particular day will be redeemed at the net
asset value of the Fund determined on the next day that net asset value is
determined. Checks for redemption proceeds will normally be mailed to the
shareholder's address of record within seven days, but will not be mailed until
all checks in payment for the purchase of the shares to be redeemed have been
honored, which may take up to 15 days. Redemption requests may be made by letter

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

<PAGE>

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

to the Transfer Agent, specifying the name of the Fund, the dollar amount or
number of shares to be redeemed, and the account number. The letter must be
signed in exactly the same way the account is registered (if there is more than
one owner of the shares, all must sign) and, if any certificates for the shares
to be redeemed are outstanding, presentation of such certificates properly
endorsed is also required. Signatures on a redemption request and/or
certificates must be guaranteed by an "eligible guarantor institution" as such
term is defined in Rule 17Ad-15 under the Securities Exchange Act of 1933, which
includes certain banks, brokers, dealers, credit unions, securities exchanges
and associations, clearing agencies and savings associations (signature
guarantees by notaries public are not acceptable). Shareholders may also redeem
Fund shares through certain registered broker-dealers, who have made
arrangements with the Fund permitting them to redeem shares by telephone or
facsimile transmission and who may charge shareholders a fee for this service if
they have not received any payments under the Distribution Plan.

Telephone Redemption
By Check

By Bank Wire

The Fund accepts telephone requests for wire redemption in excess of $1,000 (but
subject to a $25,000 limitation) to a predesignated bank either on the
subscription order form or in a subsequent written authorization with the
signature guaranteed. The Fund accepts signature guaranteed written requests for
redemption by bank wire without limitation. The proceeds are normally wired on
the following business day. Your bank must be either a member of the Federal
Reserve System or have a correspondent bank which is a member. Any change to the
banking information made at a later date must be submitted in writing with a
signature guarantee.

Requests for telephone redemption must be received between 9:00 a.m. and 4:00
p.m. eastern time. If your telephone call is received after this time or on a

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

<PAGE>

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

day when the New York Stock Exchange is not open, a new request will be required
the following business day. Shares are redeemed at the net asset value next
determined following your request. Fund shares purchased by check or through the
automatic purchase plan will not be available for redemption for up to fifteen
(15) days following the purchase. Shares held in certificate form must be
returned to the Transfer Agent for redemption of shares. Telephone redemption is
not available for IRAs. The proceeds of a telephone redemption may be directed
to an existing account in another mutual fund advised by the Adviser, provided
the account is registered in the redeeming shareholder's name. Such purchase
will be made at the respective net asset value plus applicable sales charge, if
any, with credit for any sales charge previously charged by the Distributor.

RETIREMENT PLANS

DIVIDENDS, DISTRIBUTIONS AND TAXES

Each dividend and capital gains distribution, if any, declared by the Fund on
its outstanding shares will, unless the shareholder elects otherwise, be paid on
the payment date fixed by the Board of Directors in additional shares of the
Fund having an aggregate net asset value as of the ex-dividend date of such
dividend or distribution equal to the cash amount of such distribution. An
election to receive dividends and distributions may be changed by notifying the
Fund in writing at any time prior to the record date for a particular dividend
or distribution. There are no sales or other charges in connection with the
reinvestment of dividends and capital gains distributions. There is no fixed
dividend rate, and there can be no assurance that the Fund will pay any
dividends or realize any capital gains. However, the Fund currently intends to
pay dividends quarterly and capital gains distributions, if any, on an annual
basis.

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<PAGE>

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

GENERAL INFORMATION

Description of Shares, Voting Rights
and Liabilities

The Fund sends semi-annual and annual reports to all of its shareholders which
include a list of portfolio securities and the Fund's financial statements which
shall be audited annually. Unless it is clear that a shareholder is a nominee
for the account of an unrelated person or a shareholder otherwise specifically
requests in writing, the Fund may send a single copy of semi-annual, annual and
other reports to shareholders to all accounts at the same address and all
accounts of any person at that address.

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<PAGE>

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

will not be able to elect any person or persons to the Board of Directors.
Unless specifically requested by an investor who is a shareholder of record, the
Fund does not issue certificates evidencing Fund shares.

Shareholder Approval

Performance Information

Custodian, Transfer Agent and
Dividend Disbursing Agent

Independent Auditors

Ernst & Young LLP has been appointed independent auditors for the Fund, and is
located at 787 7th Ave., New York, NY 10019.

Information for Shareholders

Upon request, Gabelli & Company, Inc. will provide without charge, a paper copy
of this Prospectus to investors or their representatives who received this
Prospectus in an electronic format.

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<PAGE>

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TABLE OF CONTENTS
Page
----
Prospectus Summary ........................................................ 2
Table of Fees and Expenses ................................................ 3
Financial Highlights ...................................................... 4
Investment Objective and Policies and
Related Risk Factors .................................................... 4
Other Investment Techniques and
Related Risk Factors .................................................... 6
Management of the Fund .................................................... 10
Distribution Plan ......................................................... 11
Purchase of Shares ........................................................ 12
Redemption of Shares ...................................................... 15
Retirement Plans .......................................................... 17
Dividends, Distributions and Taxes ........................................ 17
General Information ....................................................... 18

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

No dealer, salesman or other person has been authorized to give any information
or to make any representation other than those contained in this Prospectus, and
if given or made, such information or representation may not be relied upon as
being authorized by the Fund, the Adviser, the Administrator, the Distributor or
any affiliate thereof. This Prospectus does not constitute an offer to sell or a
solicitation of any offer to buy in any state to any person to whom it is
unlawful to make such offer in such state.

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

The
Gabelli
Small Cap
Growth
Fund

PROSPECTUS
January 30, 1996

GABELLI FUNDS, INC.
Investment Adviser

GABELLI & COMPANY, INC.
Distributor

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<PAGE>

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

THE GABELLI SMALL CAP GROWTH FUND
One Corporate Center
Rye, New York 10580-1434
Telephone 1-800-GABELLI (1-800-422-3554)

STATEMENT OF ADDITIONAL INFORMATION

January 30, 1996

This Statement of Additional Information ("Additional Statement") relates to The
Gabelli Small Cap Growth Fund (the "Fund") which is a series of The Gabelli
Equity Series Funds, Inc., a Maryland corporation (the "Corporation"), and is
not a prospectus and is only authorized for distribution when preceded or
accompanied by the Fund's prospectus dated January 30, 1996, as supplemented
from time to time (the "Prospectus"). This Statement of Additional Information
contains additional and more detailed information than that set forth in the
Prospectus and should be read in conjunction with the Prospectus, additional
copies of which may be obtained without charge by writing or telephoning the
Fund at the address and telephone number set forth above.

TABLE OF CONTENTS
Page
-----
Other Investment Techniques ............................. B-2
The Adviser ............................................. B-5
The Distributor ......................................... B-6
Directors and Officers .................................. B-7
Investment Restrictions ................................. B-10
Portfolio Transactions and Brokerage .................... B-11
Purchase and Redemption of Shares ....................... B-13
Determination of Net Asset Value ........................ B-13
Dividends, Distributions and Taxes ...................... B-13
Investment Performance Information ...................... B-16
Appendix to Statement of Additional Information ......... B-17
Financial Statements .................................... B-20

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<PAGE>

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OTHER INVESTMENT TECHNIQUES

Securities Subject to Reorganization

Nonconvertible Debt Securities

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

B-2

<PAGE>

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

evaluate the safety of principal and interest payments, not market value risk.
In addition, credit rating agencies may not change credit ratings on a timely
basis to reflect changes in economic or company conditions that affect a
security's market value. The Fund will rely on the Adviser's judgment, analysis
and experience in evaluating the creditworthiness of an issuer. In this
evaluation, the Adviser will take into consideration, among other things, the
issuer's financial resources and ability to cover its interest and fixed
charges, factors relating to the issuer's industry and its sensitivity to
economic conditions and trends, its operating history, the quality of the
issuer's management and regulatory matters.

