GABELLI EQUITY SERIES FUNDS INC, N-30D, 1996-12-13

GABELLI EQUITY SERIES FUNDS INC
N-30D, 1996-12-13

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<PAGE> 1

THE GABELLI EQUITY INCOME FUND
One Corporate Center
Rye, New York 10580-1434
ANNUAL REPORT - 1996(a)

TO OUR SHAREHOLDERS:

After a sharp correction in July, the Dow Jones Industrial Average
(DJIA) and the Standard & Poor's 500 (S&P 500) surged in September, closing the
quarter at record levels. Broader market indices such as the Value Line
Composite and smaller cap indices like the Russell 2000 rebounded as well, but
lagged the large cap indices by considerable margins.

INVESTMENT RESULTS (b)

<TABLE>
<CAPTION>
Calendar Quarter
----------------------------------------
1st 2nd 3rd 4th Year
--- --- --- --- ----
<S> <C> <C> <C> <C> <C> <C>
1996: Net Asset Value ..................... $13.47 $13.54 $13.81 __ __
Total Return ........................ 5.5% 1.0% 2.5% __ __
- -----------------------------------------------------------------------------------------------------------
1995: Net Asset Value ..................... $11.56 $11.99 $12.65 $12.84 $12.84
Total Return ........................ 8.5% 4.3% 6.1% 6.9% 28.3%
- -----------------------------------------------------------------------------------------------------------
1994: Net Asset Value ..................... $11.26 $11.08 $11.54 $10.72 $10.72
Total Return ........................ (2.2)% (0.8)% 4.9% (0.7)% 1.1%
- -----------------------------------------------------------------------------------------------------------
1993: Net Asset Value ..................... $11.35 $11.72 $12.15 $11.57 $11.57
Total Return ........................ 7.4% 3.8% 4.2% 1.5% 17.9%
- -----------------------------------------------------------------------------------------------------------
1992: Net Asset Value ..................... $10.19 $10.36 $10.40 $10.64 $10.64
Total Return ........................ 2.4%(c) 2.3% 1.1% 3.7% 9.8%(c)
- -----------------------------------------------------------------------------------------------------------
</TABLE>

Average Annual Returns - September 30, 1996 (b)

(a) The Fund's fiscal year ends September 30, 1996. (b) Average annual and
total returns reflect changes in share price and reinvestment of dividends, and
are net of expenses. The net asset value of the Fund is reduced on the
ex-dividend (payment) date by the amount of the dividend paid. Of course, the
returns represent past performance and do not guarantee future results.
Investment returns and the principal value of an investment will fluctuate.
When shares are redeemed they may be worth more or less than their original
cost. (c) From commencement of operations on January 2, 1992.

<PAGE> 2

COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
THE GABELLI EQUITY INCOME FUND AND THE S&P 500 INDEX

<TABLE>
<CAPTION>
Gabelli Equity Income Fund S&P 500 Index
--------------------------- -------------
<S> <C> <C>
1/02/96 $10,000 $10,000
9/30/92 $10,580 $10,250
9/30/93 $12,750 $11,583
9/30/94 $13,171 $12,011
9/30/95 $15,700 $15,700
9/30/96 $18,320 $18,755
</TABLE>

* Past performance is not predictive of future performance.

INVESTMENT PERFORMANCE

For the three months ended September 30, 1996, The Gabelli Equity Income
Fund's net asset value increased 2.5% to an adjusted $13.81, compared with the
2.5% increase in the Lipper Analytical Services, Inc. Equity Income Fund Index,
which covers 30 equity income funds, and the 3.1% increase in the Standard &
Poor's 500 Index, a widely accepted unmanaged index of stock market
performance. The Fund has advanced 9.1% for the nine months ended September
30, 1996. For the twelve months ended September 30, 1996, the Fund's total
return was 16.6% while the Standard &Poor's 500 Index was up 20.3% over the
same period. The Fund's return for the twelve months compares favorably to the
15.4% return of the Lipper Equity Income Fund Index.

Since its inception on January 2, 1992 through September 30, 1996, the
Fund achieved a total return of 83.2%, which equates to an average annual
return of

<TABLE>
<CAPTION>
Dividend History
- ----------------------------------------------------
Rate Reinvestment
---- ------------
Payment (ex) Date Per Share Price
- ----------------- --------- -----
<S> <C> <C>

September 30,1996 $0.07 $13.81
June 28, 1996 $0.06 $13.54
March 31, 1996 $0.07 $13.47
- ---------------------------------------------------
December 29, 1995 $0.68 $12.84
September 29,1995 $0.07 $12.65
June 30, 1995 $0.07 $11.99
March 31, 1995 $0.07 $11.56
- ---------------------------------------------------
December 30, 1994 $0.74 $10.72
September 30, 1994 $0.08 $11.54
June 30, 1994 $0.09 $11.08
March 31, 1994 $0.06 $11.26
- ---------------------------------------------------
December 31, 1993 $0.76 $11.57
September 30, 1993 $0.06 $12.15
June 30, 1993 $0.06 $11.72
March 31, 1993 $0.08 $11.35
- ---------------------------------------------------
December 31, 1992 $0.15 $10.64
September 30, 1992 $0.07 $10.40
June 30, 1992 $0.06 $10.36
March 31, 1992 $0.05 $10.19
</TABLE>

2
<PAGE> 3

13.6%, assuming reinvestment of all dividends. The Dividend History chart
details each dividend paid by the Fund since its inception. As of September
30, 1996, the Fund's shareholders numbered 6,847 and net assets were $57.0
million.

COMMENTARY

THE ECONOMY AND THE STOCK MARKET

Robust second quarter GDP growth of 4.8%, higher energy and agricultural
commodities prices, and strong employment numbers rekindled inflationary fears
sparking a 7% market correction in July. In September, more encouraging
economic data, most notably modest increases in the Producer and Consumer Price
Indices, eased inflationary concerns. Fueled by strong cash flow into equity
mutual funds, the DJIA and S&P 500 moved back into record territory.

For the present, inflation appears to be in check. However, we don't
think it's been checkmated quite yet. The world-wide demand for agricultural
and selected industrial commodities is growing. Oil remains a wild card.
Eventually, higher prices will be passed along to the consumer. With
outsourcing, downsizing, globalization of labor, technology oriented
productivity gains decelerating, and unemployment at historically low levels,
we still anticipate upward pressure on wages. On the surface, the United Auto
Worker's recent labor contract with Ford (F - $31.25 - NYSE) looks good. With
just a 3% annual wage hike over three years, Ford appears to have avoided
inflationary wage increases. However, by agreeing to limit outsourcing and, in
effect, guaranteeing UAW workers lifetime tenure, future productivity may be
diminished. We have seen the long-term implications of such labor rigidity in
Europe. We fear Ford may have just won a psychological victory. More
importantly, if President Clinton wins in a landslide, market observers will
ask: What payback will he give to his supporters? What will this mean for
labor costs, productivity gains, inflation, corporate earnings and the market?

Based largely on better than expected news on the inflation front, our
short-term posture toward the broad market has changed slightly from cautious
to cautiously optimistic. Corporate earnings should finish the year up around
10%. Valuations are above the historic norm, but not yet at troublesome
levels. If inflation remains subdued (we're still not convinced it isn't
peeking around the corner), long interest rates stabilize at current levels,
and mutual fund cash inflows remain strong, 1996 equities returns may well
exceed our expectations after the Presidential Election.

Whatever the market has in store for us over the next several quarters,
there are attractive long-term opportunities in a variety of industries. World
class industrial companies will get a boost from recovering economies in Europe
and the Pacific Rim. Aerospace component suppliers will continue to benefit
from the strong world-wide demand for new aircraft. Selected
telecommunications stocks will prosper as the sweeping deregulation of the
industry is implemented in the U.S. and emerging nations invest heavily in
building modern systems. Entertainment software stocks should also do well as
distribution networks here and abroad continue to expand. AND DEALS WILL BE
DONE. The record levels of mergers and acquisitions experienced in 1995-1996
may well be exceeded. The benefits of strategic combinations in a broad
spectrum of industries will keep investment bankers busy and value investors
happy in the year ahead.

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GENERAL MOTORS: IT'S MORE THAN JUST A CAR COMPANY

In previous reports, we've talked about "Humpty Dumpty" conglomerates
surfacing value through the sale or spin-off of divisions. The good folks at
General Motors Corporation (GM - $48.00 - NYSE) may soon be adding their name
to a list that includes American Express Company (AXP - $46.25 - NYSE),
American Brands, Inc. (AMB - $42.25 - NYSE), ITT Corporation (ITT - $43.625 -
NYSE), and AT&T Corp. (T - $52.25 - NYSE) to name just a few. Encouraged by
the successful spin-off of Electronic Data Systems Corp. (EDS - $61.375 -
NYSE), GM management is now focusing on another GM tracking stock, GM Hughes
(GMH - $57.75 - NYSE). GMH has three businesses: auto electronics, aerospace,
and a satellite telecommunications division that includes the rapidly growing
DirecTV and a satellite video distribution business that will be strengthened
with the acquisition of PanAmSat Corporation (SPOT - $27.8125 - NASDAQ). GM
has several alternatives that would benefit GMH shareholders, the largest of
which is GM itself. One scenario would be to spin off DirecTV directly to GMH
shareholders, fold the auto electronics business back into the parent company,
and sell the aerospace business. GMH is currently valued at about nine times
1996 cash flow. With the potential for rapid cash flow and eventual earnings
growth, DirecTV will receive a much higher multiple as a stand alone company.

At its current price, marked to market, GMH represents about $23 of value
per GM share. Marked to our Private Market Value model for GMH, it represents
$30 of value. Should GM restructure GMH in the aforementioned manner, GM's
auto business would be trading at about half the cash flow multiples enjoyed by
Ford and Chrysler Corp. (C - $28.625 - NYSE). Ford and Chrysler do have cost
advantages relative to GM and the impending settlement with the UAW may hamper
GM's cost cutting progress. However, that is too deep a discount for an
American auto manufacturer with excellent long-term prospects.

ONE HURDLE LEFT

The Federal Trade Commission's recent approval of the Time Warner Inc.
(TWX - $38.625 - NYSE)/Turner Broadcasting (TBS'A - $28.50 - ASE) merger
eliminates one of the hurdles facing TWX management. The Turner acquisition is
hardly a steal for Time Warner, but it does position them as an unparalleled
global powerhouse in the entertainment software and cable network businesses.
Now, Gerald Levin and company can focus on settling its differences with US
West Media Group (UMG - $16.875 - NYSE), its disgruntled partner in the cable
television and entertainment software businesses. This may entail buying US
West Media out of Warner Brothers and HBO by giving them a bigger stake in Time
Warner Cable Television or outright ownership of selected cable systems. US
West Media appears committed to the cable industry. At this stage, a deal
hinges on price (how many cable subscribers TWX will give up for exclusive
ownership of filmed entertainment assets). With TWX stock languishing, Mr.
Levin will be under increasing pressure from shareholders like Ted Turner and
Tele-Communications Inc.'s (TCOMA - $14.9375 - NASDAQ) John Malone to get
something done. We believe a compromise that will enhance US West Media's
cable/telephony franchise and turn Time Warner into a purer entertainment/news
software play will be reached. TWX can then sell additional non-core assets
and/or spin off its share of the cable operations to shareholders. The end
result would be a much better looking balance sheet, a more focused company
and, we believe, a stock price in the mid $50s.

4
<PAGE> 5

THE CONSOLIDATORS - THE 1990S GAME

The 1960s was the decade of the conglomerates. Individuals like
Harold Geneen at ITT, Charlie Bluhdorn at Gulf & Western, and Royal Little at
Textron championed corporate growth and stability by bundling non-related
businesses. Wall Street was in love with the conglomerates. And why not?
They were using their shares trading at 12 times earnings to buy smaller, less
visible companies at eight times earnings. Earnings marched steadily upward as
did conglomerate stock prices.

Times change. Wall Street now shuns conglomerates. They are
difficult for analysts to understand and many are saddled with mature
low-growth companies that restrain, rather than contribute to, earnings growth.
Corporate managers are realizing that by shedding non-related divisions through
direct sale or spin-off to shareholders, they are getting much better
valuations for their core businesses. In short, investors are willing to pay
more for the sum of the parts than for the whole. Corporate chieftains like
Harvey Golub of American Express, Tom Hays at American Brands and Rand Araskog
at ITT have already demonstrated the positive impact that consolidation has on
stock prices. Westinghouse Electric Corp.'s (WX - $18.625 - NYSE) Michael
Jordan appears to be following their lead with the acquisition of Infinity
Broadcasting Corp. (INF - $31.50 - NYSE) to complement the CBS radio network
and the revelation that he is considering spinning off or selling the company's
industrial businesses.

