GABELLI EQUITY SERIES FUNDS INC, 497, 1997-02-07

GABELLI EQUITY SERIES FUNDS INC
497, 1997-02-07

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The
Gabelli
Equity
Income
Fund

PROSPECTUS

January 30, 1997

GABELLI FUNDS, INC.
Investment Adviser

GABELLI & COMPANY, INC.
Distributor

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The Gabelli Equity Income Fund

One Corporate Center
Rye, New York 10580-1434
Telephone: 1-800-GABELLI (1-800-422-3554)
http://www.gabelli.com

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PROSPECTUS January 30, 1997

The Gabelli Equity Income Fund (the "Fund") is a series of Gabelli Equity Series
Funds, Inc., a Maryland corporation (the "Corporation"). The Fund is a no-load
open-end, diversified, management investment company whose investment objective
is to seek a high level of total return on its assets with an emphasis on
income. The Fund seeks to achieve its investment objective through a combination
of capital appreciation and current income by investing primarily in income
producing equity securities.

Shares of the Fund may be purchased without a sales load at net asset value. The
minimum initial investment is $1,000. The Fund has a distribution plan which
permits it to pay up to .25% per year of its average daily net assets for
marketing and shareholder services and expenses. For further information,
contact Gabelli & Company, Inc. at the address or telephone number shown above.

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This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Fund. A Statement of Additional Information
dated January 30, 1997 (the "Additional Statement") containing additional
information about the Fund has been filed with the Securities and Exchange
Commission (the "SEC") and is available for reference along with other
materials on the SEC Internet website (http://www.sec.gov) and is incorporated
by reference into this Prospectus. For a free copy, write or call the Fund at
the telephone number or address set forth above.

Shares of the Fund are not deposits or obligations of or guaranteed or endorsed
by any bank, and are not insured or guaranteed by any bank and are not insured
or guaranteed by the Federal Deposit Insurance Corporation, the Federal Reserve
Board or any other government agency and involve risk, including the possible
loss of principal.

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This Prospectus should be retained
by investors for future reference.

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

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PROSPECTUS SUMMARY

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

The Fund: The Gabelli Equity Income Fund is a no-load open-end, diversified,
management investment company.

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

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

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

How to Purchase Shares: Shares of the Fund may be purchased through certain
registered brokers or the Transfer Agent at the net asset value per share
next determined after receipt of an order by the Fund's Distributor or
transfer agent in proper form with accompanying check or other bank wire
payment arrangements satisfactory to the Fund. The minimum initial
investment is $1,000. There is no minimum for subsequent investments.
Investments through an Individual Retirement Account or other retirement
plans, however, have different requirements. See "Purchase of Shares" and
"Retirement Plans."

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

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

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

TABLE OF FEES AND EXPENSES

Shareholder Transaction Expenses:

Maximum Sales Charge Imposed on Purchases .......................... None
Maximum Sales Charge Imposed on Reinvested Dividends................ None
Deferred Sales Charge............................................... None
Redemption Fees..................................................... None
Exchange Fees....................................................... None

Annual Fund Operating Expenses (as a percentage of average net
assets):

Management Fees (a)................................................. 1.00%
12b-1 Expenses (b).................................................. .25
Other Expenses (c).................................................. .68%
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Total Operating Expenses........................................ 1.93%
=======

Example: 1 year 3 years 5 years 10 years
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You would pay the following
expenses on a $1,000
investment, assuming a
5% annual return at the
end of each period $20 $61 $104 $225

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

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(a) Subject to potential reduction as a result of the Adviser's expense
reimbursement obligations. See "Management of the Fund."
(b) See "Distribution Plan." Long term investors may pay more than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc.
(c) Such expenses include custodian and transfer agency fees and other
customary Fund expenses.

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Management's Discussion and Analysis of the Fund's performance during the fiscal
year ended September 30, 1996 is included in the Fund's Annual Report to
Shareholders dated September 30, 1996. The Fund's Annual Report to Shareholders
may be obtained upon request and without charge by writing or calling the Fund
at the address or telephone number listed on the Prospectus cover.