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B-3

<PAGE>

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Hedging Transactions

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

B-4

<PAGE>

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

THE ADVISER

The Adviser is a New York corporation with principal offices located at One
Corporate Center, Rye, New York 10580-1434.

Under the Investment Advisory Contract, the Adviser also (1) provides the
Fund with the services of persons competent to perform such supervisory,
administrative, and clerical functions as are necessary to provide efficient
administration of the Fund, including maintaining certain books and records and
overseeing the activities of the Fund's Custodian and Transfer Agent; (2)
oversees the performance of administrative and professional services provided to
the Fund by others, including the Fund's Custodian, Transfer Agent and Dividend
Disbursing Agent, as well as legal, accounting, auditing and other services
performed for the Fund; (3) provides the Fund, if requested, with adequate
office space and facilities: (4) prepares, but does not pay for, periodic
updating of the fund's registration statement, Prospectus and Statement of
Additional Information, including the printing of such documents for the purpose
of filings with the Securities and Exchange Commission; (5) supervises the
calculation of the net asset value of shares of the Fund; (6) prepares, but does
not pay for, all filings under state "Blue Sky" laws of such states or countries
as are designated by the Distributor, which may be required to register or
qualify, or continue the registration or qualification, of the Fund and/or its
shares under such laws; and (7) prepares notices and agendas for meetings of the
Fund's Board of Directors and minutes of such meetings in all matters required
by the Investment Company Act of 1940 (the "Act") to be acted upon by the Board.

The Adviser has entered into an Administration Contract with Furman Selz
LLC ("Furman Selz" or the "Administrator") 230 Park Avenue, New York, New York
10169, pursuant to which the Administrator provides certain administrative
services necessary for the Fund's operations but which do not concern the
investment advisory and portfolio management services provided by the Adviser.
For such services and the related expenses borne by Furman Selz, the Adviser
pays a monthly fee at the annual rate of .10% of the average net assets of the
Fund (minimum annual fee of $40,000 per portfolio) on the first $350 million of
funds advised by such Adviser and administered by Furman Selz and .075% of any
net assets above $350 million, together with the services to be rendered, is
subject to negotiation between the parties and both parties retain the right
unilaterally to terminate the arrangement on not less than 60 days' notice.

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B-5

<PAGE>

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THE DISTRIBUTOR

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B-6

<PAGE>

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Corporation, or by written consent of a majority of the directors who are not
interested persons of the Corporation or the Distributor. The Distribution
Agreement will automatically terminate in the event of its assignment, as
defined in the Act.The Distribution Agreement provides that, unless terminated,
it will remain in effect until December 15, 1993 and from year to year
thereafter, so long as continuance of the Distribution Agreement is approved
annually by the Corporation's Board of Directors or by a majority of the
outstanding voting securities of the Corporation, and in either case, also by a
majority of the Directors who are not interested persons of the Corporation or
the Distributor.

DIRECTORS AND OFFICERS

</TABLE>

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B-7

<PAGE>

Robert J. Morrissey Partner in the law firm of Morrissey & Hawkins. Former partner in the law firm
Director of Withington Cross Park & Groden. Director of The Gabelli Value Fund Inc.
Age: 56

Anthonie C. van Ekri Managing Director of Balmac International, Ltd. Director of Stahal Hardmeyer
Director A.Z. (through present); Trustee of The Gabelli Asset Fund, The Gabelli Growth
Age: 61 Fund and The Gabelli Money Market Funds. Director of Gabelli Series Funds, Inc.,
Gabelli International Growth Fund, Inc., Gabelli Investor Funds, Inc., Gabelli
Global Series Funds, Inc. and Gabelli Gold Fund, Inc.

</TABLE>

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B-8

<PAGE>

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Karl Otto Pohl* Partner of Sal Oppenheim Jr. & Cie. (private investment bank); Former President
Director of the Deutsche Bundesbank (Germany's Central Bank) and Chairman of its Central
Age: 64 Bank Council (1980-1991); Currently board member of IBM World Trade
Europe/Middle East/ Africa Corp.; Bertelsmann AG; Zurich
Versicherungs-Gesellschaft (insurance); the International Advisory Board of
General Electric Company; the International Council for JP Morgan & Co.; the
Board of Supervisory Directors of ROBECo/o Group; and the Supervisory Board of
Royal Dutch (petroleum company); Advisory Director of Unilever N.V. and Unilever
Deutschland; German Governor, International Monetary Fund (1980-1991); Board
Member, Bank for International Settlements (1980-1991); Chairman, European
Economic Community Central Bank Governors (1990-1991); Trustee or Director
of all Funds advised by Gabelli Funds, Inc.
</TABLE>

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B-9

<PAGE>

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<TABLE>
<CAPTION>
COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------------------------------
Total Compensation
Aggregate Compensa- Pension or Retirement from Registrant and
Name of Person, tion from Registrant Benefits Accrued as Estimated Annual Ben- Fund Complex Paid
Position (Fiscal Year) Part of Fund Expenses efits upon Retirement to Directors*
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mario J. Gabelli $ 0 N/A N/A $ 0
President, Director and
Chief Investment Officer
Felix J. Christiana
Director 5,000 N/A N/A 71,500 (9)
Anthony J. Colavita
Director 5,000 N/A N/A 65,753 (10)
Vincent D. Enright
Director 5,000 N/A N/A 17,000 (4)
John D. Gabelli
Director 0 N/A N/A
Robert J. Morrissey
Director 5,000 N/A N/A 28,500 (3)
Anthony R. Pustorino
Director 5,000 N/A N/A 81,003 (8)
Anthonie C.van Ekris
Director 5,000 N/A N/A 45,253 (8)
Karl Otto Pohl
Director 5,000 N/A N/A 80,263 (12)
</TABLE>

- ----------
* Represents the total compensation paid to such persons during the
calendar year ending Decem- ber 31, 1995 (and, with respect to the Fund,
estimated to be paid during a full calendar year). The parenthetical number
represents the number of investment companies (including the Fund) from which
such person receives compensation that are considered part of the same fund
complex as the Fund, because, among other things, they have a common investment
adviser.

INVESTMENT RESTRICTIONS

The Fund's investment objective and the following investment restrictions
are fundamental and cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities (defined in the 1940 Act as
the lesser of (a) more than 50% of the outstanding shares or (b) 67% or more of
the shares represented at a meeting at which more than 50% of the outstanding
shares are represented). All other investment policies or practices are
considered by the Fund not to be fundamental and accordingly may be changed
without stockholder approval. If a percentage restriction on investment or use
of assets set forth below is adhered to at the time a transaction is effected,
later changes in percentage resulting from changing market values or total
assets of the Fund will not be considered a deviation from policy. The Fund may
not:

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B-10

<PAGE>

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(2) invest 25% or more of the value of its total assets in any one
industry;

(6) invest for the purpose of exercising control over management of
any company;

(7) purchase real estate or interests therein, including limited
partnerships that invest primarily in real estate equity interests, other
than mortgage-backed securities and similar instruments;

(8) purchase or sell commodities or commodity contracts except for
hedging purposes or invest in any oil, gas or mineral interests.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Adviser currently serves as Adviser to a number of investment company
clients and may in the future act as adviser to others. Affiliates of the
Adviser act as investment adviser to numerous private accounts. It is the
practice of the Adviser and its affiliates to cause purchase and sale
transactions to be allocated among the Fund and others whose assets they manage
in such manner as it deems equitable. In making such allocations among the Fund

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

B-11

<PAGE>

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

and other client accounts, the main factors considered are the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and the opinions of the persons
responsible for managing the portfolios of the Fund and other client accounts.