There is another type of consolidation creating enthusiasm on Wall
Street. Consolidators are buying competitors, lowering expenses through
enlarged buying power, eliminating corporate overhead and driving growth rates
in the process. Consolidators are looking for fragmented industries where this
strategy is most effective. A prominent consolidator is Wayne Huzienga, who
made his first fortune consolidating the trash hauling industry with Waste
Management International Inc. (WME - $9.00 - NYSE). He repeated the pattern in
the video rental business via Blockbuster Entertainment. Now, under the
corporate banner of Republic Industries, Inc. (RWIN - $29.00 - NASDAQ), he is
consolidating the used car and electronic security businesses. We believe that
by buying smaller competitors, consolidating operations, and creating a
national brand name franchise, Mr. Huzienga will once again make a lot of money
for himself and Republic Industries' shareholders. Other industries where this
is occurring are broadcasters, banks, brokers, health care and even public
utilities.

FARMER KRAVIS

Henry Kravis, one of the principals of Kravis, Kohlberg, & Roberts
(KKR), has been harvesting seeds planted by the firm during the heyday of
leveraged buyouts in the 1980s. The recent sale of Duracell International Inc.
(DUR - $64.047 - NYSE) (34% owned by KKR) to Gillette Co. (G - $72.125 - NYSE)
follows on the heels of the sale of KKR-controlled Red Lion Hotels Inc. (RL -
$29.625 - NYSE) to Doubletree Corp. (TREE - $39.875 - NASDAQ), Stop & Shop
Companies Inc. to Royal Ahold N.V., and American Re Corp. (ARN - $63.50 -
NYSE) to Munich Reinsurance Company. Farmer Kravis is unloading this bumper
crop of fine companies. Indeed, he is in the process of raising $5 billion in
seed money for planting new crops.

Why are we interested in what Farmer Kravis is doing? For a variety
of reasons, not the least of which is that with the exception of a failed
tobacco crop (KKR's ill-fated LBO of RJR), he's been a very profitable farmer.
We like to watch what Henry is buying - KKR's recent purchase of Bruno's
reaffirms our notion of value in food retailers like Delchamps Inc. (DLCH -
$20.00 - NASDAQ) and Giant Food Inc.

5
<PAGE> 6

(GFS'A - $34.00 - ASE). We also monitor values surfaced by his selling. The
13-14 times cash flow paid by Gillette for Duracell has very positive
implications for Ralston Purina Group (RAL - $68.50 - NYSE), whose Eveready
Battery business is a strong number two in the market to Duracell. Finally, we
are encouraged that Farmer Kravis is in the process of raising a big pile of
money to buy the kind of undervalued companies available in our Fund's
portfolio.

LET'S TALK STOCKS

The following are stock specifics on selected holdings of our Fund's
investments. Favorable EBITDA prospects do not necessarily translate into
higher stock prices, but they do express a positive trend which we believe will
develop over time.

American Express Company (AXP - $46.25 - NYSE), founded in 1850, is a
diversified travel and financial services company operating in 160 countries
around the world. The company is best known for its American Express charge
card and travel-related services. Another important operation is
Minneapolis-based American Express Financial Advisors, Inc. (formerly IDS
Financial Services) which sells financial products ranging from mutual funds to
annuities. Harvey Golub, Chairman and CEO, has refocused AXP on its core
"green" charge card and investment management businesses. The company has
significantly expanded the range of merchants who welcome its cards.
Management's objective is virtual parity with bankcard networks. In July, the
company joined forces with Microsoft to start their own on-line corporate
travel service. Additionally, the company has launched Financial Direct, a
financial services operation that provides self-directed on-line trading. We
believe that American Express has been repositioned to enjoy double-digit
earnings growth over the balance of this decade.

Atlantic Richfield Company (ARCO) (ARC - $127.50 - NYSE) is a diversified
company operating globally in all aspects of the energy business. Included are
ventures in China and Russia. Approximately 35% of ARCO's 1995 revenues of
$17.3 billion were derived from oil, gas and coal resources, 40% from refining
and marketing and almost 25% from intermediate chemicals and specialty
products. ARCO's operating results last year were the highest since its record
earnings in 1990. Earnings should continue to rise as world-wide demand for
energy and petrochemical products grows over the rest of the decade. The
company's strong cash flow, exceeding $3 billion, readily supports the shares'
above average 4.20% yield.

British Petroleum Company, plc (BP - $125.00 - NYSE ), with an equity market
capitalization approaching $60 billion, is one of the largest integrated oil
enterprises in the world. Crude oil output exceeds 1.2 million barrels per day
and is anticipated to rise 5% annually through the year 2000. Refinery
throughputs are 1.7 million barrels per day. The company, like other major oil
producers and refiners, has embarked on a major cost-cutting program.
Supported by recent increases in world crude oil prices and rising volumes,
British Petroleum is a substantial cash flow generator, a portion of which is
being used to reduce debt.

Exxon Corporation (XON - $83.25 - NYSE), with an equity market value exceeding
$100 billion, is the world's largest publicly-owned integrated oil company. The
company produces an average 1.7 million barrels of crude oil and natural gas
liquids per day, roughly two-thirds of which come from overseas reserves.
Revenues, having plateaued at roughly $100 billion over the past five years,
should eventually rebound as world-wide demand for energy increases.
Profitability has been sustained by management's

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success in cutting approximately $1 billion from overhead in each of the last
few years. Dividends have been paid since 1882 and have increased annually
since 1983.

GTE Corporation (GTE - $38.50 - NYSE) is the fourth-largest publicly-owned
telecommunications company in the world. The company owns the largest non-Bell
telecommunications system, serving 19 million access lines in 30 states. GTE
is the nation's second-largest provider of cellular services, with a
controlling interest in metropolitan and rural service areas covering more than
50 million people. Roughly 25% of earnings are derived from non-telephone
businesses growing at more than 20% per year. Chairman Charles Lee is
structuring the company for accelerated growth.

International Business Machines Corporation (IBM - $124.50 - NYSE) is the
world's largest information technology services company. 1995 total revenue
increased almost $8 billion or 12% to $72 billion. IBM is also a huge cash
flow generator. The company ended the year with $7.7 billion in cash, after
spending $5.7 billion to repurchase IBM stock and $2.9 billion to acquire Lotus
Development.

Southwest Gas Corporation (SWX - $17.50 - NYSE) is a regulated natural gas
distributor serving some of the fastest growing regions in the country,
including one million customers in parts of Arizona, Nevada and California.
75% of revenues are from residential and rural commercial users. The company
has received favorable rulings in its Nevada rate cases which it hopes will
influence its filings with Arizona regulators.

Texaco Inc. (TX - $92.00 - NYSE) is a major integrated international oil
company. 50%-owned Caltex (Chevron holds the other 50%) concentrates on
refining and marketing in the Pacific Rim where standards of living and
economies are advancing rapidly. 1996 looks to be a record year for Texaco in
generation of cash flow and earnings.

NO LOAD - EFFECTIVE AUGUST 12, 1996

Effective August 12, 1996, the Fund no longer imposes a front-end sales
charge. All purchases made after August 12, 1996 are not subject to a sales
charge. The minimum initial investment for all accounts is $1,000.
Additionally, we invite shareholders to start an automatic investment plan
whereby no initial minimum is required.

INTERNET

You can now visit us on the Internet. Our home page at
http://www.gabelli.com contains information about Gabelli Funds, Inc., the
Gabelli Mutual Funds, quarterly reports, closing prices, IRAs, 401(k)s and
other current news. You can also send us E-mail at [email protected].

IN CONCLUSION

For the time being, equities investors are basking in the glow of low
inflation, relatively low interest rates, and good, if not great corporate
profits. We remain concerned that inflation will once again rear its ugly
head, making bonds and stocks vulnerable at current levels.

Our opinions on the market remain largely immaterial to the Fund's
investment posture.

7
<PAGE> 8
Cash balances in the portfolio are a function of the availability of stocks
representing good fundamental value. Our low level of cash reserves reflects
our belief that there are still numerous value oriented opportunities of which
we will continue to take advantage.

The Fund's daily net asset value is available in the financial press and
each evening after 6:00 PM (Eastern Time) by calling 1-800-GABELLI
(1-800-422-3554). The Fund's NASDAQ symbol is GABEX. Please call us during
the day for further information.

Thank you for your appreciation of our efforts to preserve and enhance
the assets you have entrusted to us.

Sincerely,

/s/ JAMES FOUNG, CFA /s/ MARIO J. GABELLI, CFA
-------------------------- -------------------------
JAMES FOUNG, CFA MARIO J. GABELLI, CFA
Associate Portfolio Manager President and
Chief Investment Officer

November 1, 1996

TOP TEN HOLDINGS
SEPTEMBER 30, 1996

British Petroleum Company, plc
Eastern Enterprises Inc.
Exxon Corporation
Chevron Corporation
American Express Company
Atlantic Richfield Company
GTE Corporation
Texaco Inc.
Int'l Business Machines Corp.
Southwest Gas Corporation

NOTE: The views expressed in this report reflect those of the portfolio
manager only through the end of the period of this report as stated on the
cover. The manager's views are subject to change at any time based on market
and other conditions.

8
<PAGE> 9

THE GABELLI EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS -- SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES COST VALUE
- ----------- ----------- -----------
<C> <S> <C>
COMMON STOCKS--88.38%
AUTOMOTIVE--1.37%
6,500 Ford Motor Company............ $ 153,183 $ 203,125
12,000 General Motors Corporation.... 447,738 576,000
----------- -----------
600,921 779,125
----------- -----------
AUTOMOTIVE: PARTS AND ACCESSORIES--1.43%
2,500 Dana Corporation.............. 65,938 75,625
15,000 GenCorp Inc. ................. 184,500 211,875
12,000 Genuine Parts Company......... 427,123 525,000
----------- -----------
677,561 812,500
----------- -----------
AVIATION: PARTS AND ACCESSORIES--5.22%
1,000 Barnes Group.................. 49,800 49,750
9,000 Boeing Co. ................... 573,279 850,500
15,000 Curtiss-Wright Corp. ......... 444,138 817,500
5,000 General Motors Corporation Cl.
H............................ 174,000 288,750
1,000 Raytheon Co. ................. 51,300 55,625
1,000 Rockwell International
Corp. ....................... 55,550 56,375
12,000 Trinova Corporation........... 386,325 378,000
4,000 United Technologies
Corporation.................. 442,717 480,500
----------- -----------
2,177,109 2,977,000
----------- -----------
BUSINESS SERVICES--5.36%
18,000 Dun & Bradstreet Corp. ....... 1,080,024 1,073,250
7,500 Honeywell, Inc. .............. 323,296 473,437
300 Imation Corporation........... 6,743 7,350
10,000 International Business
Machines Corporation......... 509,358 1,245,000
13,000 Landauer, Inc. ............... 200,317 258,375
----------- -----------
2,119,738 3,057,412
----------- -----------
CONSUMER PRODUCTS--8.91%
28,000 American Brands, Inc. ........ 1,188,275 1,183,000
6,000 Culbro Corporation............ 263,550 333,000
7,000 Eastman Kodak Company......... 413,935 549,500
12,500 General Electric Company...... 606,651 1,137,500
8,000 Gillette Company.............. 202,038 577,000
14,000 National Presto Industries,
Inc. ........................ 591,417 526,750
2,000 Philip Morris Companies
Inc. ........................ 93,100 179,500
3,500 Procter & Gamble Company...... 176,108 341,250
6,000 Tambrands Inc. ............... 255,066 252,750
----------- -----------
3,790,140 5,080,250
----------- -----------
DIVERSIFIED INDUSTRIAL--1.94%
10,000 Minnesota Mining and
Manufacturing Company........ 647,944 698,750
14,000 Thomas Industries Inc. ....... 157,975 271,250
4,000 Trinity Industries, Inc. ..... 137,700 133,500
----------- -----------
943,619 1,103,500
----------- -----------
ENERGY--ELECTRIC--1.16%
1,000 FPL Group, Inc. .............. 28,613 43,250
30,000 PacifiCorp.................... 595,750 618,750
----------- -----------
624,363 662,000
----------- -----------
ENERGY--NATURAL GAS--9.32%
21,000 Bay State Gas Company......... 501,475 561,750
2,000 Berkshire Gas Company......... 33,290 30,500
3,000 Brooklyn Union Gas Company.... 74,900 83,625
24,000 Colonial Gas Company.......... 484,600 534,000
28,000 Commonwealth Energy System.... 556,837 651,000
56,000 Eastern Enterprises Inc. ..... 1,521,906 2,114,000