FINANCIAL HIGHLIGHTS

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

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

<TABLE>
<CAPTION>
1996 1995 1994 1993 1992+
------- ------- ------- ------- -------
<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 ........................................ (0.01) -- -- -- --
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 .................................... 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 (a) ........... $ 0.048 -- -- -- --
</TABLE>

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* Annualized
+ Fund commenced operations on January 2, 1992.

(a) 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.

INVESTMENT OBJECTIVE AND POLICIES
AND RELATED RISK FACTORS

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

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Equity Securities

Common stocks represent the residual ownership interest in the issuer and are
entitled to the income and increase in the value of the assets and business of
the entity after all of its obligations and preferred stock are satisfied.
Common stocks generally have voting rights. Common stocks fluctuate in price in
response to many factors including historical and prospective earnings of the
issuer, the value of its assets, general economic conditions, interest rates,
investor perceptions and market liquidity.

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

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

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

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

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bonds." For further information regarding lower rated securities and the risks
associated therewith, see "Other Investment Techniques" in the Additional
Statement and the Description of Corporate Bond, Corporate Debt and Preferred
Stock Ratings attached hereto as an Appendix.

Nonconvertible Debt Securities

Under normal market conditions, the Fund may invest up to 35% of its assets in
fixed income securities which are not convertible or exchangeable for common
stock. These securities include preferred stocks, bonds, debentures, notes,
asset and mortgage backed securities and money market instruments such as
commercial paper and bankers acceptances. There is no minimum credit rating for
these securities in which the Fund may invest. Accordingly, the Fund could
invest in securities in default although the Fund will not invest more than 5%
of its assets in such securities. See "Equity Securities" for a discussion of
credit considerations. Preferred stocks are subject to the same types of risks
as debt instruments.

Asset-Backed and Mortgage-Backed
Securities

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

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

OTHER INVESTMENT TECHNIQUES
AND RELATED RISK FACTORS

Foreign Securities

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

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

Dividend and interest income from non-U.S. securities will generally be subject
to withholding taxes by the country in which the issuer is located

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and may not be recoverable by the Fund or the investor.

Corporate Reorganizations

Subject to the Fund's policy of investing at least 65% of its assets in income
producing equity securities, the Fund may invest without limit in securities for
which a tender or exchange offer has been made or announced and in securities of
companies for which a merger, consolidation, liquidation or similar
reorganization proposal has been announced if, in the judgment of the Adviser,
there is a reasonable prospect of capital appreciation significantly greater
than the added portfolio turnover expenses inherent in the short term nature of
such transactions. The principal risk is that such offers or proposals may not
be consummated within the time and under the terms contemplated at the time of
the investment, in which case, unless such offers or proposals are replaced by
equivalent or increased offers or proposals which are consummated, the Fund may
sustain a loss. For further information on such investments, see "Other
Investment Techniques" in the Additional Statement.

Options and Futures

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

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

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

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

Warrants and Rights

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

When Issued, Delayed Delivery
Securities and Forward Commitments

The Fund may enter into forward commitments

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

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

Unseasoned Companies

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

Short Sales

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

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

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

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

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its assets or the Fund's aggregate short sales of a particular class of
securities exceeds 25% of the outstanding securities of that class. The Fund may
also make short sales "against the box" without respect to such limitations. In
this type of short sale, at the time of the sale, the Fund owns or has the
immediate and unconditional right to acquire at no additional cost the identical
security.

Restricted and Illiquid Securities

The Fund may invest up to 10% of its net assets in securities the markets for
which are illiquid. Illiquid securities include most of the securities the
disposition of which is subject to substantial legal or contractual
restrictions. The sale of illiquid securities often requires more time and
results in higher brokerage charges or dealer discounts and other selling
expenses than does the sale of securities eligible for trading on national
securities exchanges or in the over-the-counter markets. Restricted securities
may sell at a price lower than similar securities that are not subject to
restrictions on resale. Securities freely salable among qualified institutional
investors under special rules adopted by the Securities and Exchange Commission
may be treated as liquid if they satisfy liquidity standards established by the
Board of Directors. The continued liquidity of such securities is not as well
assured as that of publicly traded securities, and accordingly the Board of
Directors will monitor their liquidity.