The Adviser may also place orders for the purchase or sale of portfolio
securities with Gabelli & Company, Inc. ("Gabelli"), a broker-dealer member of
the National Association of Securities Dealers, Inc. and an affiliate of the
Adviser, when it appears that, as an introducing broker or otherwise, Gabelli
can obtain a price and execution which is at least as favorable as that
obtainable by other qualified brokers. The Adviser may also consider sales of
shares of the Fund and any other registered investment companies managed by the
Adviser and its affiliates by brokers and dealers other than the Distributor as
a factor in its selection of brokers and dealers to execute portfolio
transactions for the Fund. For the fiscal years ended September 30, 1993,
September 30, 1994, and September 30, 1995 the Fund paid a total of $277,455,
$213,534 and $135,080 respectively, in brokerage commissions of which Gabelli &
Company, Inc. received $14,178, $15,687 and $17,243 (or 5.1%, 7.3% and 12.8%
of the total brokerage commission), respectively.

To obtain the best execution of portfolio trades on the New York Stock
Exchange ("Exchange"), Gabelli controls and monitors the execution of such
transactions on the floor of the Exchange through independent "floor brokers" or
through the Designated Order Turnaround ("DOT") System of the Exchange. Such
transactions are then cleared, confirmed to the Fund for the account of Gabelli,
and settled directly with the Custodian of the Fund by a clearing house member
firm which remits the commission less its clearing charges to Gabelli. Gabelli

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

B-12

<PAGE>

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

may also effect Fund portfolio transactions in the same manner and pursuant to
the same arrangements on other national securities exchanges which adopt direct
access rules similar to those of the New York Stock Exchange.

PURCHASE AND REDEMPTION OF SHARES

DETERMINATION OF NET ASSET VALUE

DIVIDENDS, DISTRIBUTIONS AND TAXES

General

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

B-13

<PAGE>

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

its basis in its shares of the Fund by an amount equal to 65% of the amount of
undistributed capital gain included in such shareholder's gross income.

Hedging transactions undertaken by the Fund may result in "straddles" for
U.S. Federal income tax purposes. The straddle rules may affect the character of
gains (or losses) realized by the Fund. In addition, losses realized by the Fund
on positions that are part of a straddle may be deferred under the straddle
rules, rather than being taken into account in calculating the taxable income
for the taxable year in which such losses are realized. Further, the Fund may be
required to capitalize, rather than deduct currently, any interest expense on
indebtedness incurred or continued to purchase or carry any positions that are
part of a straddle. The Fund may make one or more of the elections available
under the Code which are applicable to straddles. If the Fund makes any of the
elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules that
vary according to the election(s) made. The rules applicable under certain of
the elections accelerate the recognition of gains or losses from the affected
straddle positions. Because application of the straddle rules may affect the
character and timing of gains, losses or deductions from the affected straddle
positions, the amount which must be distributed to shareholders, and which will
be taxed to shareholders as ordinary income or long-term capital gain, may be
increased or decreased substantially as compared to a fund that did not engage
in such hedging transactions.

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

B-14

<PAGE>

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

Distributions

Sales of Shares

Backup Withholding

Foreign Withholding Taxes

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

B-15

<PAGE>

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

Corporate Matters

The Corporation reserves the right to create and issue a number of series
shares, in which case the shares of each series would participate equally in the
earnings, dividends, and assets of the particular series and would vote
separately to approve management agreements or changes in investment policies,
but shares of all series would vote together in the election or selection of
Directors, principal underwriters and auditors and on any proposed material
amendment to the Corporation's Certificate of Incorporation.

INVESTMENT PERFORMANCE INFORMATION

YIELD = 2[((A-B)/(CD)+1)^6-1]

For the 30 day period ended October 31, 1995, the Fund's annualized yield was
- -3.46%.

From time to time evaluations of performance are made by independent
sources that may be used in advertisements concerning the fund. These sources
include: Lipper Analytical Services, Weisenberger Investment Company Service,
Barron's, Business Week, Financial World, Forbes, Fortune, Money, Personal
Investor, Sylvia Porter's Personal Finance, Bank Rate Monitor, Morningstar and
The Wall Street Journal.

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

B-16

<PAGE>

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

In connection with communicating its yield or total return to current or
prospective shareholders, the Fund may also compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
other unmanaged indexes which may assume reinvestment of dividends but generally
do not reflect deductions for administrative and management costs.

T=(ERV/P)^(1/n)-1

For the period from October 22, 1991 (commencement of operations) through
September 30, 1995, the Fund's cumulative total return was 115.0% and the
average annual total return for the period from October 22, 1991 (commencement
of operations) through September 30, 1995 was 21.4%. As of the 12 months ended
September 30, 1995 it was 19.5%. Assuming deduction of the maximum 4.50% sales
charge the total return for the respective periods noted herein would have been
105.4%, 20.0% and 14.1%, respectively.

SHARES OF BENEFICIAL INTEREST

As of the date of this Statement of Additional Information, the Directors
of the Fund as a group owned less than 1% of the outstanding shares of the Fund.

The following persons were known by the Fund to own of record 5% or more of
the outstanding voting securities of the Fund as of January 22, 1996:

Name and Address of
Holder of Record Percentage of Fund
- ---------------- ------------------
Charles Schwab & Co., Inc. 5.34%
101 Montgomery Street
San Francisco, CA

APPENDIX TO STATEMENT OF ADDITIONAL INFORMATION

Description of Moody's Investors Service, Inc.'s ("Moody's") Corporate Bond
Ratings

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

B-17

<PAGE>

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

securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which made the long term risks appear
somewhat larger than in Aaa securities. A: Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future. Baa: Bonds which are rated Baa are considered
as medium grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well. Ba: Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class. B: Bonds which are
rated B generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small. Caa: Bonds which are rated Caa are of
poor standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest. Ca: Bonds which are rated Ca
represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings. C: Bonds which are rated C
are the lowest rated class of bonds and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.

Description of Standard & Poor's Corporation's ("S&P's") Corporate Debt Ratings

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

B-18

<PAGE>

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

Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.

Description of Moody's Preferred Stock Ratings

aaa: An issue which is rated aaa is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks. aa: An issue
which is rated aa is considered a high-grade preferred stock. This rating
indicates that there is reasonable assurance that earnings and asset protection
will remain relatively well maintained in the foreseeable future. a: An issue
which is rated a is considered to be an upper medium grade preferred stock.
While risks are judged to be somewhat greater than in the aaa and aa
classifications, earnings and asset protection are, nevertheless expected to be
maintained at adequate levels. baa: An issue which is rated baa is considered to
be medium grade, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time. ba: An issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class. b: An
issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small. caa: An issue which is rated
caa is likely to be in arrears on dividend payments. This rating designation
does not purport to indicate the future status of payment. ca: An issue which is
rated ca is speculative in a high degree and is likely to be in arrears on
dividends with little likelihood of eventual payment. c: This is the lowest
rated class of preferred or preference stock. Issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.

Description of S&P's Preferred Stock Ratings

- --------------------------------------------------------------------------------
B-19

<PAGE>

sinking fund payments but that is currently paying. C: A preferred stock rated C
is a non-paying issue. D: A preferred stock rated D is a non-paying issue with
the issuer in default on debt instruments.

Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

FINANCIAL STATEMENTS

The Fund's Financial Statements for the period July 3, 1995 (commencement
of operations)through December 31, 1995 including the Report of Ernst &Young
LLP, independent accountants, are included herein.