<CAPTION>
SHARES COST VALUE
- ----------- ----------- -----------
<C> <S> <C>
ENERGY--NATURAL GAS (CONTINUED)
2,500 Essex County Gas Company...... $ 63,375 $ 67,500
2,500 Fall River Gas Company........ 57,175 47,500
70,000 Southwest Gas Corporation..... 1,114,775 1,225,000
----------- -----------
4,408,333 5,314,875
----------- -----------
ENERGY--OIL--20.27%
14,000 Atlantic Richfield Company.... 1,551,942 1,785,000
20,000 British Petroleum Company,
plc ADR...................... 878,500 2,500,000
20,000 Burlington Resources Inc. .... 844,528 887,500
30,000 Chevron Corporation........... 984,813 1,878,750
25,000 Exxon Corporation............. 1,527,887 2,081,250
10,000 Halliburton Company........... 420,389 516,250
10,000 Pennzoil Company.............. 453,000 528,750
15,000 Texaco Inc. .................. 938,375 1,380,000
----------- -----------
7,599,434 11,557,500
----------- -----------
ENTERTAINMENT--0.26%
2,000 Polygram NV ADR............... 58,725 111,500
1,000 Time Warner Inc. ............. 25,888 38,625
----------- -----------
84,613 150,125
----------- -----------
FINANCIAL SERVICES--10.43%
40,000 American Express Company...... 854,291 1,850,000
10,000 Banco Santander SA ADR........ 448,234 523,750
5,000 BankAmerica Corporation....... 211,500 410,625
12,500 Commerzbank AG Spons ADR...... 480,411 571,211
16,000 Deutsche Bank AG ADR.......... 739,200 754,229
11,000 Morgan (J.P.) & Co.
Incorporated................. 685,500 977,625
1,500 Northern Trust Company........ 60,300 98,625
12,000 SunTrust Banks Inc. .......... 251,737 492,000
2,200 Transamerica Corporation...... 111,528 153,725
2,000 U.S. Trust Corporation........ 47,394 116,000
----------- -----------
3,890,095 5,947,790
----------- -----------
FOOD AND BEVERAGE--1.59%
5,000 Giant Food, Inc. Cl. A........ 168,375 170,000
3,500 Kellogg Company............... 176,926 241,063
8,500 PepsiCo, Inc. ................ 261,500 240,125
1,500 Quaker Oats Company........... 51,525 54,938
14,000 Rykoff-Sexton, Inc. .......... 176,347 201,250
----------- -----------
834,673 907,376
----------- -----------
HEALTH CARE--1.35%
15,000 Johnson & Johnson............. 301,284 768,750
----------- -----------
INDUSTRIAL EQUIPMENT AND SUPPLIES--4.26%
2,400 Caterpillar Inc. ............. 56,971 180,900
27,500 Deere & Company............... 381,351 1,155,000
2,500 EG&G Inc. .................... 44,813 44,688
11,500 Ingersoll Rand Co. ........... 446,263 546,250
2,500 Minerals Technologies Inc. ... 63,238 93,438
4,000 Tenneco Inc. ................. 164,497 200,500
4,500 Union Carbide Corporation..... 75,038 205,313
----------- -----------
1,232,171 2,426,089
----------- -----------
METALS AND MINING--1.65%
2,400 Freeport-McMoRan Copper & Gold
Inc. Cl. A................... 50,935 70,800
22,455 Freeport-McMoRan Copper & Gold
Inc. Cl. B+.................. 436,032 701,719
5,333 Freeport-McMoRan Inc. ........ 116,854 166,656
----------- -----------
603,821 939,175
----------- -----------
</TABLE>

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

9
<PAGE> 10

THE GABELLI EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES COST VALUE
- ----------- ----------- -----------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
PUBLISHING--0.17%
2,500 Reader's Digest Association,
Inc. Cl. B................... $ 92,668 $ 94,063
----------- -----------
RETAIL--0.16%
2,000 Sears, Roebuck and Co. ....... 51,241 89,500
----------- -----------
SPECIALTY CHEMICALS--1.33%
8,000 E.I. du Pont de Nemours and
Company...................... 524,000 706,000
2,000 Ferro Corporation............. 53,600 54,000
----------- -----------
577,600 760,000
----------- -----------
TELECOMMUNICATIONS--12.20%
5,000 ALLTEL Corporation............ 120,500 139,375
18,000 BC TELECOM Inc. .............. 317,456 360,132
25,000 BCE Inc. ..................... 845,708 1,068,750
11,000 British Telecommunications
plc ADR...................... 691,526 614,625
7,500 Cable & Wireless plc ADR...... 147,710 156,563
1,500 Cincinnati Bell Inc. ......... 24,075 79,500
20,000 Citizens Utilities Company Cl.
A............................ 248,500 242,500
18,000 COMSAT Corporation............ 418,213 407,250
36,000 GTE Corporation............... 1,220,300 1,386,000
10,000 Hong Kong Telecommunications
Ltd. ADR..................... 139,671 180,000
1,500 Motorola, Inc. ............... 40,894 77,438
8,000 NYNEX Corporation............. 315,750 347,997
2,000 Pacific Telesis Group Inc. ... 55,261 67,250
25,000 Southern New England
Telecommunications
Corporation.................. 866,964 921,875
5,000 STET SpA--Societa Financiaria
Telefonica SpA ADR........... 169,000 173,125
10,000 Telefonica de Espana ADR...... 384,623 556,250
6,000 US WEST Communications
Group........................ 147,104 178,500
----------- -----------
6,153,255 6,957,130
----------- -----------
TOTAL COMMON STOCKS........... 36,762,639 50,384,160
----------- -----------
CONVERTIBLE CORPORATE BONDS--8.36%
AUTOMOTIVE: PARTS AND ACCESSORIES--0.68%
$ 375,000 GenCorp Inc. Sub. Deb. Cv.
8.00%, 08/01/02.............. 370,555 388,125
----------- -----------
BUILDING AND
CONSTRUCTION--0.18%
100,000 Medusa Corporation Sub. Notes
Cv.
6.00%, 01/15/20.............. 97,582 105,500
----------- -----------
CABLE--1.79%
1,000,000 Home Shopping Network, Inc.
Sub. Deb. Cv. 5.875%,
03/01/06(a).................. 1,000,000 1,020,000
----------- -----------
CONSUMER PRODUCTS--0.76%
600,000 Fieldcrest Cannon, Inc. Sub.
Deb. Cv.
6.00%, 03/15/12.............. 451,682 432,000
----------- -----------
ENERGY--OIL--0.39%
150,000 Pennzoil Company Sub. Deb. Cv.
6.50%, 01/15/02.............. 150,000 221,250
----------- -----------

<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES COST VALUE
- ----------- ----------- -----------
<C> <S> <C>
ENTERTAINMENT--0.20%
$ 150,000 Savoy Pictures Entertainment,
Inc. Sub. Deb. Cv. 7.00%,
07/01/03...................... $ 129,498 $ 111,750
----------- -----------
FOOD AND BEVERAGE--0.29%
500,000 Flagstar Companies, Inc. Sub.
Deb. Cv. 10.00%, 11/01/14..... 342,888 166,875
----------- -----------
HOTELS/CASINOS--0.47%
250,000 Hilton Hotels Corporation Sub.
Deb. Cv. 5.00%, 05/15/06...... 250,000 267,812
----------- -----------
INDUSTRIAL EQUIPMENT AND SUPPLIES--1.52%
500,000 Cooper Industries, Inc. Sub.
Deb. Cv. 7.05%, 01/01/15...... 496,011 545,000
319,000 Kollmorgen Corporation Sub.
Deb. Cv.
8.75%, 05/01/09............... 261,707 320,994
----------- -----------
757,718 865,994
----------- -----------
PUBLISHING--0.81%
100,000 News American Holdings
Incorporated Sub. Deb. Cv.
Zero Cpn., 03/31/02........... 65,823 89,750
400,000 Thomas Nelson Inc. Sub. Deb.
Cv.
5.75%, 11/30/99............... 396,718 370,000
----------- -----------
462,541 459,750
----------- -----------
RETAIL--0.54%
400,000 General Host Corporation Sub.
Deb. Cv. 8.00%, 02/15/02...... 393,594 308,000
----------- -----------
TRANSPORTATION--0.36%
250,000 Greyhound Lines, Inc. Sub. Deb.
Cv.
8.50%, 03/31/07............... 141,719 205,000
----------- -----------
WIRELESS COMMUNICATIONS--0.37%
300,000 COMCAST Cellular Communications
Inc. Redeemable Notes, Zero
Cpn., 03/05/00................ 209,404 213,750
----------- -----------
TOTAL CONVERTIBLE CORPORATE
BONDS......................... 4,757,181 4,765,806
----------- -----------
CONVERTIBLE PREFERRED STOCKS--1.58%
CONSUMER PRODUCTS--0.05%
2,000 Kerr Group, Inc.
Cl. B $1.70 Cv. Pfd. Ser. D... $ 33,288 $ 24,750
----------- -----------
DIVERSIFIED INDUSTRIAL--0.35%
3,500 GATX Corporation $3.875 Cv.
Pfd. ......................... 164,025 199,500
----------- -----------
INDUSTRIAL EQUIPMENT AND SUPPLIES--0.74%
6,000 Flagstar Companies, Inc. $2.25
Cv. Pfd. Ser. A............... 118,188 40,500
2,500 Navistar International
Corporation
$6.00 Cv. Pfd. Ser. G......... 68,625 140,000
3,200 Sequa Corporation $5.00 Cv.
Pfd. ......................... 204,510 243,200
----------- -----------
391,323 423,700
----------- -----------
</TABLE>

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

10
<PAGE> 11

THE GABELLI EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES COST VALUE
- ----------- ----------- -----------
<C> <S> <C>
CONVERTIBLE PREFERRED STOCKS (CONTINUED)
METALS AND MINING--0.24%
5,000 Freeport-McMoRan Copper & Gold
Inc. 5.00% Cv. Pfd. ......... $ 106,500 $ 138,750
----------- -----------
PUBLISHING--0.20%
2,000 Golden Books Family
Entertainment, Inc. 8.75% Cv.
Pfd(a)....................... 100,000 113,500
----------- -----------
TOTAL CONVERTIBLE PREFERRED
STOCKS....................... 795,136 900,200
----------- -----------
U.S. GOVERNMENT OBLIGATIONS--2.02%
$ 1,150,000(b) U.S. Treasury Bills,
4.89% to 4.95%, due 10/03/96
to 10/10/96.................. 1,148,722 1,148,722
----------- -----------
TOTAL U.S. GOVERNMENT
OBLIGATIONS.................. 1,148,722 1,148,722
----------- -----------
TOTAL INVESTMENTS--100.34%.... $43,463,678* 57,198,888
============
LIABILITIES, IN EXCESS
OF OTHER ASSETS--(0.34%)..... (192,627)
-----------
NET ASSETS--100%
(4,127,713 shares
outstanding)................. $57,006,261
===========
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE... $13.81
======
</TABLE>

<TABLE>
<CAPTION>
NUMBER OF PROCEEDS
CONTRACTS RECEIVED VALUE
- ---------- ----------- -----------
<C> <S> <C> <C>
CALL OPTIONS WRITTEN
10 British Petroleum Company, plc
ADR January 1997 $120 C....... $ 5,094 $ 8,000
----------- -----------
TOTAL CALL OPTIONS WRITTEN..... $ 5,094 $ 8,000
----------- -----------
</TABLE>

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

* For Federal income purposes:

<TABLE>
<S> <C>
Aggregate cost................................... $43,463,678
===========
Gross unrealized appreciation.................... 14,471,701
Gross unrealized depreciation.................... (736,491)
-----------
Net unrealized appreciation...................... $13,735,210
===========
</TABLE>

+ 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, 1996, Rule 144A
securities amounted to $1,133,500, or 2.0% of net assets.
(b) Held by the custodian in a segregated account as collateral for open call
options written.