Repurchase Agreements

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

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

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Loans of Portfolio Securities

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

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

Borrowing

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

Portfolio Turnover

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

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

MANAGEMENT OF THE FUND

The Fund's Board of Directors (who, with its officers, are described in the
Additional Statement) has overall responsibility for the management of the Fund.
The Board of Directors decides upon matters of general policy and reviews the
actions of the Distributor, the Adviser and the Administrator (as defined
below). Pursuant to an Investment Advisory Contract with the Fund on behalf of
the Fund, the Adviser under the supervision of the Fund's Board of Directors,
provides a continuous investment program for the Fund's portfolio; provides
investment research and makes and executes recommendations for the purchase and
sale of securities and the exercise of all voting and other rights appertaining
thereto; provides facilities and personnel required for the Fund's
administrative management; supervises the performance of administrative and
professional services provided by others; and pays the compensation of the
Administrator and all officers

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and directors of the Fund who are its affiliates. Mr. Mario J. Gabelli
- --Portfolio Manager, will be primarily responsible for the day-to-day management
of the Gabelli Equity Income Fund. Mr. Gabelli is Chairman, President and Chief
Executive Officer and a Director of the Adviser. As compensation for its
services and the related expenses borne by the Adviser, the Fund pays the
Adviser a fee, computed daily and payable monthly, equal, on an annual basis, to
1.00% of the Fund's average daily net assets, which is higher than that paid by
most mutual funds. For fiscal years ended September 30, 1994, September 30, 1995
and September 30, 1996, the Adviser received fees of $520,763, $512,370 and
$561,461, respectively, representing an annualized fee of 1.00% of average net
assets. The Adviser is located at One Corporate Center, Rye, New York
10580-1434.

The Adviser was formed in 1980 and as of December 31, 1996 acts as investment
adviser to the following funds with aggregate assets in excess of $4.1 billion:

Net Assets
Open-end funds: 12/31/96
- --------------- --------
(in millions)
Gabelli Asset Fund $1,080
Gabelli Growth Fund 609
Gabelli Gold Fund, Inc. 17
Gabelli Value Fund Inc. 461
Gabelli Small Cap Growth Fund 216
Gabelli Equity Income Fund 60
Gabelli U.S. Treasury Money Market Fund 234
Gabelli ABC Fund 27
Gabelli Global Telecommunications Fund 109
Gabelli Global Interactive
Couch Potato(R) Fund 32
Gabelli Global Convertible Securities Fund 14
Gabelli International Growth Fund, Inc. 13
Gabelli Capital Asset Fund 51

Closed-end funds:
- -----------------
Gabelli Convertible Securities Fund, Inc. 90
Gabelli Equity Trust Inc. 1,051
Gabelli Global Multimedia Trust Inc. 91

Gabelli & Company, Inc., the Distributor of each open-end fund's respective
shares, is an indirect majority owned subsidiary of the Adviser. GAMCO
Investors, Inc, ("GAMCO"), a majority owned subsidiary of the Adviser, acts as
investment adviser for individuals, pension trusts, profit sharing trusts and
endowments. As of December 31, 1996, GAMCO had aggregate assets in excess of
$5.2 billion under its management. Teton Advisers LLC is an affiliated
Investment Adviser to the Westwood Funds with aggregate assets in excess of $88
million. Mr. Mario J. Gabelli may be deemed a "controlling person" of the
Adviser and the Distributor on the basis of his ownership of stock of the
Adviser.

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

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

Administrator

The Adviser has entered into an Administration Contract with BISYS Fund
Services, Inc. ("BISYS" or the "Administrator") pursuant to which the

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Administrator provides certain administrative services necessary for the Fund's
operations. These services include the preparation and distribution of materials
for meetings of the Fund's Board of Directors, compliance testing of Fund
activities and assistance in the preparation of proxy statements, reports to
shareholders and other documentation. The Administrator's services do not
include the investment advisory and portfolio management services of the
Adviser. For the services and the related expenses borne by BISYS, the Adviser
pays it a monthly fee at the annual rate of .10% of the average net assets (with
a minimum annual fee of $40,000 per portfolio) on the first $350 million of
funds advised by the Adviser and affiliates and administered by BISYS; 0.075% of
any assets above $350 million and .06% of any assets above $600 million which,
together with the services to be rendered, are subject to negotiation between
the parties and both parties retain the right unilaterally to terminate the
arrangement on not less than 60 days' notice. BISYS has its principal office at
3435 Stelzer Rd., Columbus, Ohio 43219.