- --------------------------------------------------------------------------------
B-20

<PAGE>

The Gabelli Small Cap Growth Fund
Portfolio of Investments -- September 30, 1995

================================================================================

Market
Shares Cost Value
------ ---- -----
COMMON STOCKS -- 96.63%

AGRICULTURE -- 0.00%
100 Delta & Pine Land
Company+ ..................... $ 1,280 $ 3,775
----------- -----------

AUTOMOTIVE: PARTS AND ACCESSORIES -- 4.46%
12,500 APS Holding Corporation
Cl. A+ ....................... 193,750 303,125
3,000 Breed Technologies, Inc. ....... 51,828 59,625
100,000 GenCorp Inc. ................... 1,546,161 1,062,500
60,000 Handy & Harman ................. 793,525 900,000
1,000 Harley Davidson, Inc. .......... 9,425 24,375
1,000 JPE Inc.+ ...................... 12,150 13,500
40,000 Modine Manufacturing
Company ...................... 536,346 1,140,000
30,000 Monro Muffler Brake, Inc.+ ..... 347,396 457,500
80,000 Redlaw Industries Inc.+ ........ 258,943 220,000
15,000 SPX Corporation ................ 264,113 223,125
110,000 Standard Motor
Products, Inc. ............... 1,526,613 2,090,000
40,000 Stant Corporation .............. 526,300 400,000
2,000 Strattec Security
Corporation+ ................. 22,500 28,500
1,800 Superior Industries
International Inc. ........... 24,923 48,375
2,000 TransPro Inc. .................. 35,600 35,500
132,500 UAP Inc. Cl. A ................. 1,478,881 1,604,415
62,250 Wynn's International, Inc. ..... 789,637 1,696,312
----------- -----------
8,418,091 10,306,852
----------- -----------

AVIATION: PARTS AND ACCESSORIES -- 1.36%
24,000 Curtiss-Wright Corporation ..... 831,188 1,062,000
26,500 Hi-Shear Industries Inc.+ ...... 164,141 192,125
40,000 Hudson General
Corporation .................. 607,300 960,000
150,000 UNC Incorporated ............... 896,488 937,500
----------- -----------
2,499,117 3,151,625
----------- -----------

BROADCASTING -- 7.08%
35,000 Ackerley Communications,
Inc. ......................... 299,725 533,750
5,000 Belo (A.H.) Corporation ........ 164,636 171,875
1,250 Clear Channel
Communications, Inc.+ ........ 34,800 94,688
3,000 Gray Communications
Systems Inc.+ ................ 84,225 98,250
180,000 Liberty Corporation ............ 4,673,517 5,850,000
65,000 Outlet Communications,
Inc. Cl. A+ .................. 232,177 3,006,250
2,500 Price Communications
Corporation+ ................. 8,600 20,313
2,000 Scandinavian Broadcasting
System SA+ ................... 27,300 56,500
2,000 Silver King Communications,
Inc. ......................... 70,000 64,750
8,000 Turner Broadcasting
System, Inc. Cl. B ........... 112,464 220,000
70,000 United Television, Inc. ........ 1,779,330 6,247,500
----------- -----------
7,486,774 16,363,876
----------- -----------

BUILDING AND CONSTRUCTION -- 2.88%
90,000 CalMat Co. ..................... 1,668,638 1,620,000
30,000 Florida Rock Industries Inc. ... 844,869 840,000
35,000 Medusa Corporation ............. 687,102 988,750
15,000 Morgan Products Ltd.+ .......... 128,663 103,125
125,000 Nortek, Inc.+ .................. 740,362 1,093,750
7,500 Oakwood Homes
Corporation .................. 167,562 264,375
2,000 Puerto Rican Cement
Company, Inc. ................ 48,850 69,250
140,000 Republic Gypsum
Company ...................... 847,257 1,662,500
1,500 Schuler Homes, Inc.+ ........... 21,275 17,438
----------- -----------
5,154,578 6,659,188
----------- -----------

BUSINESS SERVICES -- 1.49%
5,000 Amway Asia Pacific Ltd.+ ....... 145,750 186,875
2,000 Amway Japan Limited
Spons. ADR+ .................. 37,213 36,750
30,000 Berlitz International, Inc.+ ... 431,450 446,250
5,000 Bolt Beranek & Newman,
Inc. ......................... 179,038 186,875
20,000 Borg-Warner Security
Corporation+ ................. 250,000 172,500
10,000 Landauer, Inc. ................. 163,888 190,000
83,000 Nashua Corporation ............. 2,053,718 1,276,125
106,052 Trans-Lux Corporation .......... 869,896 941,211
----------- -----------
4,130,953 3,436,586
----------- -----------

CABLE -- 6.73%
150,000 BET Holdings, Inc. ............. 2,561,337 3,000,000
73,500 Citicasters Inc.+ .............. 1,372,733 2,453,062
3,000 Falcon Cable Systems
Company ...................... 29,775 26,625
120,000 Home Shopping Network,
Inc.+ ........................ 990,655 1,110,000
205,000 International Family
Entertainment, Inc.+ ......... 2,755,140 3,895,000
25,000 Jones Intercable
Investors L.P. ............... 267,256 318,750
98,000 Media General, Inc. Cl. A ...... 1,767,529 3,503,500
11,774 People's Choice TV
Corporation .................. 169,656 288,463

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

B-21

<PAGE>

The Gabelli Small Cap Growth Fund
Portfolio of Investments -- September 30, 1995 (Continued)

================================================================================

Market
Shares Cost Value
------ ---- -----
52,000 United International
Holdings, Inc. Cl. A+ ........ $ 694,277 $ 962,000
----------- -----------
10,608,358 15,557,400
----------- -----------

COMMERCIAL SERVICES -- 0.18%
15,000 Barefoot, Inc. ................. 160,000 196,875
11,000 Wackenhut Corporation
Cl. A ........................ 122,864 171,875
2,750 Wackenhut Corporation
Cl. B ........................ 30,716 37,813
----------- -----------
313,580 406,563
----------- -----------

COMPUTER SOFTWARE AND SERVICES -- 1.65%
12,000 America Online, Inc.+ .......... 95,250 825,000
2,200 Broderbund Software, Inc.+ ..... 39,017 167,475
1,000 Noise Cancellation
Technologies, Inc.+ .......... 625 1,000
40,000 Sierra On-Line, Inc.+ .......... 277,079 1,570,000
3,000 The Learning Company+ .......... 48,588 181,500
117,000 Triad Systems Corporation+ ..... 504,563 672,750
9,500 Volt Information Sciences,
Inc.+ ........................ 154,888 408,500
----------- -----------
1,120,010 3,826,225
----------- -----------

CONSUMER PRODUCTS-- 6.72%
20,000 Advantage Companies Inc.+ ...... 265,084 355,000
74,000 Carter-Wallace, Inc. ........... 843,752 925,000
80,000 Church & Dwight Co., Inc. ...... 1,743,659 1,740,000
25,000 Coachmen Industries Inc. ....... 289,025 415,625
37,500 Culbro Corporation+ ............ 1,140,737 1,509,375
30,000 First Brands Corporation ....... 802,950 1,350,000
30,000 Fleetwood Enterprises, Inc. .... 506,125 596,250
95,000 General Housewares
Corporation .................. 1,314,476 1,068,750
200,000 Genlyte Group
Incorporated+ ................ 804,165 1,050,000
8,000 Hechinger Company Cl. B ........ 86,425 38,000
10,000 Huffy Corporation .............. 143,500 113,750
43,000 Jostens, Inc. .................. 846,383 1,010,500
102,500 Kerr Group, Inc.+ .............. 748,848 717,500
2,000 Mafco Consolidated
Group Inc.+ .................. 28,244 51,500
3,000 Nu-Kote Holding Inc. Cl. A+ .... 26,883 65,250
25,000 Outboard Marine
Corporation .................. 467,013 537,500
25,000 Playtex Products, Inc.+ ........ 182,500 215,625
45,000 Robert Mondavi Wine Corp.
Cl. A+ ....................... 376,535 1,147,500
82,000 Scotts Company Cl. A+ .......... 1,445,536 1,814,250
30,000 Skyline Corporation ............ 517,738 540,000
7,500 Stewart Enterprises Inc.
Cl. A ........................ 101,800 271,875
----------- -----------
12,681,378 15,533,250
----------- -----------