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

11
<PAGE> 12

THE GABELLI EQUITY INCOME FUND

STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
- ----------------------------------------------------------

<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(Cost $43,463,678) (Note 1).................... $57,198,888
Cash............................................. 44,581
Receivable for Fund shares sold.................. 15,076
Receivable for investments sold.................. 397,534
Dividends receivable............................. 139,294
Accrued interest receivable...................... 76,303
Receivable for premiums on options written....... 5,094
Deferred organizational expenses (Note 5)........ 7,434
-----------
TOTAL ASSETS................................. 57,884,204
-----------
LIABILITIES:
Payable to Advisor (Note 4)...................... 46,470
Payable for distribution fees (Note 6)........... 23,812
Dividends payable................................ 19,734
Call options written, at value
(premiums received: $5,094).................... 8,000
Payable for investments purchased................ 717,392
Payable for Fund shares redeemed................. 28,575
Other accrued expenses........................... 33,960
-----------
TOTAL LIABILITIES............................ 877,943
-----------
NET ASSETS (applicable to 4,127,713 shares
outstanding) (Note 2)...................... $57,006,261
===========
NET ASSET VALUE AND REDEMPTION PRICE PER
SHARE...................................... $13.81
======
NET ASSETS CONSIST OF:
Capital Stock, at par value (Note 2)............. $ 4,128
Additional paid-in capital....................... 40,720,059
Distributions in excess of net investment
income......................................... (27,356)
Accumulated net realized gain on investments and
futures transactions........................... 2,577,095
Net unrealized appreciation on investments and
assets and liabilities denominated in foreign
currencies..................................... 13,732,335
-----------
NET ASSETS................................... $57,006,261
===========
</TABLE>

STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1996
- ----------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign taxes of $28,156)....... $1,655,577
Interest.......................................... 543,368
----------
TOTAL INCOME.................................. 2,198,945
----------
EXPENSES:
Investment advisory fee (Note 4).................. 561,461
Transfer and shareholder servicing agent fees..... 156,088
Distribution expenses (Note 6).................... 140,353
Legal and audit fees.............................. 54,563
Printing and mailing expenses..................... 52,822
Custodian fees and expenses....................... 38,257
Directors' fees................................... 35,021
Registration fees................................. 17,509
Amortization of organization expenses (Note 5).... 13,393
Miscellaneous..................................... 12,423
----------
TOTAL EXPENSES................................ 1,081,890
----------
INVESTMENT INCOME--NET............................. 1,117,055
----------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain on investments and foreign
currency transactions:
Long transactions............................. 2,516,623
Short transactions............................ 36,175
Futures contracts............................... 8,721
Net change in unrealized appreciation............. 4,939,022
----------
Net gain on investments..................... 7,500,541
----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS...................................... $8,617,596
==========
</TABLE>

STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1996 1995
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Investment income--net........................................................................ $ 1,117,055 $ 1,278,770
Net realized gain (loss) on:
Investments and foreign currency transactions................................................. 2,552,798 2,788,574
Futures contracts............................................................................. 8,721 (83,041)
Net change in unrealized appreciation.......................................................... 4,939,022 5,063,872
------------ ------------
Net increase in net assets resulting from operations........................................... 8,617,596 9,048,175
------------ ------------
Distributions to shareholders:
Net investment income......................................................................... (1,142,065) (1,270,183)
In excess of net investment income............................................................ (27,356) --
Net realized gains............................................................................ (2,515,013) (2,774,449)
------------ ------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS............................................................ (3,684,434) (4,044,632)
------------ ------------
Share transactions--net (Note 2)............................................................... (2,732,464) (388,680)
------------ ------------
Net increase in net assets..................................................................... 2,200,698 4,614,863
NET ASSETS:
Beginning of year.............................................................................. 54,805,563 50,190,700
------------ ------------
End of year.................................................................................... $57,006,261 $54,805,563
============ ============
</TABLE>

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

12
<PAGE> 13

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 preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
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 prices). 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 prices. 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 recorded at the exchange rate on the valuation date.

(ii) purchases and sales of investment securities, income and expenses are
recorded 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, 1996.

13
<PAGE> 14

THE GABELLI EQUITY INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------

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).
Transactions in shares of common stock were as follows:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------
1996 1995
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Shares sold......................................................... 303,716 $ 4,038,336 515,300 $ 6,046,383
Shares issued upon reinvestment of dividends........................ 267,164 3,474,191 347,341 3,817,233
Shares redeemed..................................................... (775,940) (10,244,991) (877,751) (10,252,296)
--------- ------------- --------- -------------
Net decrease........................................................ (205,060) $ (2,732,464) (15,110) $ (388,680)
========= ============= ========= =============
</TABLE>

3. PURCHASES AND SALES OF SECURITIES. Purchases and sales of securities for the
year ended September 30, 1996, other than U.S. Government obligations,
short-term securities and securities sold short aggregated $10,262,135 and
$14,374,920, respectively. During the same period, the Fund opened and closed
transactions in securities sold short aggregating $227,375 and $191,200,
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 dependant 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 short futures contracts aggregating
$32,326,533 and closed short futures contracts aggregating $32,317,812 during
the year ended September 30, 1996. As of September 30, 1996, there were no open
futures contracts.

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.

OPTIONS. The Fund may purchase or write call or put options on securities or
indices. During the year ended September 30, 1996, the Fund utilized put and
call options to hedge the value of the Fund's portfolio. As a writer of call
options, the Fund receives a premium at the outset and then bears the market
risk of unfavorable changes in the price of the financial instrument underlying
the option. The Fund would incur a loss if the price of the underlying financial
instrument increases between the date the option is written and the date on
which the option is terminated. The Fund would realize a gain, to the extent of
the premiums, if the price of the financial instrument decreases between those
dates.

14
<PAGE> 15

THE GABELLI EQUITY INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------

As a purchaser of put options, the Fund pays a premium for the right to sell to
the seller of the put option the underlying security at a specified price. The
seller of the put has the obligation to purchase the underlying security upon
exercise at the exercise price. If the price of the underlying security
declines, the Fund would realize a gain upon sale or exercise. If the price of
the underlying security increases, the Fund would realize a loss upon sale or at
the expiration date, but only to the extent of the premium paid.

Transactions in put and call options for the year ended September 30, 1996:

<TABLE>
<CAPTION>
PURCHASED PUT
WRITTEN CALL OPTIONS: OPTIONS:
--------------------- ---------------------
NUMBER OF NUMBER OF
CONTRACTS PREMIUM CONTRACTS PREMIUM
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Options outstanding at October 1, 1995................................... -- $ -- -- $ --
Options written.......................................................... 10 5,094 -- --
Options purchased........................................................ -- -- 50 5,725
Options exercised........................................................ -- -- (50) (5,725)
--- ------ --- ------
Options outstanding at September 30, 1996................................ 10 $5,094 0 $ 0
====== ====== === ======
</TABLE>

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
and/or U.S. Government securities sufficient to cover its short position. At
September 30, 1996, 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, 1996.

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, 1996, the Fund has
incurred distribution costs payable to Gabelli & Company, Inc., an affiliate of
the Advisor, of $140,353, or 0.25% of average net assets, the annual limitation
under the Plan. The Board

15
<PAGE> 16

THE GABELLI EQUITY INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------

of Directors has approved that Distribution costs incurred by Gabelli & Company,
Inc., totaling $210,837, which are in excess of the 0.25% limitation may be
recovered from the Fund in future periods.

7. TRANSACTIONS WITH AFFILIATES. During the year ended September 30, 1996, the
Fund paid $10,069 in brokerage commissions to Gabelli & Company, Inc., an
affiliate of the Advisor. Gabelli & Company, Inc. has informed the Fund that the
amount of sales charges and underwriting fees earned during the year ended
September 30, 1996 was $14,218.

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------
1996 1995 1994 1993 1992(A)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period............................. $ 12.65 $ 11.54 $ 12.15 $ 10.40 $ 10.00
-------- -------- -------- -------- --------
Net investment income............................................ 0.28 0.29 0.30 0.29 0.21
Net realized and unrealized gain on securities................... 1.76 1.77 0.08 1.81 0.37
-------- -------- -------- -------- --------
Total from investment operations................................. 2.04 2.06 0.38 2.10 0.58
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income............................. (0.28) (0.29) (0.31) (0.29) (0.18)
Distributions in excess of net investment income................. (.01) -- -- -- --
Distributions from net realized gain on investments.............. (0.59) (0.66) (0.68) (0.06) --
-------- -------- -------- -------- --------
Total distributions.............................................. (0.88) (0.95) (0.99) (0.35) (0.18)
-------- -------- -------- -------- --------
Net asset value, end of period..................................... $ 13.81 $ 12.65 $ 11.54 $ 12.15 $ 10.40
======== ======== ======== ======== ========
Total return (b)................................................... 16.65% 19.24% 3.30% 20.50% 5.80%
======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)......................... $ 57,006 $ 54,806 $ 50,191 $ 54,585 $ 44,940
Ratio of operating expenses to average net assets................ 1.93% 1.83% 1.81% 1.78% 1.93%
Ratio of net investment income to average net assets............. 1.99% 2.50% 2.58% 2.62% 2.65%
Portfolio turnover rate.......................................... 20% 30% 20% 76% 22%
Average commission rate per share (c)............................ $ 0.048 -- -- -- --
</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.
(c) For fiscal years beginning on or after November 1, 1995, a fund is required
to disclose its average commission rate paid per share for purchases and
sales of investment securities.

16
<PAGE> 17

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, 1996, and the related
statement of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the financial
highlights for each of the 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, 1996 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, 1996, 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 6, 1996

1996 TAX NOTICE TO SHAREHOLDERS (UNAUDITED)

For the fiscal year ended September 30, 1996, the Fund paid to shareholders
ordinary income dividends (comprised of net investment income and short-term
capital gains) totaling $0.29 per share. Additionally, on December 29, 1995, the
Fund paid $0.59 per share in long-term capital gains. For fiscal year 1996, 99%
of the ordinary 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
1996 which was derived from U.S. Treasury securities was 7.88%. 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 Equity Income Fund did not meet this strict requirement in 1996. 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.

17
<PAGE> 18

This page left intentionally blank
<PAGE> 19

GABELLI'S FAMILY OF FUNDS

GABELLI ASSET FUND
Invests in a diversified portfolio of companies selling below their private
market value. The Fund's primary objective is to seek growth of capital.
(No-load)
Portfolio Manager: Mario J. Gabelli, CFA

GABELLI GROWTH FUND
Invests in a diversified portfolio of common stocks that have favorable, yet
undervalued, prospects for earnings growth. The Fund's primary objective is to
seek capital appreciation by employing an earnings-driven investment approach.
(No-load)
Portfolio Manager: Howard F. Ward, CFA

GABELLI/WESTWOOD FUNDS
Three investment portfolios designed to pursue a variety of investment
objectives. Equity Fund seeks growth, Balanced Fund seeks income and growth,
Intermediate Bond Fund seeks current income. (No-load)

Portfolio Manager: Susan Byrne

GABELLI SMALL CAP GROWTH FUND
Invests primarily in equity securities of smaller companies (total market
capitalization of less than $500 million) which are believed likely to have
rapid growth in revenues and earnings. The Fund's primary objective is to seek
capital appreciation. (No-load)
Portfolio Manager: Mario J. Gabelli, CFA

GABELLI EQUITY INCOME FUND
Invests primarily in a portfolio of income producing equity securities. Pays
quarterly dividends. The Fund's primary objective is to seek a high level of
total return. (No-load)
Portfolio Manager: Mario J. Gabelli, CFA

GABELLI VALUE FUND
Invests in a concentrated portfolio of securities of companies which are
selling below their private market value. The Fund's primary objective is
long-term capital appreciation. Max. Sales charge: 5 1/2%
Portfolio Manager: Mario J. Gabelli, CFA

GABELLI U.S. TREASURY MONEY MARKET FUND
Invests exclusively in short-term U.S. Treasury securities. The Fund's primary
objective is to provide high current income consistent with the preservation of
principal and liquidity. An investment in the Fund is neither insured nor
guaranteed by the U.S. Government and there can be no assurance that the Fund
will be able to maintain a stable net asset value of $1.00 per share.
Portfolio Manager: Ronald Eaker

GABELLI FUNDS
Searching for Opportunities [art]
W O R L D W I D E

GLOBAL SERIES

GABELLI GLOBAL TELECOMMUNICATIONS FUND
Invests in telecommunications companies throughout the world. Targets
undervalued companies with strong earnings per share and cash flow dynamics.
The Fund's primary objective is to seek capital appreciation. (No-load)
Team Manager: Mario J. Gabelli

GABELLI GLOBAL CONVERTIBLE SECURITIES FUND
Invests principally in bonds and preferred stocks which are convertible into
common stock of foreign and domestic companies. The Fund's primary objective
is to seek a high level of total return through a combination of current income
and capital appreciation. (No-load)
Portfolio Manager: Hart Woodson

GABELLI GLOBAL INTERACTIVE COUCH POTATO(R) FUND
Invests in companies involved in communications, creativity and copyright
throughout the world. The Fund will also invest in companies participating in
emerging technological advances in interactive services and products. The
Fund's primary objective is to seek capital appreciation. (No-load)
Portfolio Manager: Marc J. Gabelli

GABELLI GOLD FUND
Invests in a global portfolio of equity securities of gold mining and related
companies. The Fund's primary objective is to seek capital appreciation.
Investment in gold stocks is considered speculative and is affected by a
variety of worldwide economic, financial and political factors. (No-load)
Portfolio Manager: Caesar Bryan

GABELLI INTERNATIONAL GROWTH FUND
Invests in a diversified portfolio of equity securities of companies outside of
the U.S. Seeks to achieve international diversification and capital
appreciation. (No-load)
Portfolio Manager: Caesar Bryan

The five funds above invest in foreign securities which involves risks not
ordinarily associated with investments in domestic issues, including currency
fluctuation, economic and political risks.

Distributed by Gabelli & Company, Inc.

<PAGE> 20

Gabelli Equity Series Funds, Inc.
THE GABELLI EQUITY INCOME FUND

One Corporate Center
Rye, New York 10580-1434
1-800-GABELLI
[1-800-422-3554]
FAX: 1-914-921-5118
HTTP://WWW.GABELLI.COM
E-MAIL: [email protected]
(Net Asset Value may be obtained daily by calling
1-800-GABELLI after 6:00 P.M.)