DISTRIBUTION PLAN

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

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

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

The Board of Directors has initially implemented the Plan by having the
Corporation enter into an agreement with the Distributor authorizing
reimbursement of expenses (including overhead) incurred by the Distributor and
its affiliates up to the .25% rate authorized by the Plan for distribution
activities of the types listed above. To the extent any of these payments are
based on allocations by the Distributor, the Fund may be considered to be
participating in joint distribution activities with other funds distributed by
the Distributor. Any such allocations would be subject to approval by the Fund's
non-interested Directors and would be based on such factors as the net assets of
each Fund, the number of shareholder inquiries and similar pertinent criteria.
For

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the fiscal years ended September 30, 1994, September 30, 1995 and September
30, 1996, the Fund incurred distribution costs of $130,199, $128,073 and
$140,353 respectively, or 0.25% of average net assets under the Plan.

PURCHASE OF SHARES

Shares of the Fund are currently offered without a sales charge. The minimum
initial investment is $1,000. There is no minimum for subsequent investments.
Shares of the Fund are sold at the net asset value per share next determined
after receipt of an order by the Fund's Distributor or Transfer Agent in proper
form with accompanying check or bank wire payment arrangements satisfactory to
the Fund. Although most shareholders elect not to receive stock certificates,
certificates for whole shares only can be obtained on specific written request
to the Transfer Agent.

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

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

Mail

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

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

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

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

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13
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reject purchases by check made payable to someone other than the Fund.

Bank Wire

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

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

A/C #_______________________________

Account of (Registered Owner)
---------------------------
225 Franklin Street, Boston, MA 02110

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

Personal Delivery

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

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

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

Automatic Investment Plan

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

Systematic Withdrawal Plan

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

Other Investors

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

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REDEMPTION OF SHARES

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

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

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

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

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

Telephone Redemption
By Check

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the address has not changed within thirty (30) days prior to your request. The
check will be made payable to the person in whose name the account is registered
and will normally be mailed within seven (7) days.

By Bank Wire

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

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

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

RETIREMENT PLANS

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

Investors who are self-employed may purchase shares of the Fund through
tax-deductible contributions to retirement plans for self-employed persons,
known as Keogh or H.R. 10 plans. The Fund does not currently act as Sponsor for
such plans. Fund shares may also be a suitable investment for other types of
qualified pension or profit-sharing plans which are employer-sponsored,
including deferred compensation or salary reduction plans known as "401(k)
Plans" which give participants the right to defer portions of their compensation
for investment on a tax-deferred basis until distributions are made from the
plans. The minimum initial investment for an individual under such plans is
$1,000 and there is no minimum for additional investments. Under the Code,
individuals may make wholly or partly tax deductible IRA contributions of up to
$2,000 annually, depending on whether they are active participants in an
employer-sponsored retirement plan and on their income level. However, dividends
and distributions held in the account are not taxed until withdrawn in
accordance with the provisions of the Code. An individual with a non-working
spouse may establish a separate IRA for the spouse under the same conditions and
contribute a maximum of $4,000 annually (beginning for 1997 contributions) to
either or both IRAs pro-

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vided that no more than $2,000 may be contributed to the IRA of either spouse.

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

DIVIDENDS, DISTRIBUTIONS AND TAXES

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

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

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

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

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

GENERAL INFORMATION

Description of Shares, Voting Rights
and Liabilities

The Fund is a series of Gabelli Equity Series Funds, Inc., which was
incorporated in Maryland on July 25, 1991. The authorized capital stock consists
of one billion shares of stock having a par value of one tenth of one cent
($.001) per share, one hundred million of which have been initially classified
as Fund shares. The Corporation is not required, and does not intend, to hold
regular annual shareholder meetings, but may hold special meetings for
consideration of proposals requiring shareholder approval, such as changing
fundamental policies or upon the written request of 10% of the Fund's shares to
replace its Directors. The Corporation's Board of

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Directors is authorized to divide the unissued shares into separate series of
stock, each series representing a separate, additional portfolio. The Board
currently has authorized the division of the unissued shares into two series
each having a separate portfolio. Shares of all series will have identical
voting rights, except where by law, certain matters must be approved by a
majority of the shares of the affected series. Each share of any series of
shares when issued has equal dividend, liquidation (see "Redemption of Shares")
and voting rights within the series for which it was issued and each fractional
share has those rights in proportion to the percentage that the fractional share
represents of a whole share. Shares will be voted in the aggregate.