COUNTRY/CLOSED END FUNDS -- 1.87%
70,000 Central European Equity
Fund Inc. .................... 927,957 1,120,000
85,000 Emerging Germany Fund
Inc. ......................... 669,375 616,250
50,000 France Growth Fund, Inc. ....... 531,418 487,500
39,415 Germany Fund, Inc. ............. 449,639 453,273
44,000 Italy Fund Inc. ................ 394,348 341,000
95,000 New Germany Fund Inc. .......... 1,084,012 1,187,500
12,700 Spain Fund Inc. ................ 118,435 107,950
----------- -----------
4,175,184 4,313,473
----------- -----------

DIVERSIFIED INDUSTRIAL -- 6.32%
65,000 Ampco-Pittsburgh
Corporation .................. 472,437 674,375
10,000 Anixter International Inc. ..... 184,050 413,750
15,000 Gardner Denver Machinery
Corporation .................. 248,670 255,000
470,000 Lamson & Sessions Co.+ ......... 2,660,427 2,937,500
65,000 Lindsay Manufacturing
Company+ ..................... 2,054,573 2,161,250
350,000 Noel Group, Inc.+ .............. 1,817,224 2,187,500
65,000 Park-Ohio Industries, Inc.+ .... 756,925 942,500
130,000 Thomas Industries, Inc. ........ 1,420,400 2,616,250
25,000 Trinity Industries, Inc. ....... 672,010 775,000
600,000 Tyler Corporation+ ............. 2,933,192 1,650,000
----------- -----------
13,219,908 14,613,125
----------- -----------

ELECTRICAL EQUIPMENT AND SUPPLIE -- 5.89%
230,000 AMETEK, Inc. ................... 3,374,733 3,938,750
1,000 Belden Inc. .................... 15,425 26,250
38,000 CTS Corporation ................ 845,762 1,178,000
150,000 Dynamics Corporation of
America ...................... 1,619,625 3,487,500
63,000 Kollmorgen Corporation ......... 434,850 669,375
10,000 Littlefuse, Inc.+ .............. 125,313 325,000
49,700 Pittway Corporation ............ 1,685,385 3,081,400
14,500 Pittway Corporation Cl. A ...... 319,725 902,625
----------- -----------
8,420,818 13,608,900
----------- -----------

ENERGY -- 1.82%
1,425,000 GEO International Corporation+ . 74,145 1
200,000 Kaneb Services Inc.+ ........... 653,258 500,000
22,000 Lufkin Industries, Inc. ........ 389,520 517,000
226,500 RPC Inc.+ ...................... 1,678,187 1,783,688
90,000 Southwest Gas Corporation ...... 1,556,054 1,406,250
----------- -----------
4,351,164 4,206,939
----------- -----------

ENTERTAINMENT -- 0.81%
8,000 Churchill Downs Incorporated ... 342,863 292,000
10,000 Cineplex Odeon
Corporation+ ................. 20,888 20,000
32,000 Jackpot Enterprises, Inc. ...... 321,225 344,000

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

B-22

<PAGE>

The Gabelli Small Cap Growth Fund
Portfolio of Investments -- September 30, 1995 (Continued)

================================================================================

Market
Shares Cost Value
------ ---- -----
2,500 Samuel Goldwyn Company+ ........ $ 24,625 $ 15,000
10,000 Savoy Pictures
Entertainment, Inc.+ ......... 87,800 66,250
200 Scientific Games Holdings
Corp.+ ....................... 1,825 7,475
65,000 Spelling Entertainment Inc.+ ... 475,125 861,250
40,000 Topps Company, Inc.+ ........... 243,963 260,000
----------- -----------
1,518,314 1,865,975
----------- -----------

ENVIRONMENTAL CONTROL -- 0.66%
130,000 EnviroSource, Inc.+ ............ 442,370 390,000
58,000 U.S. Waste Services, Inc.+ ..... 685,211 1,131,000
----------- -----------
1,127,581 1,521,000
----------- -----------

FINANCIAL SERVICES -- 3.82%
7,000 Berliner Bank
Aktiengesellschaft ........... 1,452,996 1,936,275
50,000 Danielson Holding
Corporation+ ................. 185,138 375,000
22,500 Gryphon Holdings Inc.+ ......... 292,500 360,000
25,000 Hibernia Corporation ........... 190,063 253,125
15,000 Jupiter National, Inc.+ ........ 161,113 457,500
4,000 Lawyers Title Insurance
Corporation .................. 58,015 59,500
40,000 Midland Company ................ 1,717,750 1,860,000
115,000 Pioneer Group, Inc. ............ 1,269,630 3,148,125
30,000 Riggs National Corporation+ .... 274,744 386,250
----------- -----------
5,601,949 8,835,775
----------- -----------

FOOD AND BEVERAGE -- 6.53%
12,000 Brau und Brunnen ............... 2,420,221 2,126,050
254,800 Bruno's, Inc. .................. 2,732,659 2,898,350
32,000 Celestial Seasonings, Inc.+ .... 557,895 576,000
6,250 Cheesecake Factory
Incorporated+ ................ 103,555 167,188
72,100 Chock Full o'Nuts
Corporation+ ................. 556,764 432,600
36,000 Delchamps, Inc. ................ 775,423 666,000
190,000 Eskimo Pie Corporation (a) ..... 3,111,685 3,562,500
15,500 Genesee Corporation Cl. B ...... 611,817 695,563
10,000 Grist Mill Company+ ............ 73,023 93,750
35,000 Ingles Markets, Incorporated
Cl. A ........................ 252,825 350,000
12,000 International Multifoods
Corporation .................. 242,875 258,000
10,200 J & J Snack Foods Corp.+ ....... 99,485 119,850
14,000 Midwest Grain Products,
Inc. ......................... 353,626 241,500
2,000 Northland Cranberries, Inc.
Cl. A ........................ 29,750 34,750
10,000 Ralcorp Holdings, Inc.+ ........ 154,250 236,250
83,750 Rykoff-Sexton, Inc. ............ 1,148,276 1,978,594
56,584 Sylvan Foods Holdings,
Inc.+ ........................ 512,602 657,790
----------- -----------
13,736,731 15,094,735
----------- -----------

HOME FURNISHINGS -- 1.99%
8,000 Bassett Furniture Industries
Incorporated ................. 188,438 201,000
8,000 Bed Bath & Beyond Inc.+ ........ 103,306 244,000
30,000 Foamex International Inc.+ ..... 258,725 311,250
10,000 La-Z-Boy Chair Company ......... 218,125 298,750
10,000 National Presto Industries,
Inc. ......................... 447,833 448,750
65,000 Oneida Ltd. .................... 967,187 1,056,250
100,000 Syratech Corporation+ .......... 1,774,858 2,050,000
----------- -----------
3,958,472 4,610,000
----------- -----------