<TABLE>
<S> <C>
BOARD OF DIRECTORS
Mario J. Gabelli, CFA Felix J. Christiana
Chairman and Chief Former Senior
Investment Officer Vice President
Gabelli Funds, Inc. Dollar Dry Dock Savings Bank
Anthony J. Colavita Vincent D. Enright
Attorney-at-Law Senior Vice President and
Anthony J. Colavita, P.C. Chief Financial Officer
The Brooklyn Union Gas
John D. Gabelli Company
Vice President
Gabelli & Company, Inc. Robert J. Morrissey
Attorney-at-Law
Karl Otto Pohl Morrissey & Hawkins
Former President
Deutsche Bundesbank Anthonie C. van Ekris
Managing Director
Anthony R. Pustorino BALMAC International, Inc.
Certified Public Accountant
Professor, Pace University
OFFICERS
Mario J. Gabelli, CFA James E. McKee
President and Secretary
Chief Investment Officer
Bruce N. Alpert James Foung, CFA
Vice President and Treasurer Associate Portfolio Manager
</TABLE>

DISTRIBUTOR
Gabelli & Company, Inc.

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

LEGAL COUNSEL
Skadden, Arps, Slate, Meagher & Flom
- ----------------------------------------------------------

This report is submitted for the general information of the shareholders of The
Gabelli Equity Income Fund. It is not authorized for distribution to prospective
investors unless preceded or accompanied by an effective prospectus.
- ----------------------------------------------------------

LOGO

THE
GABELLI

EQUITY
INCOME
FUND
ANNUAL REPORT
SEPTEMBER 30, 1996
<PAGE> 21
THE GABELLI SMALL CAP GROWTH FUND

One Corporate Center

Rye, New York 10580-1434

ANNUAL REPORT - 1996(a)

TO OUR SHAREHOLDERS:

After a sharp correction in July, the Dow Jones Industrial Average (DJIA)
and the Standard & Poor's 500 (S&P 500) surged in September, closing the quarter
at record levels. Broader market indices such as the Value Line Composite and
smaller cap indices like the Russell 2000 rebounded as well, but lagged the
large cap indices by considerable margins.

INVESTMENT RESULTS (b)

<TABLE>
<CAPTION>
Calendar Quarter
------------------------------------------
1st 2nd 3rd 4th Year
------ ------ ------ ------ ------

<S> <C> <C> <C> <C> <C>
1996: Net Asset Value ....................... $19.65 $20.68 $20.02 __ __
Total Return .......................... 6.2% 5.2% (3.2)% __ __
------ ------ ------ ------ ------
1995: Net Asset Value ....................... $17.03 $17.88 $19.34 $18.50 $18.50
Total Return .......................... 7.4% 5.0% 8.2% 2.6% 25.2%
------ ------ ------ ------ ------
1994: Net Asset Value ....................... $16.76 $16.33 $17.24 $15.85 $15.85
Total Return .......................... (3.6)% (2.6)% 5.6% (2.1)% (2.9)%
------ ------ ------ ------ ------
1993: Net Asset Value ....................... $15.46 $15.74 $16.90 $17.38 $17.38
Total Return .......................... 6.6% 1.8% 7.4% 5.3% 22.8%
------ ------ ------ ------ ------
1992: Net Asset Value ....................... $13.42 $13.41 $13.10 $14.50 $14.50
Total Return .......................... 9.9% (0.1)% (2.3)% 12.1% 20.3%
------ ------ ------ ------ ------
1991: Net Asset Value ....................... __ __ __ $12.21 $12.21
Total Return .......................... __ __ __ 22.9%(c) 22.9%(c)
------ ------ ------ ------ ------

<CAPTION>
Average Annual Returns - September 30, 1996 (b)
--------------------------------------------------
<S> <C>
1 Year ..................................... 11.0%
3 Year ..................................... 11.5%
Life of Fund(c) ............................ 19.2%

<CAPTION>
Dividend History
- -------------------------------------------------------------
Payment (ex) Date Rate Per Share Reinvestment Price
- ----------------- -------------- ------------------
<S> <C> <C>
December 29, 1995 $1.340 $18.50
December 30, 1994 $1.030 $15.85
December 31, 1993 $0.420 $17.38
December 31, 1992 $0.185 $14.50
December 31, 1991 $0.080 $12.21
</TABLE>

(a) The Fund's fiscal year ends September 30, 1996. (b) Average annual and total
returns reflect changes in share price and reinvestment of dividends, and are
net of expenses. The net asset value of the Fund is reduced on the ex-dividend
(payment) date by the amount of the dividend paid. Of course, total return
represents past performance and does not guarantee future results. Investment
returns and the principal value of an investment will fluctuate. When shares are
redeemed they may be worth more or less than their original cost. (c) From
commencement of operations on October 22, 1991.
<PAGE> 22
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
IN THE GABELLI SMALL CAP GROWTH FUND,
THE S&P 500 INDEX AND THE RUSSELL 2000 INDEX

<TABLE>
<CAPTION>
GABELLI SMALL CAP S&P 500 RUSSELL 2000
GROWTH FUND INDEX INDEX
----------- ------- -------

* Past performance is not predictive of future performance.

INVESTMENT PERFORMANCE

For the nine months ended September 30, 1996, The Gabelli Small Cap Growth
Fund's total return was 8.2% compared to returns of 13.5%, 12.2%, and 10.7% over
the same period for the Standard & Poor's 500 Index (S&P 500), the Value Line
Composite, and Russell 2000 Index, respectively. Each index is an unmanaged
indicator of stock market performance which does not take into account any
charges, fees or other expenses. During the third quarter of 1996, the Fund's
net asset value decreased 3.2% to $20.02 per share. The S&P 500, the Value Line
Composite, and Russell 2000 Index had returns of 3.1%, 0.6% and -0.2%,
respectively for the same period. For the 12 months ended September 30, 1996,
the Fund gained 11.0% including reinvested dividends, versus 20.3% for the S&P
500, 13.9% for the Value Line Composite, and 12.8% for the Russell 2000.

Since inception on October 22, 1991 through September 30, 1996, the Fund
has had a total return of 138.7%, which equates to an average annual return of
19.2%. As of September 30, 1996, the Fund's total net assets were over $223
million.

WHAT WE DO

We do what is described as bottom-up research: we read annual reports; we
visit the competition; we talk to customers; we go belly to belly with
management. We structure our portfolio by picking stocks.

In past reports, we have tried to articulate our investment philosophy and
methodology. The following graphic further illustrates the interplay among the
four components of our valuation approach.

[GRAPHIC]

2
<PAGE> 23
Our focus is on free cash flow; earnings before interest, taxes,
depreciation and amortization (EBITDA) minus the capital expenditures necessary
to grow the business. We believe free cash flow is the best barometer of a
business' value. Rising free cash flow often foreshadows net earnings
improvement. We also look at earnings per share trends. Unlike Wall Street's
ubiquitous earnings momentum players, we do not try to forecast earnings with
accounting precision and then trade stocks based on quarterly expectations and
realities. We simply try to position ourselves in front of long-term earnings
uptrends. In addition, we analyze on and off balance sheet assets and
liabilities such as plant and equipment, inventories, receivables, and legal,
environmental and health care issues. We want to know everything and anything
that will add to or detract from our private market value (PMV) estimates.
Finally, we look for a catalyst; something happening in the company's industry
or indigenous to the company itself that will surface value. In the case of the
independent telephone stocks, the catalyst is a regulatory change. In the
agricultural equipment business, it is the increasing worldwide demand for
American food and feed crops. In other instances, it may be a change in
management, sale or spin-off of a division or the development of a profitable
new business.

Once we identify stocks that qualify as fundamental and conceptual
bargains, we then become patient investors. This has been a proven long-term
method for preserving and enhancing wealth in the U.S. equities market. At the
margin, our new investments are focused on businesses that are well managed and
will benefit from sustainable long-term economic dynamics. These include macro
trends, such as globalization of the market in filmed entertainment and
telecommunications, and micro trends, such as increased focus on productivity
enhancing goods and services.

COMMENTARY

THE ECONOMY AND THE STOCK MARKET

Robust second quarter GDP growth of 4.8%, higher energy and agricultural
commodities prices, and strong employment numbers rekindled inflationary fears
sparking a 7% market correction in July. In September, more encouraging economic
data, most notably modest increases in the Producer and Consumer Price Indices,
eased inflationary concerns. Fueled by strong cash flow into equity mutual
funds, the DJIA and S&P 500 moved back into record territory.

For the present, inflation appears to be in check. However, we don't think
it's been checkmated quite yet. The world-wide demand for agricultural and
selected industrial commodities is growing. Oil remains a wild card. Eventually,
higher prices will be passed along to the consumer. With outsourcing,
downsizing, globalization of labor, technology oriented productivity gains
decelerating, and unemployment at historically low levels, we still anticipate
upward pressure on wages. On the surface, the United Auto Worker's recent labor
contract with Ford (F - $31.25 - NYSE) looks good. With just a 3% annual wage
hike over three years, Ford appears to have avoided inflationary wage increases.
However, by agreeing to limit outsourcing and, in effect, guaranteeing UAW
workers lifetime tenure, future productivity may be diminished. We have seen the
long-term implications of such labor rigidity in Europe. We fear Ford may have
just won a psychological victory. More importantly, if President Clinton wins in
a landslide, market observers will ask: What payback will he give to his
supporters? What will this mean for labor costs, productivity gains, inflation,
corporate earnings and the market?

3
<PAGE> 24
Based largely on better than expected news on the inflation front, our
short-term posture toward the broad market has changed slightly from cautious to
cautiously optimistic. Corporate earnings should finish the year up around 10%.
Valuations are above the historic norm, but not yet at troublesome levels. If
inflation remains subdued (we're still not convinced it isn't peeking around the
corner), long interest rates stabilize at current levels, and mutual fund cash
inflows remain strong, 1996 equities returns may well exceed our expectations
after the Presidential Election.

Whatever the market has in store for us over the next several quarters,
there are attractive long-term opportunities in a variety of industries. World
class industrial companies will get a boost from recovering economies in Europe
and the Pacific Rim. Aerospace component suppliers will continue to benefit from
the strong world-wide demand for new aircraft. Selected telecommunications
stocks will prosper as the sweeping deregulation of the industry is implemented
in the U.S. and emerging nations invest heavily in building modern systems.
Entertainment software stocks should also do well as distribution networks here
and abroad continue to expand. AND DEALS WILL BE DONE. The record levels of
mergers and acquisitions experienced in 1995-1996 may well be exceeded. The
benefits of strategic combinations in a broad spectrum of industries will keep
investment bankers busy and value investors happy in the year ahead.

LET'S TALK STOCKS

The following are stock specifics on selected holdings of our Fund's
investments. Favorable EBITDA prospects do not necessarily translate into higher
stock prices, but they do express a positive trend which we believe will develop
over time.

AMETEK, Inc. (AME - $18.875 - NYSE) manufactures electric motors and blowers for
floor care, lawn and garden products, medical and heating equipment, precision
instruments for the aerospace and process industries, heavy vehicles, and
specialty materials and water filtration products. The company is the world's
leading supplier of electric motors for vacuum cleaners. Its advanced motor
technology, high quality and low costs provide an edge over competing producers.
AMETEK has an aggressive shareholder value enhancement plan and has authorized
an additional buyback program of up to $50 million in common shares. Strategic
growth is based on new products, global market expansion, customer focus, niche
market penetration and innovative technology. We expect earnings per share to
increase from $1.55 in 1996 to almost $3.00 in 2000.

BET Holdings, Inc. (BTV - $28.75 - NYSE) is a publicly-traded,
media-entertainment company that primarily targets black consumers. Its core
business is Black Entertainment Television, Inc. (BET), an advertiser-supported,
cable television programming service. BET serves over 42 million cable
households and is launching BET Movies/STARZ!, the first urban and
black-oriented movie channel devoted to showcasing black film artists. The
company is leveraging its brand identity into markets including pay-per-view
movies, direct merchandising and magazine publishing.

CLARCOR Inc. (CLC - $21.875 - NYSE) is a manufacturer and marketer of filtration
products and consumer packaging products. Filtration products include air, fuel
and hydraulic filters for heavy-duty trucks, buses, cars, boats and air and
antimicrobial filters for factories, hospitals and clean rooms. CLC is a leading
producer of custom-decorated metal and plastic containers widely used by
consumer products companies such as Johnson & Johnson, General Foods, McCormick
and Nestle. In fiscal 1995,

4
<PAGE> 25
sales and earnings increased only about 7%, reflecting temporary operating
problems at two units. More substantial gains are anticipated for 1996 and on
through the end of the decade as the company continues its history of bringing
acquisitions profitably into the fold.

Dynamics Corporation of America (DYA - $28.875 - NYSE) is an under-followed
company with a significant stake in CTS Corporation (CTS - $42.125 - NYSE). DYA
owns 2.4 million shares, or 44%, of CTS's common stock. At CTS's current market
price, DYA's investment is worth almost $100 million which approximates the
total equity market value for DYA. Therefore, investors in DYA are buying the
investment in CTS and then getting the other DYA businesses for free. Both DYA
and CTS are strong cash generators and are virtually free of long-term debt.

Lamson & Sessions Co. (LMS - $8.875 - NYSE), through its largest unit, Carlon,
is a leading domestic producer of thermoplastic electrical conduit and
accessories for the construction and industrial markets. The company also
produces thermoplastic sewer pipe and fittings. Its money-losing aerospace
fasteners division has been sold. Management is endeavoring to strategically
focus its operations on improved margins and more sustained earnings growth.