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

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

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

Shareholder Approval

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

Performance Information

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

Custodian, Transfer Agent and
Dividend Disbursing Agent

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at The BFDS Building, Two Heritage Drive, North Quincy, MA 02171. State Street
Bank and Trust Company does not assist in and is not responsible for investment
decisions involving assets of the Fund.

Independent Auditors

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

Information for Shareholders

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

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

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

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TABLE OF CONTENTS

Page
----
Prospectus Summary ......................... 2

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

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

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

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

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

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

Purchase of Shares ......................... 13

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

Retirement Plans ........................... 16

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

General Information ........................ 17

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

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<PAGE>

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The
Gabelli
Small Cap
Growth
Fund

PROSPECTUS

January 30, 1997

GABELLI FUNDS, INC.
Investment Adviser

GABELLI & COMPANY, INC.
Distributor

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<PAGE>

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The Gabelli Small Cap Growth Fund

One Corporate Center
Rye, New York 10580-1434
Telephone: 1-800-GABELLI (1-800-422-3554)
http://www.gabelli.com

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

PROSPECTUS January 30, 1997

The Gabelli Small Cap Growth Fund (the "Fund") is a series of Gabelli Equity
Series Funds, Inc., a Maryland corporation (the "Corporation"). The Fund is a
no-load open-end, diversified, management investment company whose investment
objective is to seek a high level of capital appreciation on its assets. The
Fund seeks to achieve its investment objective by investing primarily in the
equity securities of smaller companies (those with market values at the time of
investment of less than $500 million) which the Fund's investment adviser
believes are likely to have rapid growth in revenue and/or earnings and
potential for above average capital appreciation.

Shares of the Fund may be purchased without a sales load at net asset value. The
minimum initial investment is $1,000. Additionally, accounts establishing an
Automatic Investment Plan do not require any minimum initial investment (see
"Purchase of Shares"). The Fund has a distribution plan which permits it to pay
up to .25% per year of its average daily net assets for marketing and
shareholder services and expenses. For further information, contact Gabelli &
Company, Inc. at the address or telephone number shown above.

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

This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Fund. A Statement of Additional Information
dated January 30, 1997 (the "Additional Statement") containing additional
information about the Fund has been filed with the Securities and Exchange
Commission (the "SEC") and is available for reference along with other materials
on the SEC Internet website (http://www.sec.gov) and is incorporated by
reference into this Prospectus. For a free copy, write or call the Fund at the
telephone number or address set forth above.

Shares of the Fund are not deposits or obligations of any bank, are not endorsed
or guaranteed by any bank and are not insured or guaranteed by the Federal
Deposit Insurance Corporation, The Federal Reserve Board or any other government
agency and involve risk, including the possible loss of principal.

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

This Prospectus should be retained
by investors for future reference.

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

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<PAGE>

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PROSPECTUS SUMMARY

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

The Fund: The Gabelli Small Cap Growth Fund is a no-load open-end,
diversified, management investment company.

Investment Objective: The Fund's investment objective is to seek a high level of
capital appreciation on its assets. The Fund will seek to achieve this
objective by investing primarily in equity securities of smaller companies
(those with total market values at the time of investment of less than
$500 million) which the Fund's investment adviser believes are likely to
have rapid growth in revenues and/or earnings and potential for above
average capital appreciation. Although the Fund may also invest in any
type of fixed income instrument and may use various special investment
techniques, under normal market conditions the Fund will invest at least
65% of its total assets in the equity securities of smaller growth
companies (as defined above). Equity securities include common stock,
preferred stock and securities convertible into or exchangeable for common
or preferred stock. See "Investment Objective and Policies and Related
Risk Factors" and "Other Investment Techniques and Related Risk Factors."