HOSPITAL SUPPLIES AND SERVICES -- 0.05%
5,000 International Research
and Development
Corporation+ ................. 17,218 1,875
1,000 Professional Sports Care
Management, Inc.+ ............ 11,780 5,375
9,000 U.S. Physical Therapy Inc.+ .... 56,250 105,750
----------- -----------
85,248 113,000
----------- -----------

HOTELS/CASINOS -- 2.15%
410,200 Aztar Corporation+ ............. 2,651,385 3,435,425
35,000 Mirage Resorts,
Incorporated+ ................ 357,753 1,150,625
15,000 National Gaming
Corporation+ ................. 189,386 153,750
10,000 Station Casinos, Inc.+ ......... 139,708 153,750
15,000 TPI Enterprises, Inc.+ ......... 95,613 65,625
----------- -----------
3,433,845 4,959,175
----------- -----------

INDUSTRIAL EQUIPMENT AND SUPPLIES -- 10.11%
65,000 AFC Cable Systems, Inc.+ ....... 657,930 1,121,250
12,000 Alltrista Corporation .......... 232,498 228,007
15,000 Amphenol Corporation
Cl. A+ ....................... 196,200 324,375
60,000 AMTROL Inc. .................... 930,177 975,000
320,000 Baldwin Technology
Company, Inc. Cl. A+ ......... 1,534,459 2,040,000
40,000 Brad Ragan, Inc.+ .............. 1,013,337 1,340,000
52,000 Brenco, Incorporated ........... 459,843 585,000
219,500 CLARCOR Inc. ................... 3,708,370 5,158,250
45,000 Crane Company .................. 1,187,013 1,552,500
125,000 Eljer Industries, Inc.+ ........ 1,209,663 609,375
20,000 General Magnaplate
Corporation .................. 83,763 103,750
50,000 Gerber Scientific, Inc. ........ 602,337 893,750
130,000 Greif Bros. Corporation
Class A ...................... 2,414,014 3,233,750

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

B-23

<PAGE>

The Gabelli Small Cap Growth Fund
Portfolio of Investments -- September 30, 1995 (Continued)

================================================================================

Market
Shares Cost Value
------ ---- -----
30,000 INDRESCO Inc.+ ................. $ 376,725 $ 536.25
34,650 Johnston Industries, Inc. ...... 268,295 311,850
14,000 K-Tron International, Inc.+ .... 135,222 77,000
20,000 Mark IV Industries, Inc. ....... 299,911 445,000
7,000 Plantronics, Inc.+ ............. 107,637 254,625
18,000 Scotsman Industries, Inc. ...... 153,375 294,750
13,500 Sequa Corporation Cl. A+ ....... 465,631 361,125
3,000 Sequa Corporation Cl. B+ ....... 93,017 96,938
17,500 SPS Technologies, Inc.+ ........ 448,826 682,500
15,000 Teleflex Incorporated .......... 453,413 607,500
14,000 Tennant Company ................ 304,175 365,750
45,000 Valmont Industries, Inc. ....... 752,800 1,091,250
4,500 Watsco, Inc. Cl. B ............. 29,770 75,938
----------- -----------
18,118,401 23,365,483
----------- -----------

METALS AND MINING -- 1.87%
10,000 Barrick Gold Corporation ....... 257,938 258,750
140,000 Echo Bay Mines Ltd. ............ 1,494,762 1,522,500
22,500 Magma Copper Company
Cl. B+ ....................... 269,125 421,875
100,000 Pegasus Gold Inc.+ ............. 1,786,355 1,362,500
175,000 Royal Oak Mines Inc.+ .......... 831,033 754,688
----------- -----------
4,639,213 4,320,313
----------- -----------

PUBLISHING -- 3.06%
30,000 Commerce Clearing House,
Inc. Cl. A ................... 529,779 723,750
60,000 Independent Newspapers
plc .......................... 288,061 362,829
15,000 McClatchy Newspapers, Inc.
Cl. A ........................ 287,838 328,125
20,000 Meredith Corporation ........... 593,862 795,000
33,000 Pulitzer Publishing
Company ...................... 1,341,509 1,707,750
1,000 Scholastic Inc.+ ............... 37,500 62,750
50,000 Western Publishing Group,
Inc.+ ........................ 578,387 637,500
42,000 Wiley (John) & Sons, Inc.
Cl. B ........................ 924,625 2,454,375
----------- -----------
4,581,561 7,072,079
----------- -----------

PUMPS AND VALVES -- 5.28%
60,000 AptarGroup, Inc. ............... 967,688 1,987,500
27,750 Duriron Company, Inc. .......... 443,102 811,688
55,000 Franklin Electric Company ...... 1,624,331 1,773,750
17,775 Gorman-Rupp Company ............ 276,467 284,400
90,000 Goulds Pumps,
Incorporated ................. 2,172,983 2,070,000
4,000 Graco Inc. ..................... 83,113 136,500
64,000 IDEX Corporation ............... 791,467 2,288,000
55,000 Robbins & Myers, Inc. .......... 932,766 1,787,500
27,500 Roper Industries, Inc. ......... 350,813 1,065,625
----------- -----------
7,642,730 12,204,963
----------- -----------

RETAIL -- 4.72%
44,700 Aaron Rents Inc. Cl. A ......... 300,359 807,394
22,000 Aaron Rents Inc. Cl. B ......... 140,144 390,500
67,001 Belding Heminway Company,
Inc.+ ........................ 499,204 318,255
50,000 Burlington Coat Factory
Warehouse Corporation+ ....... 589,663 662,500
7,000 Crown Books Corporation+ ....... 98,017 70,000
80,000 Earl Scheib, Inc.+ ............. 442,708 500,000
30,000 Fingerhut Companies, Inc. ...... 451,763 483,750
10,000 Gander Mountain, Inc.+ ......... 118,840 83,750
170,000 General Host Corporation+ ...... 1,269,126 998,750
125,000 Hartmarx Corporation+ .......... 796,050 750,000
60,000 Lillian Vernon Corporation ..... 933,380 802,500
33,500 Mott's Holdings, Inc.+ ......... 214,069 201,000
250,000 Neiman Marcus Group,
Inc.+ ........................ 3,563,006 4,500,000
25,000 Zale Corporation+ .............. 320,840 346,875
----------- -----------
9,737,169 10,915,274
----------- -----------

SPECIALTY CHEMICALS -- 1.67%
30,000 Ferro Corporation .............. 714,101 746,250
99,800 Guardsman Products Inc. ........ 1,227,118 1,322,350
12,500 MacDermid, Incorporated ........ 381,570 584,375
25,000 Penwest Ltd. ................... 470,610 631,250
25,000 Pratt & Lambert Inc. ........... 399,935 584,375
----------- -----------
3,193,334 3,868,600
----------- -----------

TELECOMMUNICATIONS -- 3.56%
1,000 Arch Communications
Group Inc.+ .................. 14,425 26,250
35,000 Atlantic Tele-Network Inc.+ .... 416,220 428,750
1,000 BHI Corporation ................ 15,750 15,750
100,000 Communications Systems,
Inc. ......................... 556,544 1,475,000
155,000 C-TEC Corporation+ ............. 2,955,847 3,603,750
30,000 C-TEC Corporation Cl. B+ ....... 495,027 705,000
17,500 Data Transmission Network
Corporation+ ................. 237,758 634,375
29,000 Lincoln Telecommunications
Company ...................... 361,663 543,750
30,000 NTN Communications Inc.+ ....... 214,375 157,500
20,000 Pacific Telecom Inc. ........... 510,130 600,000
12,000 Peoples Telephone Company
Inc.+ ........................ 93,263 45,750
----------- -----------
5,871,002 8,235,875
----------- -----------