Liberty Corporation (LC - $35.125 - NYSE) is a holding company for Liberty Life
Insurance Company and Cosmos Broadcasting Corporation. Cosmos Broadcasting
operates eight television stations. Liberty Life is a regional insurer, with
North Carolina and South Carolina accounting for more than 50% of its premium
volume.

International Family Entertainment, Inc. (FAM - $16.375 - NYSE) is a
Virginia-based entertainment company with production and distribution operations
around the world. With key assets such as The Family Channel, MTM and Cable
Health Club, FAM is a leading provider of cable programming oriented toward
families. The Family Channel is performing exceptionally well, and MTM has been
re-energized. While the company posts strong operating margins in its core
businesses, it is currently funding losses in its start-up businesses. FAM has
formed a joint venture to launch three Latin American channels next year. These
new units would provide operating leverage and, as they reach profitability,
increase opportunity for capital appreciation.

Neiman Marcus Group, Inc. (NMG - $35.25 - NYSE) operates 27 high-fashion Neiman
Marcus stores and two Bergdorf Goodman stores in New York City. NMG has an
extensive mail order business. Harcourt General is the company's majority
shareholder, holding more than 51% of the outstanding common equity after the
recent public offering of eight million shares. The proceeds from the offering
are being used to partially fund the planned repurchase of its outstanding
preferred stock (all held by Harcourt General). Neiman Marcus is positioned to
be an important participant in the trend towards higher-scale, consumer
spending. We see earnings increasing to $2.00 per share in the next few years.

United Television, Inc. (UTVI - $96.25 - NASDAQ) is a television broadcasting
company which owns and operates five television stations: one ABC, one NBC and
three UPN affiliates. Its stations cover approximately 6% of the U.S.
population. UTVI is a 57%-owned subsidiary of BHC Communications. Strong
advertising demand, prospects for favorable regulatory changes in the industry
and corporate cost controls will magnify EBITDA growth going forward. Our 1996
PMV is estimated at $120 per share, $23 of which is cash. UTVI's PMV is expected
to approach $200 by the year 2000.

5
<PAGE> 26
NO LOAD - EFFECTIVE AUGUST 12, 1996

Effective August 12, 1996, the Fund no longer imposes a front-end sales
charge. All purchases made after August 12, 1996 are not subject to a sales
charge. The minimum initial investment for all accounts is $1,000. Additionally,
we invite shareholders to start an automatic investment plan whereby no initial
minimum is required.

INTERNET

You can now visit us on the Internet. Our home page at
http://www.gabelli.com contains information about Gabelli Funds, Inc., the
Gabelli Mutual Funds, quarterly reports, closing prices, IRAs, 401(k)s and other
current news. You can also send us E-mail at [email protected].

IN CONCLUSION

For the time being, equities investors are basking in the glow of low
inflation, relatively low interest rates, and good, if not great corporate
profits. We remain concerned that inflation will once again rear its ugly head,
making bonds and stocks vulnerable at current levels.

Our opinions on the market remain largely immaterial to the Fund's
investment posture. Cash balances in the portfolio are a function of the
availability of stocks representing good fundamental value. Our low level of
cash reserves reflects our belief that there are still numerous value oriented
opportunities of which we will continue to take advantage.

The Fund's daily net asset value is available in the financial press and
each evening after 6:00 PM (Eastern Time) by calling 1-800-GABELLI
(1-800-422-3554). The Fund's NASDAQ symbol is GABSX. Please call us during the
day for further information.

We thank you for your confidence in our investing abilities and wish you a
productive and financially rewarding 1996.

Sincerely,

/S/ MARIO J. GABELLI
__________________________________
MARIO J. GABELLI, CFA
President and
Chief Investment Officer
November 1, 1996

NOTE: The views expressed in this report reflect those of the portfolio manager
only through the end of the period of this report as stated on the cover. The
manager's views are subject to change at any time based on market and other
conditions.

6
<PAGE> 27

THE GABELLI SMALL CAP GROWTH FUND
PORTFOLIO OF INVESTMENTS -- SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES COST VALUE
- ------------ ------------ ------------
<C> <S> <C> <C>
COMMON STOCKS--100.62%
AGRICULTURE--0.00%
199 Delta and Pine Land
Company+................... $ 1,274 $ 5,821
------------ ------------
AUTOMOTIVE: PARTS AND
ACCESSORIES--6.21%
15,000 APS Holding Corporation Cl.
A+......................... 232,600 436,875
100,000 GenCorp Inc. ............... 1,546,161 1,412,500
60,400 Handy & Harman.............. 800,295 1,079,650
1,000 Harley Davidson, Inc. ...... 9,425 43,000
2,000 Lund International Holdings
Inc. ...................... 25,000 24,500
50,000 Modine Manufacturing
Company.................... 831,146 1,312,500
20,000 Monro Muffler Brake,
Inc.+...................... 214,048 397,500
80,000 Redlaw Industries Inc.+..... 261,003 125,000
10,000 SPX Corporation............. 170,863 298,750
110,000 Standard Motor Products,
Inc. ...................... 1,544,175 1,567,500
90,000 Stant Corporation........... 1,031,315 967,500
2,000 Strattec Security
Corporation................ 22,500 29,000
1,800 Superior Industries
International Inc. ........ 24,923 43,425
125,000 TransPro Inc. .............. 1,295,773 1,000,000
165,000 UAP Inc. Cl. A.............. 1,824,324 1,908,039
114,000 Wynn's International,
Inc. ...................... 1,204,530 3,220,500
------------ ------------
11,038,081 13,866,239
------------ ------------
AVIATION: PARTS AND
ACCESSORIES--3.19%
10,000 AAR Corporation............. 198,875 231,250
30,000 Curtiss-Wright
Corporation................ 1,097,363 1,635,000
26,500 Hi-Shear Industries Inc.+... 58,141 72,875
40,000 Hudson General
Corporation................ 607,300 1,600,000
80,000 Moog, Inc. Cl. A............ 1,567,693 1,800,000
200,000 UNC Incorporated+........... 1,288,889 1,775,000
------------ ------------
4,818,261 7,114,125
------------ ------------
BROADCASTING--7.00%
35,000 Ackerley Communications,
Inc. ...................... 299,725 1,168,125
2,000 Clear Channel
Communications, Inc.+...... 27,840 177,000
12,000 Granite Broadcasting
Corporation................ 156,125 171,000
15,000 Gray Communications Systems
Inc.+...................... 295,613 303,750
110,250 Jacor Communications,
Inc.--Warrants............. 330,750 303,188
172,000 Liberty Corporation......... 4,465,516 6,041,500
2,500 Price Communications
Corporation+............... 8,600 20,156
2,000 Scandinavian Broadcasting
System SA+................. 27,300 45,000
27,900 Silver King Communications,
Inc. ...................... 747,385 655,650
70,000 United Television, Inc. .... 1,779,330 6,737,500
------------ ------------
8,138,184 15,622,869
------------ ------------
BUILDING AND CONSTRUCTION
--3.66%
102,000 CalMat Co. ................. 1,853,688 1,887,000
100,000 Catellus Development
Corporation................ 908,543 987,500
30,000 Florida Rock Industries
Inc. ...................... 844,869 866,250
31,000 Medusa Corporation.......... 615,885 953,250
15,000 Morgan Products Ltd.+....... 128,663 112,500
125,000 Nortek, Inc.+............... 740,362 1,718,750
13,000 Oakwood Homes Corporation... 144,450 357,500
90,000 Republic Gypsum Company..... 559,113 1,293,750
------------ ------------
5,795,573 8,176,500
------------ ------------

<CAPTION>
SHARES COST VALUE
- ------------ ------------ ------------
<C> <S> <C> <C>
BUSINESS SERVICES--2.08%
5,000 Amway Asia Pacific Ltd.+.... $ 145,750 $ 173,125
14,641 Amway Japan Limited Spons.
ADR........................ 322,933 311,121
33,000 BBN Corporation............. 951,917 565,125
32,000 Berlitz International,
Inc.+...................... 470,487 716,000
15,000 Borg-Warner Security
Corporation+............... 157,250 140,625
10,000 Landauer, Inc. ............. 163,888 198,750
82,500 Nashua Corporation.......... 2,038,693 1,103,438
105,052 Trans-Lux Corporation(a).... 863,809 1,437,899
------------ ------------
5,114,727 4,646,083
------------ ------------
CABLE--4.97%
150,000 BET Holdings, Inc. ......... 2,561,337 4,312,500
120,000 Home Shopping Network,
Inc.+...................... 990,655 1,245,000
262,500 International Family
Entertainment, Inc.+....... 2,849,765 4,298,438
25,000 Jones Intercable Investors
L.P. ...................... 267,256 312,500
11,774 People's Choice TV
Corporation................ 169,656 167,780
55,000 United International
Holdings, Inc. Cl. A+....... 732,527 749,375
------------ ------------
7,571,196 11,085,593
------------ ------------
COMMERCIAL SERVICES--0.71%
10,000 Barefoot, Inc. ............. 109,375 101,250
40,000 Department 56 Inc. ......... 947,374 995,000
8,000 Pittston Brink's Group...... 240,339 251,000
7,000 Wackenhut Corporation Cl.
A.......................... 64,811 128,625
6,187 Wackenhut Corporation Cl.
B.......................... 52,368 96,672
------------ ------------
1,414,267 1,572,547
------------ ------------
COMPUTER SOFTWARE AND
SERVICES--0.47%
4,500 America Online, Inc.+....... 48,348 160,313
1,000 Noise Cancellation
Technologies, Inc. ........ 625 719
117,000 Triad Systems
Corporation+............... 504,563 628,875
6,000 Volt Information Sciences,
Inc.+...................... 47,250 252,000
------------ ------------
600,786 1,041,907
------------ ------------
CONSUMER PRODUCTS--6.09%
100,000 Carter-Wallace, Inc. ....... 1,168,890 1,237,500
80,000 Church & Dwight Co.,
Inc. ...................... 1,743,659 1,630,000
35,000 Coachmen Industries Inc. ... 232,250 901,250
50,000 Culbro Corporation+......... 1,832,039 2,775,000
45,000 First Brands Corporation.... 612,200 1,175,625
98,000 General Housewares
Corporation................ 1,309,289 992,250
145,000 Genlyte Group
Incorporated+.............. 554,300 1,323,125
108,000 Kerr Group, Inc.+........... 769,061 364,500
10,000 Mafco Consolidated Group
Inc.+...................... 229,907 306,250
3,000 Nu-Kote Holding Inc. Cl.
A+......................... 26,883 32,625
15,000 Playtex Products, Inc.+..... 109,500 131,250
82,000 Scotts Company Cl. A+....... 1,445,536 1,578,500
28,000 Skyline Corporation......... 483,638 770,000
11,250 Stewart Enterprises Inc. Cl.
A.......................... 101,800 379,688
------------ ------------
10,618,952 13,597,563
------------ ------------
COUNTRY/CLOSED END FUNDS
--1.97%
66,498 Central European Equity Fund
Inc. ...................... 890,508 1,288,399
80,000 Emerging Germany Fund
Inc. ...................... 629,750 640,000
45,000 France Growth Fund, Inc. ... 476,793 466,875
37,854 Germany Fund, Inc........... 429,141 482,639
</TABLE>

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

7
<PAGE> 28

THE GABELLI SMALL CAP GROWTH FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES COST VALUE
- ------------ ------------ ------------
<C> <S> <C> <C>
COMMON STOCKS (CONTINUED)
COUNTRY/CLOSED END FUNDS
(CONTINUED)
44,000 Italy Fund Inc. ............ $ 394,348 $ 390,500
73,025 New Germany Fund Inc. ...... 849,304 1,004,094
12,700 Spain Fund Inc. ............ 118,435 125,412
------------ ------------
3,788,279 4,397,919
------------ ------------
DIVERSIFIED INDUSTRIAL
--8.24%
65,000 Ampco-Pittsburgh
Corporation................ 472,437 771,875
10,000 Anixter International
Inc. ...................... 95,200 146,250
16,000 Gardner Denver Machinery
Corporation................ 267,815 488,000
21,500 Katy Industries............. 241,675 233,813
440,000 Lamson & Sessions Co.+...... 2,495,881 3,905,000
87,000 Lindsay Manufacturing
Company+................... 1,843,443 3,610,500
338,000 Noel Group, Inc.+........... 1,761,812 2,577,250
33,000 Oil-Dri Corporation of
America.................... 445,450 457,875
65,000 Park-Ohio Industries,
Inc.+...................... 756,925 942,500
30,000 Standex International
Corporation................ 938,062 900,000
127,000 Thomas Industries, Inc. .... 1,391,750 2,460,625
25,000 Trinity Industries, Inc. ... 672,010 834,375
710,000 Tyler Corporation+.......... 3,254,292 1,065,000
------------ ------------
14,636,752 18,393,063
------------ ------------
ELECTRICAL EQUIPMENT AND
SUPPLIES--6.79%
222,000 AMETEK, Inc. ............... 3,235,456 4,190,250
1,000 Belden Inc. ................ 15,425 29,000
40,100 CTS Corporation............. 933,067 1,689,213
150,000 Dynamics Corporation of
America.................... 1,619,625 4,331,250
74,700 Kollmorgen Corporation...... 571,448 943,088
10,000 Littlefuse, Inc.+........... 125,313 387,500
83,850 Pittway Corporation......... 2,127,906 3,595,069
------------ ------------
8,628,240 15,165,370
------------ ------------
ENERGY--2.35%
1,425,000 GEO International
Corporation+(a)(c)......... 74,145 1
120,000 Kaneb Services Inc.+........ 337,375 390,000
22,000 Lufkin Industries, Inc. .... 389,520 456,500
225,000 RPC Inc.+................... 1,668,737 2,559,375
105,000 Southwest Gas Corporation... 1,783,470 1,837,500
------------ ------------
4,253,247 5,243,376
------------ ------------
ENTERTAINMENT--1.22%
8,000 Churchill Downs
Incorporated............... 342,863 308,000
10,000 Cineplex Odeon
Corporation+............... 20,888 15,000
1,500 Fisher Companies Inc. ...... 135,550 150,000
200 International Speedway
Corporation................ 54,000 68,600
110,000 Jackpot Enterprises,
Inc. ...................... 1,277,538 1,113,750
2,000 Metromedia International
Group Inc.+ ............... 22,000 21,250
100,000 Savoy Pictures
Entertainment, Inc. ....... 597,585 250,000
75,000 Spelling Entertainment
Inc. ...................... 578,500 562,500
55,000 Topps Company, Inc.+ ....... 331,431 233,750
------------ ------------
3,360,355 2,722,850
------------ ------------
ENVIRONMENTAL CONTROL--0.22%
130,000 EnviroSource, Inc.+ ........ 442,370 487,500
------------ ------------