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

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2
<PAGE>

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

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

TABLE OF FEES AND EXPENSES

Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on Purchases........................... None
Maximum Sales Charge Imposed on Reinvested Dividends................ None
Deferred Sales Charge............................................... None
Redemption Fees..................................................... None
Exchange Fees....................................................... None

Annual Fund Operating Expenses (as a percentage of average net
assets):

Management Fees (a)................................................. 1.00%
12b-1 Expenses (b).................................................. .25
Other Expenses (c).................................................. .33%
-------
Total Fund Operating Expenses................................... 1.58%
=======

Example: 1 year 3 years 5 years 10 years
------ ------- ------- --------
You would pay the following expenses
on a $1,000 investment, assuming a 5%
annual return at the end of each period... $16 $50 $86 $188

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The amounts listed in this example should not be considered as representative of
future expenses since actual expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, the Fund's
actual performance will vary and may result in an actual return greater or less
than 5%.
- --------------------------------------------------------------------------------
The foregoing table is to assist you in understanding the various direct and
indirect costs and expenses that an investor in the Fund would bear.

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3
<PAGE>

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FINANCIAL HIGHLIGHTS

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

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

1996 1995 1994 1993 1992+
------- ------- ------- ------- -------
<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)
------- ------- ------- ------- -------
Total Distributions .......................... (1.34) (1.03) (0.42) (0.19) (0.08)
Net asset value, end of period ............... $ 20.02 $ 19.34 $ 17.24 $ 16.90 $ 13.10
======= ======= ======= ======= =======
Total Return ................................. 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% 18% 13% 16%
Average commission rate per share (a) ....... $ 0.049 -- -- -- --
</TABLE>

- ----------
* Annualized
+ For the period October 22, 1991 (commencement of operations) through
September 30, 1992.
(a) For fiscal years beginning on or after Nov. 1, 1995, a fund is required to
disclose its average commission rate paid per share for purchases and
sales of investment securities.

INVESTMENT OBJECTIVE AND POLICIES
AND RELATED RISK FACTORS

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

Equity Securities

Common stocks represent the residual ownership interest in the issuer and are
entitled to the income and increase in the value of the assets and business of
the entity after all of its obliga-

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4
<PAGE>

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tions and preferred stock are satisfied. Common stocks generally have voting
rights. Common stocks fluctuate in price in response to many factors including
historical and prospective earnings of the issuer, the value of its assets,
general economic conditions, interest rates, investor perceptions and market
liquidity.

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

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

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

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5
<PAGE>

nonconvertible debt securities described below. There is no minimum credit
rating for these securities in which the Fund may invest.

Nonconvertible Debt Securities

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

Asset-Backed and Mortgage-Backed
Securities

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

OTHER INVESTMENT TECHNIQUES
AND RELATED RISK FACTORS

Foreign Securities

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

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6
<PAGE>

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than there is in the U.S. The Fund might have greater difficulty taking
appropriate legal action in non-U.S. courts. Non-U.S. markets also have
different clearance and settlement procedures which in some markets have at
times failed to keep pace with the volume of transactions, thereby creating
substantial delays and settlement failures that could adversely affect the
Fund's performance.

Corporate Reorganizations

Subject to the Fund's policy of investing at least 65% of its assets in equity
securities of smaller companies, the Fund may invest without limit in securities
for which a tender or exchange offer has been made or announced and in
securities of companies for which a merger, consolidation, liquidation or
similar reorganization proposal has been announced if, in the judgment of the
Adviser, there is a reasonable prospect of capital appreciation significantly
greater than the added portfolio turnover expenses inherent in the short term
nature of such transactions. The principal risk is that such offers or proposals
may not be consummated within the time and under the terms contemplated at the
time of the investment, in which case, unless such offers or proposals are
replaced by equivalent or increased offers or proposals which are consummated,
the Fund may sustain a loss. For further information on such investments, see
"Other Investment Techniques" in the Additional Statement.

Options and Futures

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

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

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

Other Investment Companies

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

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7
<PAGE>

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Warrants and Rights

Unseasoned Companies

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

When Issued, Delayed Delivery
Securities and Forward Commitments

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

Short Sales

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

If the price of the security sold short increases between the time of the short
sale and the time the Fund replaces the borrowed security, the

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8
<PAGE>

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

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

Restricted and Illiquid Securities

The Fund may invest up to 15% of its net assets in securities the markets for
which are illiquid. Illiquid securities include most of the securities the
disposition of which is subject to substantial legal or contractual
restrictions. The sale of illiquid securities often requires more time and
results in higher brokerage charges or dealer discounts and other selling
expenses than does the sale of securities eligible for trading on national
securities exchanges or in the over-the-counter markets. Restricted securities
may sell at a price lower than similar securities that are not subject to
restrictions on resale. Securities freely salable among qualified institutional
investors under special rules adopted by the Securities and Exchange Commission
may be treated as liquid if they satisfy liquidity standards established by the
Board of Directors. The continued liquidity of such securities is not as well
assured as that of publicly traded securities, and accordingly the Board of
Directors will monitor their liquidity.