TRANSPORTATION -- 0.17%
50,000 OMI Corporation ................ 334,638 350,000
4,000 WorldCorp, Inc.+ ............... 19,575 48,500
----------- -----------
354,213 398,500
----------- -----------

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

B-24

<PAGE>

The Gabelli Small Cap Growth Fund
Portfolio of Investments -- September 30, 1995 (Continued)

================================================================================

Principal
Amount Market
or Shares Cost Value
--------- ---- -----
WIRELESS COMMUNICATIONS -- 1.73%
70,000 Allen Group Inc. ............... $ 1,097,525 $ 2,537,500
50,000 American Paging, Inc.+ ......... 392,913 387,500
15,000 Cellular Communications of
Puerto Rico, Inc.+ ........... 201,450 457,500
25,000 Centennial Cellular
Corporation+ ................. 346,560 487,500
4,000 Mobile Telecommunication
Technologies Corp.+ .......... 78,863 123,500
----------- -----------
2,117,311 3,993,500
----------- -----------
TOTAL COMMON
STOCKS ....................... 168,298,267 223,362,024
----------- -----------

CONVERTIBLE CORPORATE BONDS -- 0.91%

AUTOMOTIVE: PARTS AND ACCESSORIES -- 0.14%
$325,000 GenCorp Inc. Sub. Deb. Cv.
8.00%, 08/01/02 .............. 323,229 323,375
----------- -----------

ENTERTAINMENT -- 0.14%
150,000 All American Communica-
tions, Inc. Sub. Deb. Cv.
6.50%, 10/01/03 (b) .......... 143,062 168,000
200,000 Savoy Pictures Entertainment,
Inc. Sub. Deb. Cv.
7.00%, 07/01/03 .............. 155,451 154,000
----------- -----------
298,513 322,000
----------- -----------

INDUSTRIAL EQUIPMENT AND SUPPLIES -- 0.47%
750,000 Intermagnetics General
Corporation Sub. Deb. Cv.
5.75%, 09/15/03 (b) .......... 749,525 930,000
250,000 Kushner Locke Company Sub.
Deb. Cv. 8.00%,
12/15/00 ..................... 250,000 150,000
500 MacNeal-Schwendler
Corporation Sub. Deb. Cv.
7.875%, 08/18/04 ............. 558 615
----------- -----------
1,000,083 1,080,615
----------- -----------

RETAIL -- 0.16%
400,000 General Host Corporation
Sub. Deb. Cv
8.00%, 02/15/02 .............. 380,290 376,000
----------- -----------

TOTAL CONVERTIBLE
CORPORATE BONDS .............. 2,002,115 2,101,990
----------- -----------

Principal
Amount
---------
U.S. GOVERNMENT OBLIGATIONS -- 2.79%
$6,480,000 U.S. Treasury Bills, 5.20% to
5.35% due 10/05/95 to
11/16/95 ..................... $ 6,454,563 $ 6,454,563
----------- -----------

TOTAL U.S. GOVERNMENT
OBLIGATIONS .................. 6,454,563 6,454,563
----------- -----------

TOTAL INVESTMENTS
-- 100.33% ................... $176,754,945* 231,918,577
============

Liabilities, in excess of
Other Assets -- (0.33%) .................... (762,376)
-------------

NET ASSETS -- 100.00%
(11,954,701 shares outstanding) ............ $ 231,156,201
=============

Net Asset Value And Redemption
Price Per Share ............................ $19.34
======

MAXIMUM PUBLIC OFFERING
PRICE PER SHARE
($19.34 / .955 Based on a
maximum sales charge of 4.5%) .............. $20.25
======

- ----------
*For Federal income tax purposes:
Aggregate cost ......................... $176,754,945
============

Gross unrealized appreciation ............ $ 62,133,863
Gross unrealized depreciation ............ 6,970,231
------------
Net unrealized appreciation .............. $ 55,163,632
============

+ Non-income producing security

ADR -- American Depositary Receipt

(a) Considered an affiliated issuer because the Fund owns at least 5% of the
outstanding voting securities.

(b) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At September 30,
1995, Rule 144A securities amounted to $1,098,000 or 0.5% of net assets.

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

B-25

<PAGE>

The Gabelli Small Cap Growth Fund

Statement of Assets and Liabilities
September 30, 1995
================================================================================

Assets:
Investments in securities, at value
(Cost $176,754,945) (Note 1) ........................... $231,918,577
Cash ..................................................... 125,387
Receivable for Fund shares sold .......................... 29,281
Receivable for investments sold .......................... 404,319
Dividends receivable ..................................... 212,045
Accrued interest receivable .............................. 21,984
Other assets ............................................. 27,220
Deferred organization expenses (Note 5) .................. 15,645
------------
Total Assets ........................................... 232,754,458
------------
Liabilities:
Payable to Advisor (Note 4) .............................. 191,211
Payable for distribution fees (Note 6) ................... 96,833
Payable for investments purchased ........................ 1,273,622
Payable for Fund shares redeemed ......................... 20,560
Other accrued expenses ................................... 16,031
------------
Total Liabilities ...................................... 1,598,257
------------
Net Assets (applicable to 11,954,701
shares outstanding) (Note 2) ......................... $231,156,201
============
Net asset value and redemption
price per share ...................................... $19.34
============
Maximum Offering Price Per Share
($19.34 /.955 Based on a maximum
sales charge of 4.5%) ................................. $20.25
============
Net Assets Consist of:
Capital Stock, at par value (Note 2) ..................... 11,955
Additional paid-in capital ............................... 161,016,706
Accumulated net realized gain on investments
and foreign currency transactions ...................... 14,964,979
Net unrealized appreciation on investments
and assets and liabilities denominated in
foreign currencies ..................................... 55,162,561
------------
Net assets ............................................. $231,156,201
============

Statement of Operations
For the Year Ended September 30, 1995
================================================================================

Investment Income:
Dividends (net of foreign taxes of $17,656) .............. $ 2,467,661
Interest ................................................. 277,775
------------
Total Income ........................................... 2,745,436
------------
Expenses:
Investment advisory fee (Note 4) ......................... 2,112,855
Distribution expenses (Note 6) ........................... 528,080
Transfer and shareholder servicing agent ................. 403,163
Custodian fees and expenses .............................. 55,188
Printing and mailing ..................................... 39,023
Directors' fees .......................................... 35,054
Registration fees ........................................ 30,552
Legal and audit fees ..................................... 29,871
Amortization of organization expenses
(Note 5) ............................................... 14,753
Miscellaneous ............................................ 10,815
------------
Total expenses ......................................... 3,259,354
------------
Investment loss -- net ................................... (513,918)
------------
Net Realized and Unrealized Gain on
Investments and Foreign Currency Transactions:
Net realized gain on investments and
foreign currency transactions .......................... 16,367,947
Net change in unrealized appreciation .................... 22,785,104
------------
Net gain on investments ................................ 39,153,051
------------
Net increase in net assets resulting
from operations ......................................... $ 38,639,133
============

<TABLE>
<CAPTION>
Statement of Changes in Net Assets
====================================================================================================================================

Year Ended September 30,
--------------------------
1995 1994
---- ----
<S> <C> <C>
Increase in Net Assets:
Investment loss -- net ............................................................ $ (513,918) $ (585,154)
Net realized gain on investments and foreign currency transactions ................ 16,367,947 12,080,009
Net realized gain on futures ...................................................... -- 16,029
Net change in unrealized appreciation ............................................. 22,785,104 (2,553,608)
------------- -------------
Net increase in net assets resulting from operations ............................ 38,639,133 8,957,276
------------- -------------
Distributions from net realized gains ............................................. (12,003,675) (5,077,843)
------------- -------------
Share transactions -- net (Note 2) ................................................ (1,178,460) (2,796,795)
------------- -------------
Net increase in net assets ...................................................... 25,456,998 1,082,638
Net Assets:
Beginning of period ............................................................... 205,699,203 204,616,565
------------- -------------
End of period ..................................................................... $ 231,156,201 $ 205,699,203
============= =============
</TABLE>