<CAPTION>
SHARES COST VALUE
- ------------ ------------ ------------
<C> <S> <C> <C>
FINANCIAL SERVICES--3.03%
70,000 Berliner Bank
Aktiengesellschaft......... $ 1,452,996 $ 1,400,000
50,000 Danielson Holding
Corporation................ 185,138 275,000
20,000 Gryphon Holdings Inc.+...... 260,000 275,000
18,000 Hibernia Corporation........ 140,063 204,750
4,000 Lawyers Title Insurance
Corporation................ 58,015 85,000
40,000 Midland Company............. 1,717,750 1,500,000
115,000 Pioneer Group, Inc. ........ 1,269,630 3,018,750
------------ ------------
5,083,592 6,758,500
------------ ------------
FOOD AND BEVERAGE--6.33%
10,000 Brau und Brunnen............ 1,990,844 763,944
250,000 Bruno's, Inc. .............. 2,682,996 3,437,500
40,000 Celestial Seasonings,
Inc.+...................... 726,350 780,000
6,250 Cheesecake Factory
Incorporated+.............. 103,555 142,188
72,100 Chock Full o'Nuts
Corporation+............... 556,764 351,488
36,000 Delchamps, Inc. ............ 775,423 720,000
8,000 Earthgrains Co. ............ 245,400 308,000
181,900 Eskimo Pie Corporation(a)... 2,977,462 3,001,350
1,000 Farmer Brothers Company..... 133,895 151,000
18,000 Genesee Corporation Cl. B... 727,317 756,000
10,000 Grist Mill Company.......... 73,023 62,500
30,000 Ingles Markets, Incorporated
Cl. A...................... 219,075 483,750
12,000 International Multifoods
Corporation................ 242,875 195,000
12,000 J & J Snack Foods Corp.+.... 121,707 129,000
8,000 Midwest Grain Products,
Inc. ...................... 158,761 109,000
1,000 Northland Cranberries, Inc.
Cl. A...................... 7,625 17,000
50,000 Pepsi-Cola Puerto Rico
Bottling Company........... 233,750 237,500
10,000 Ralcorp Holdings, Inc.+..... 154,250 207,500
95,100 Rykoff-Sexton, Inc. ........ 1,400,119 1,367,063
50,000 Sylvan Foods Holdings,
Inc.+...................... 458,287 537,500
10,545 Tootsie Roll Industries,
Inc........................ 381,375 373,029
------------ ------------
14,370,853 14,130,312
------------ ------------
HOME FURNISHINGS--2.34%
8,000 Bassett Furniture Industries
Incorporated............... 188,438 190,000
4,000 Bed Bath & Beyond Inc.+..... 44,500 109,500
30,000 Foamex International
Inc.+...................... 258,200 487,500
10,000 La-Z-Boy Chair Company...... 218,125 301,250
11,000 National Presto Industries,
Inc. ...................... 484,883 413,875
85,000 Oneida Ltd. ................ 1,304,412 1,275,000
100,000 Syratech Corporation+....... 1,774,858 2,450,000
------------ ------------
4,273,416 5,227,125
------------ ------------
HOSPITAL SUPPLIES AND
SERVICES--0.03%
7,500 U.S. Physical Therapy
Inc. ...................... 46,875 70,313
------------ ------------
HOTELS/CASINOS--2.55%
395,000 Aztar Corporation+.......... 2,544,968 3,456,250
4,000 Boyd Gaming Corporation..... 56,450 37,500
10,000 Chartwell Leisure, Inc. .... 126,258 175,000
70,000 Mirage Resorts,
Incorporated+.............. 357,753 1,793,750
20,000 Station Casinos, Inc.+ ..... 271,470 240,000
------------ ------------
3,356,899 5,702,500
------------ ------------
</TABLE>

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

8
<PAGE> 29

THE GABELLI SMALL CAP GROWTH FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES COST VALUE
- ------------ ------------ ------------
<C> <S> <C> <C>
COMMON STOCKS (CONTINUED)
INDUSTRIAL EQUIPMENT AND
SUPPLIES--10.95%
65,000 AFC Cable Systems, Inc.+ ... $ 657,933 $ 1,137,500
26,000 Alltrista Corporation....... 497,722 552,499
15,000 Amphenol Corporation Cl.
A+......................... 196,200 343,125
48,000 AMTROL Inc. ................ 744,192 1,320,000
320,000 Baldwin Technology Company,
Inc. Cl. A................. 1,534,459 940,000
40,000 Brad Ragan, Inc.+........... 1,013,337 1,230,000
5,000 BW/IP Inc. ................. 75,000 77,500
210,000 CLARCOR Inc. ............... 3,553,710 4,593,750
1,000 Commercial Intertech
Corporation................ 11,675 11,500
42,000 Crane Company............... 1,114,988 1,863,750
1,000 Cuno Incorporated........... 14,500 15,500
5,000 Ducommun, Incorporated...... 80,125 85,000
140,000 Eljer Industries, Inc.+..... 1,354,413 1,365,000
20,000 General Magnaplate
Corporation................ 83,763 112,500
60,000 Gerber Scientific, Inc. .... 746,587 855,000
20,000 Global Industrial
Technologies, Inc. ........ 254,600 367,500
120,000 Greif Bros. Corporation
Class A.................... 2,230,764 3,570,000
34,650 Johnston Industries,
Inc. ...................... 268,295 272,869
14,000 K-Tron International,
Inc.+...................... 120,533 129,500
17,000 Mark IV Industries, Inc. ... 247,775 369,750
5,000 Plantronics, Inc.+.......... 76,787 188,125
33,500 Sequa Corporation Cl. A+.... 1,143,102 1,494,937
3,500 Sequa Corporation Cl. B+.... 119,646 186,375
17,500 SPS Technologies, Inc.+..... 448,826 1,106,875
15,000 Teleflex Incorporated....... 453,413 744,375
14,000 Tennant Company............. 304,175 322,000
32,000 Valmont Industries, Inc. ... 501,688 1,092,000
5,250 Watsco, Inc. Cl. B.......... 23,627 106,969
------------ ------------
17,871,835 24,453,899
------------ ------------
METALS AND MINING--1.54%
10,000 Barrick Gold Corporation.... 257,938 251,250
135,000 Echo Bay Mines Ltd. ........ 1,464,512 1,189,688
100,000 Pegasus Gold Inc.+.......... 1,651,066 1,012,500
200,000 Royal Oak Mines Inc.+....... 957,283 787,500
30,000 TVX Gold, Inc. ............. 249,000 202,500
------------ ------------
4,579,799 3,443,438
------------ ------------
PUBLISHING--3.85%
50,000 Golden Books Family
Entertainment, Inc., ...... 578,387 581,250
121,278 Independent Newspapers
plc........................ 380,260 625,999
15,000 McClatchy Newspapers, Inc.
Cl. A...................... 287,838 420,000
86,000 Media General, Inc. Cl. A... 1,538,413 2,709,000
20,000 Meredith Corporation........ 593,862 987,500
10,000 Providence Journal
Company.................... 150,000 293,750
34,000 Pulitzer Publishing
Company.................... 1,386,371 1,942,250
20,000 Thomas Nelson Inc. ......... 231,000 217,500
28,500 Wiley (John) & Sons, Inc.
Cl. B...................... 366,063 819,375
------------ ------------
5,512,194 8,596,624
------------ ------------
PUMPS AND VALVES--4.68%
30,000 AptarGroup, Inc. ........... 504,635 963,750
32,750 Duriron Company, Inc........ 573,302 867,875
69,000 Franklin Electric Company... 2,073,422 2,328,750
17,775 Gorman-Rupp Company......... 276,456 246,628
100,000 Goulds Pumps,
Incorporated............... 2,389,858 2,225,000
6,000 Graco Inc. ................. 83,113 112,500

<CAPTION>
SHARES COST VALUE
- ------------ ------------ ------------
<C> <S> <C> <C>
PUMPS AND VALVES (CONTINUED)
52,000 IDEX Corporation............ $ 643,067 $ 1,729,000
45,000 Robbins & Myers, Inc. ...... 403,248 1,018,125
20,000 Roper Industries, Inc. ..... 257,500 945,000
------------ ------------
7,204,601 10,436,628
------------ ------------
RETAIL--6.21%
60,700 Aaron Rents Inc............. 202,222 789,100
44,700 Aaron Rents Inc. Cl. A...... 147,449 586,688
67,001 Belding Heminway Company,
Inc.+...................... 499,204 134,002
50,000 Burlington Coat Factory
Warehouse Corporation+..... 589,663 549,999
7,000 Crown Books Corporation+.... 98,017 69,125
80,500 Earl Scheib, Inc.+.......... 445,795 664,125
25,000 Fingerhut Companies, Inc.... 367,919 331,250
177,750 General Host Corporation+... 1,091,449 488,813
85,000 Hartmarx Corporation+....... 523,438 414,375
80,000 Lillian Vernon
Corporation................ 1,197,153 1,000,000
33,500 Mott's Holdings, Inc.+(c)... 214,069 201,000
245,000 Neiman Marcus Group,
Inc.+...................... 3,496,131 8,636,250
------------ ------------
8,872,509 13,864,727
------------ ------------
SPECIALTY CHEMICALS--0.90%
30,000 Ferro Corporation........... 714,101 810,000
3,000 Hach Company................ 55,275 54,750
8,500 MacDermid, Incorporated..... 263,945 590,750
30,200 Penwest Ltd................. 576,802 551,150
------------ ------------
1,610,123 2,006,650
------------ ------------
TELECOMMUNICATIONS--2.06%
18,000 Aliant Communications....... 231,438 283,500
1,000 Arch Communications Group
Inc.+...................... 14,425 13,688
23,000 Atlantic Tele-Network
Inc.+...................... 255,910 465,750
2,000 BHI Corporation............. 30,250 37,500
100,000 Communications Systems,
Inc........................ 556,544 1,300,000
42,000 C-TEC Corporation+.......... 957,200 1,092,000
30,000 C-TEC Corporation Cl. B+.... 495,027 765,000
26,800 Data Transmission Network
Corporation+............... 128,229 562,800
16,000 NTN Communications Inc.+.... 114,150 75,000
------------ ------------
2,783,173 4,595,238
------------ ------------
TRANSPORTATION--0.17%
50,000 OMI Corporation............. 334,638 356,250
4,000 WorldCorp, Inc.+............ 19,575 23,000
------------ ------------
354,213 379,250
------------ ------------
WIRELESS COMMUNICATIONS
--0.81%
5,000 Allen Group, Inc. .......... 79,000 92,500
50,000 American Paging, Inc.+...... 392,914 287,500
5,000 American Portable Telecom,
Inc. ...................... 48,625 50,625
2,000 Associated Group Inc., Cl.
A.......................... 50,750 63,500
17,000 Cellular Communications of
Puerto Rico, Inc.+......... 291,750 433,500
62,000 Centennial Cellular
Corporation+............... 1,012,201 844,750
4,000 Rural Cellular Corp. Cl.
A.......................... 40,205 42,000
------------ ------------
1,915,445 1,814,375
------------ ------------
TOTAL COMMON STOCKS......... 168,056,071 224,618,904
------------ ------------
</TABLE>