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

B-26

<PAGE>

The Gabelli Small Cap Growth Fund
Notes to Financial Statements

================================================================================

1. Significant Accounting Policies. The Gabelli Small Cap Growth Fund (the
"Fund") is a series of Gabelli Equity Series Funds, Inc. (the "Corporation").
The Fund is an open-end, diversified management investment company and one of
two separately managed portfolios of the Corporation. The Corporation was
incorporated in Maryland on July 25, 1991. Prior to October 22, 1991
(commencement of operations), the Fund had no operations other than the sale of
10,000 shares of common stock at $10.00 per share to Gabelli Funds, Inc., the
Fund's advisor, on September 16, 1991. The following is a summary of significant
accounting policies followed by the Fund:

Foreign Currency Transactions. The books and records of the Fund are maintained
in U.S. dollars as follows:

(i) market value of investment securities and other assets and liabilities are
translated at the exchange rate on the valuation date.

(ii) purchases and sales of investment securities, income and exoenses are
translated at the exchange rate prevailing on the respective date of such
transactions.

The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuation
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.

Net realized and unrealized foreign exchange gains and losses which arise from
changes in exchange rates involving assets and liabilities other than
investments in securities were immaterial for the year ended September 30, 1995.

B-27

<PAGE>

The Gabelli Small Cap Growth Fund
Notes to Financial Statements (Continued)

================================================================================

At September 30, 1995 there were no forward foreign currency contracts
outstanding.

Dividends from net investment income and distributions from net realized gains
are determined in accordance with federal income tax regulations which may
differ from net investment income and net realized capital gains recorded in
accordance with generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent. To the extent these
differences are permanent, such amounts are reclassified within the capital
accounts based on their federal tax basis treatment; temporary differences do
not require reclassification.

The Fund's net operating losses of $513,918 and $585,154 for the fiscal years
ending September 30, 1995 and 1994, respectively, may be used to offset net
short-term capital gains and were charged against undistributed net realized
gain on investments in 1995 and 1994, respectively. In addition, during 1995
miscellaneous permanent differences of $24,693 were charged to paid-in capital
from distributions in excess of net investment income.

2. Capital Stock Transactions. The Articles of Incorporation, dated July 25,
1991, permit the Fund to issue 100,000,000 shares (par value $0.001).
Transactions in shares of common stock were as follows:

<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------------
1995 1994
---------------------------- -----------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares sold ........................................... 3,685,060 $ 62,670,998 4,806,495 $ 82,168,098
Shares issued upon reinvestment of dividends .......... 737,234 11,685,157 284,945 4,952,351
Shares redeemed ....................................... (4,400,246) (75,534,615) (5,266,065) (89,917,244)
---------- ------------ ---------- ------------
Net increase (decrease) ............................. 22,048 $ (1,178,460) (174,625) $ (2,796,795)
========== ============ ========== ============
</TABLE>

B-28

<PAGE>

The Gabelli Small Cap Growth Fund
Notes to Financial Statements (Continued)

================================================================================

6. Distribution Plan. The Fund's Board of Directors has adopted a distribution
plan (the "Plan") under Section 12(b) of the Investment Company Act of 1940 and
Rule 12b-1 thereunder. For the year ended September 30, 1995, the Fund has
reimbursed distribution costs incurred by Gabelli & Company, Inc., an affiliate
of the Advisor, of $528,080, or 0.25% of average net assets, the annual
limitation under the Plan. The Board of Directors has approved that Distribution
costs incurred by Gabelli & Company, Inc., totalling $156,995, which are in
excess of the 0.25% limitation may be recovered from the Fund in future periods.

7. Transactions with Affiliates. The Fund paid brokerage commissions to Gabelli
& Company, Inc., an affiliate of the Advisor, during the year ended September
30, 1995 of $17,243. Gabelli & Company, Inc. has informed the Fund that the
amount of sales charges and underwriting fees earned during the year ended
September 30, 1995 was $28,415.

Financial Highlights

================================================================================

Selected data for a share of capital stock outstanding throughout each period:

<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------
1995 1994 1993 1992 (a)
------ ------ ------ --------
<S> <C> <C> <C> <C>
Operating Performance:
Net asset value, beginning of period ........................ $17.24 $16.90 $13.10 $10.00
------ ------ ------ ------
Net investment income (loss) ................................ (0.04) (0.05) 0.01 0.04
Net realized and unrealized gain on securities .............. 3.17 0.81 3.98 3.14
------ ------ ------ ------
Total from investment operations ............................ 3.13 0.76 3.99 3.18
------ ------ ------ ------
Less Distributions:
Dividends from net investment income ........................ -- -- (0.03) (0.01)
Distributions from net realized gain on investments ......... (1.03) (0.42) (0.16) (0.07)
------ ------ ------ ------
Net asset value, end of period .............................. $19.34 $17.24 $16.90 $13.10
====== ====== ====== ======

Total Return (not reflecting sales load) (b) .................. 19.47% 4.48% 30.65% 31.86%

Ratios to average net assets/supplemental data:
Net assets, end of period (in thousands) .................... $231,156 $205,699 $204,617 $94,864
Ratio of operating expenses to average net assets ........... 1.54% 1.54% 1.64% 1.97%*
Ratio of net investment income (loss) to average net assets . (0.24)% (0.28)% 0.03% 0.32%*
Portfolio turnover rate ..................................... 17.22% 18.66% 13.69% 16.35%
</TABLE>
- ----------
* Annualized
(a) Fund commenced operations on October 22, 1991.
(b) Total return is calculated assuming a purchase of shares at the net asset
value on the first day and a sale on the last day of each year reported and
includes reinvestment of dividends and distributions.

B-29

<PAGE>

The Gabelli Small Cap Growth Fund
Report of Ernst & Young LLP, Independent Auditors

================================================================================

Shareholders and Board of Directors
The Gabelli Small Cap Growth Fund

We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Gabelli Small Cap Growth Fund (a series of
Gabelli Equity Series Funds, Inc.) as of September 30, 1995, and the related
statement of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the financial
highlights for each of the periods indicated therein. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Gabelli Small Cap Growth Fund at September 30, 1995, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the indicated periods, in conformity with generally accepted accounting
principles.

/s/ Ernst & Young LLP

New York, New York
November 7, 1995

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

1995 TAX NOTICE TO SHAREHOLDERS (Unaudited)

For the fiscal year ended September 30, 1995, the Fund paid to shareholders, on
December 30, 1994, ordinary income dividends (comprised of net investment income
and short-term capital gains) totalling $0.01 per share. Additionally, on that
date, the Fund paid $1.02 per share in long-term capital gains. For fiscal year
1995, none of the ordinary income dividend qualifies for the dividend received
deduction available to corporations.

U.S. Government Income:

The percentage of the ordinary income dividend paid by the Fund during fiscal
1995 which was derived from U.S. Treasury securities was 3.18%. Such income is
exempt from state and local income tax in all states. However, many states,
including New York and California, allow a tax exemption for a portion of the
income earned only if a mutual fund has invested at least 50% of its assets at
the end of each quarter of the Fund's fiscal year in U.S. Government securities.
The Gabelli Small Cap Growth Fund did not meet this strict requirement in 1995.
Due to the diversity in state and local tax law, it is recommended that you
consult your personal tax advisor for the applicability of the information
provided as to your own situation.

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

B-30