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

9
<PAGE> 30

THE GABELLI SMALL CAP GROWTH FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT COST VALUE
- ------------ ------------ ------------
<C> <S> <C> <C>
CONVERTIBLE CORPORATE BONDS
--0.79%
AUTOMOTIVE: PARTS AND
ACCESSORIES--0.15%
$ 325,000 GenCorp Inc. Sub. Deb. Cv.
8.00%, 08/01/02............ $ 323,424 $ 336,375
------------ ------------
ENTERTAINMENT--0.13%
150,000 All American Communications,
Inc. Sub. Deb. Cv. 6.50%,
10/01/03(b)................ 143,647 150,750
200,000 Savoy Pictures
Entertainment, Inc. Sub.
Deb. Cv. 7.00%, 07/01/03... 159,259 149,000
------------ ------------
302,906 299,750
------------ ------------
INDUSTRIAL EQUIPMENT AND
SUPPLIES--0.37%
650,000 Intermagnetics General
Corporation Sub. Deb. Cv.
5.75%, 09/15/03(b)......... 649,573 659,750
250,000 Kushner Locke Company Sub.
Deb. Cv. 8.00%,
12/15/00(c)................ 250,000 168,175
500 MacNeal-Schwendler
Corporation Sub. Deb. Cv.
7.875%, 08/18/04........... 540 455
------------ ------------
900,113 828,380
------------ ------------
RETAIL--0.14%
400,000 General Host Corporation
Sub. Deb. Cv. 8.00%,
02/15/02................... 382,522 308,000
------------ ------------
TOTAL CONVERTIBLE CORPORATE
BONDS...................... 1,908,965 1,772,505
------------ ------------

TOTAL INVESTMENTS--101.41%................. $169,965,036 $226,391,409
=============
LIABILITIES, IN EXCESS OF OTHER
ASSETS--(1.41)% (3,152,206)
------------
NET ASSETS (11,148,837 shares
outstanding)...................... 100.00% $223,239,203
======= =============
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE........ $20.02
=============
</TABLE>

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

<TABLE>
<S> <C>
* For Federal income tax purposes:
Aggregate cost................................ $169,965,036
=============
Gross unrealized appreciation................. $ 68,272,296
Gross unrealized depreciation................. (11,845,923)
------------
Net unrealized appreciation................... $ 56,426,373
=============
+ Non-income producing security.
ADR -- American Depositary Receipts
(a) Considered an affiliated issuer because the
Fund owns at least 5% of the outstanding
voting securities. (See Note 8)
(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, 1996,
Rule 144A securities amounted to $810,500 or
0.4% of net assets.
(c) Security fair valued as determined by the
Board of Directors.
</TABLE>

TOP TEN HOLDINGS
SEPTEMBER 30, 1996

<TABLE>
<S> <C>
Neiman Marcus Group, Inc. BET Holdings, Inc.
United Television, Inc. Int'l Family Entertainment, Inc.
Liberty Corporation AMETEK, Inc.
CLARCOR Inc. Lamson & Sessions Company
Dynamics Corp. of America Lindsay Manufacturing Company
</TABLE>

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

10
<PAGE> 31

THE GABELLI SMALL CAP GROWTH FUND

STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
- ----------------------------------------------------------

<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(Cost $169,965,036).......................... $226,391,409
Cash........................................... 43,556
Receivable for Fund shares sold................ 55,799
Receivable for investments sold................ 1,020,370
Dividends receivable........................... 161,475
Accrued interest receivable.................... 21,741
Deferred organizational expenses
(Note 5)..................................... 885
------------
TOTAL ASSETS............................... 227,695,235
------------
LIABILITIES:
Payable to Advisor (Note 4).................... 183,083
Payable to Custodian........................... 3,468,236
Payable for distribution fees
(Note 6)..................................... 170,252
Payable for investments purchased.............. 252,488
Payable for Fund shares redeemed............... 284,228
Other accrued expenses......................... 97,745
------------
TOTAL LIABILITIES.......................... 4,456,032
------------
NET ASSETS (applicable to 11,148,837 shares
outstanding) (Note 2).................... $223,239,203
============
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE.......................... $20.02
======

NET ASSETS CONSISTS OF:
Capital Stock, at par value (Note 2)........... 11,149
Additional paid-in capital..................... 143,711,003
Accumulated net realized gain on investments... 23,091,004
Net unrealized appreciation on investments and
assets and liabilities denominated in foreign
currencies................................... 56,426,047
------------
NET ASSETS................................. $223,239,203
============
</TABLE>

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
- ----------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign taxes of $14,685)...... $ 2,432,873
Interest......................................... 197,751
-----------
TOTAL INCOME................................. 2,630,624
-----------
EXPENSES:
Investment advisory fee (Note 4)................. 2,276,908
Distribution expenses (Note 6)................... 503,777
Transfer and shareholder servicing agent fees.... 484,383
Custodian fees and expenses...................... 109,460
Printing and mailing expenses.................... 57,792
Legal and audit fees............................. 44,556
Directors' fees.................................. 35,076
Registration fees................................ 23,576
Amortization of organization expenses (Note 5)... 14,759
Miscellaneous.................................... 42,446
-----------
TOTAL EXPENSES............................... 3,592,733
-----------
INVESTMENT LOSS--NET.............................. (962,109)
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain on:
Investments and foreign currency transactions.... 23,621,731
Net change in unrealized appreciation............ 1,263,486
-----------
NET GAIN ON INVESTMENTS........................... 24,885,217
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS....................................... $23,923,108
===========
</TABLE>

STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1996 1995
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Investment loss--net.......................................................................... $ (962,109) $ (513,918)
Net realized gain on investments and foreign currency transactions............................ 23,621,731 16,367,947
Net change in unrealized appreciation......................................................... 1,263,486 22,785,104
------------- -------------
Net increase in net assets resulting from operations......................................... 23,923,108 38,639,133
------------- -------------
Distributions from net realized gains......................................................... (15,495,706) (12,003,675)
------------- -------------
Share transactions--net...................................................................... (16,344,400) (1,178,460)
------------- -------------
Net increase (decrease) in net assets......................................................... (7,916,998) 25,456,998
NET ASSETS:
Beginning of year............................................................................ 231,156,201 205,699,203
------------- -------------
End of year.................................................................................. $ 223,239,203 $ 231,156,201
============ ============
</TABLE>

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

11
<PAGE> 32

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 preparation of financial statements
in accordance with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates. 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 recorded at the exchange rate on the valuation date.
(ii) purchases and sales of investment securities, income and expenses are
recorded at the exchange rate prevailing on the respective date of
such transactions.

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.

12
<PAGE> 33

THE GABELLI SMALL CAP GROWTH FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------

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 loss of $962,109 for the fiscal year ended September
30, 1996 was charged against paid-in capital. The net operating loss of $513,918
for the fiscal year ended September 30, 1995 was used to offset net short-term
capital gains and therefore was charged against undistributed net realized gain
on investments. In addition, during fiscal 1995 miscellaneous permanent
differences of $24,693 were charged to paid-in capital from distributions in
excess of net investment income.

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------
1996 1995
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares sold..................................................... 2,264,334 $ 44,652,493 3,685,060 $ 62,670,998
Shares issued upon reinvestment of dividends.................... 812,880 15,038,288 737,234 11,685,157
Shares redeemed................................................. (3,883,078) (76,035,181) (4,400,246) (75,534,615)
----------- ------------- ----------- -------------
Net increase (decrease)......................................... (805,864) $ (16,344,400) 22,048 $ (1,178,460)
========== ============= ========== =============
</TABLE>

3. PURCHASES AND SALES OF SECURITIES. Purchases and sales of securities for the
year ended September 30, 1996, other than U.S. Government obligations and
short-term securities, aggregated $25,749,915 and $49,575,397, respectively.

13
<PAGE> 34

THE GABELLI SMALL CAP GROWTH FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------

7. TRANSACTIONS WITH AFFILIATES. During the year ended September 30, 1996, the
Fund paid $25,682 in brokerage commissions to Gabelli & Company, Inc., an
affiliate of the Advisor. Gabelli & Company, Inc. has informed the Fund that the
amount of sales charges and underwriting fees earned during the year ended
September 30, 1996 was $42,750.

8. TRANSACTIONS IN SECURITIES OF AFFILIATED ISSUERS. Affiliated Issuers, as
defined under the Investment Company Act of 1940, are those in which the Fund's
holdings of an issuer represent 5% or more of the outstanding voting securities
of the issuer. A summary of the Fund's transactions in the securities of these
issuers during the year ended September 30, 1996 is set forth below:

<TABLE>
<CAPTION>
VALUE AT
BEGINNING SHARES ENDING REALIZED DIVIDEND SEPTEMBER
AFFILIATED ISSUERS SHARES SOLD SHARES LOSS INCOME 30, 1996
- ----------------------------------------------------- --------- ------ --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Eskimo Pie Corp. .................................... 190,000 8,100 181,900 $(23,165) $36,610 $3,001,350
Trans-Lux Corp. ..................................... 106,052 1,000 105,052 (9,737) 11,100 1,437,899
GEO International Corporation........................ 1,425,000 -- 1,425,000 -- -- 1
-------- -------- ----------
$(32,902) $47,710 $4,439,250
========= ======= ==========
</TABLE>

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------
1996 1995 1994 1993 1992(a)
--------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period............................ $ 19.34 $ 17.24 $ 16.90 $ 13.10 $10.00
--------- --------- --------- --------- -------
Net investment income (loss).................................... (0.09) (0.04) (0.05) 0.01 0.04
Net realized and unrealized gain on securities.................. 2.11 3.17 0.81 3.98 3.14
--------- --------- --------- --------- -------
Total from investment operations................................ 2.02 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......... (1.34) (1.03) (0.42) (0.16) (0.07)
--------- --------- --------- --------- -------
Net asset value, end of period.................................. $ 20.02 $ 19.34 $ 17.24 $ 16.90 $13.10
========= ========= ========= ========= ========
Total return(b)................................................. 11.01% 19.47% 4.48% 30.65% 31.86%
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........................ $ 223,239 $ 231,156 $ 205,699 $ 204,617 $94,864
Ratio of operating expenses to average net assets........... 1.58% 1.54% 1.54% 1.64% 1.97%*
Ratio of net investment income (loss) to average net
assets.................................................... (0.42)% (0.24)% (0.28)% 0.03% 0.32%*
Portfolio turnover rate......................................... 11% 17% 19% 14% 16%
Average commission rate per share(c)............................ $ 0.049 -- -- -- --
</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.
(c) For fiscal years beginning on or after November 1, 1995, a fund is required
to disclose its average commission rate paid per share for purchases and
sales of investment securities.

<PAGE> 35

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, 1996, and the related
statement of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the financial
highlights for each of the 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, 1996, the results of its
operations for the year 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 6, 1996

1996 TAX NOTICE TO SHAREHOLDERS (UNAUDITED)

For the fiscal year ended September 30, 1996, the Fund paid to shareholders, on
December 29, 1995, ordinary income dividends (comprised of net investment income
and short-term capital gains) totaling $0.065 per share. Additionally, on that
date, the Fund paid $1.275 per share in long-term capital gains. For fiscal year
1996, 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
1996 which was derived from U.S. Treasury securities was 0.81% . 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 1996.
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.

15
<PAGE> 36

Gabelli Equity Series Funds, Inc.
THE GABELLI SMALL CAP GROWTH FUND
One Corporate Center
Rye, New York 10580-1434
1-800-GABELLI
[1-800-422-3554]
FAX: 1-914-921-5118
HTTP://WWW.GABELLI.COM
E-MAIL: INFO @ GABELLI.COM
(Net Asset Value may be obtained daily by calling
1-800-GABELLI after 6:00 P.M.)

<TABLE>
<S> <C>
BOARD OF DIRECTORS
Mario J. Gabelli, CFA Felix J. Christiana
Chairman and Chief Former Senior
Investment Officer Vice President
Gabelli Funds, Inc. Dollar Dry Dock Savings Bank
Anthony J. Colavita Vincent D. Enright
Attorney-at-Law Senior Vice President
Anthony J. Colavita, P.C. and Chief Financial Officer
The Brooklyn Union Gas
John D. Gabelli Company
Vice President
Gabelli & Company, Inc. Robert J. Morrissey
Attorney-at-Law
Karl Otto Pohl Morrissey & Hawkins
Former President
Deutsche Bundesbank Anthonie C. van Ekris
Managing Director
Anthony R. Pustorino BALMAC International, Inc.
Certified Public Accountant
Professor, Pace University
OFFICERS
Mario J. Gabelli, CFA James E. McKee
President and Secretary
Chief Investment Officer
Bruce N. Alpert
Vice President and Treasurer
</TABLE>

DISTRIBUTOR
Gabelli & Company, Inc.

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

LEGAL COUNSEL
Skadden, Arps, Slate, Meagher & Flom

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

This report is submitted for the general information of the shareholders of The
Gabelli Small Cap Growth Fund. It is not authorized for distribution to
prospective investors unless preceded or accompanied by an effective prospectus.
- ----------------------------------------------------------

LOGO

THE
GABELLI

SMALL CAP
GROWTH
FUND
ANNUAL REPORT
SEPTEMBER 30, 1996