Repurchase Agreements

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

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9
<PAGE>

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accrued interest. If the seller fails to repurchase the securities, the Fund may
suffer a loss to the extent proceeds from the sale of the underlying securities
are less than the repurchase price. The Fund will not enter into repurchase
agreements of a duration of more than seven days if, taken together with all
other illiquid securities in the Fund's portfolio, more than 10% of its total
assets would be so invested.

Loans of Portfolio Securities

Borrowing

Portfolio Turnover

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

MANAGEMENT OF THE FUND

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10
<PAGE>

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Fund's Board of Directors, provides a continuous investment program for the
Fund's portfolio; provides investment research and makes and executes
recommendations for the purchase and sale of securities and the exercise of all
voting and other rights appertaining thereto; provides facilities and personnel
required for the Fund's administrative management; supervises the performance of
administrative and professional services provided by others, and pays the
compensation of the Administrator and all officers and directors of the Fund who
are its affiliates. Mr. Mario J. Gabelli --Portfolio Manager, will be primarily
responsible for the day-to-day management of The Gabelli Small Cap Growth Fund.
Mr. Gabelli is Chairman, President and Chief Executive Officer and a Director of
the Adviser. As compensation for its services and the related expenses borne by
the Adviser, the Fund pays the Adviser a fee, computed daily and payable
monthly, equal, on an annual basis, to 1.00% of the Fund's average daily net
assets, which is higher than that paid by most mutual funds. For the fiscal
years ended September 30, 1994, September 30, 1995 and September 30, 1996, the
Adviser received fees of $2,102,245, $2,112,855 and $2,276,908, respectively,
representing an annualized fee of 1.00% of average net assets. The Adviser is
located at One Corporate Center, Rye, New York 10580-1434.

The Adviser was formed in 1980 and as of December 31, 1996 acts as investment
adviser to the following funds with aggregate assets in excess of $4.1 billion:

Net Assets
Open-end funds: 12/31/96
- --------------- --------
(in millions)
Gabelli Asset Fund $1,080
Gabelli Growth Fund 609
Gabelli Gold Fund, Inc. 17
Gabelli Value Fund Inc. 461
Gabelli Small Cap Growth Fund 216
Gabelli Equity Income Fund 60
Gabelli U.S. Treasury Money Market Fund 234
Gabelli ABC Fund 27
The Gabelli Global Telecommunications Fund 109
The Gabelli Global Interactive
Couch Potato(R) Fund 32
The Gabelli Global Convertible Securities Fund 14
Gabelli International Growth Fund, Inc. 13
Gabelli Capital Asset Fund 51

Closed-end funds:
- -------------
The Gabelli Convertible
Securities Fund, Inc. 90
The Gabelli Equity Trust Inc. 1,015
The Gabelli Global Multimedia
Trust Inc. 91

Gabelli & Company, Inc., the Distributor of each open-end fund's respective
shares, is an indirect majority owned subsidiary of the Adviser. GAMCO
Investors, Inc. ("GAMCO"), a majority owned subsidiary of the Adviser, acts as
investment adviser for individuals, pension trusts, profit sharing trusts and
endowments. As of December 31, 1995, GAMCO had aggregate assets in excess of
$5.2 billion under its management. Teton Advisors LLC is an affiliated
Investment Adviser to the Westwood Funds with aggregate assets in excess of $88
million. Mr. Mario J. Gabelli may be deemed a "controlling person" of the
Adviser and the Distributor on the basis of his ownership of stock of the
Adviser.

In addition to the fees of the Adviser, the Fund is responsible for the payment
of all its other expenses incurred in the operation of the Fund, which include,
among other things, expenses for legal and independent auditor's services, costs
of printing all materials sent to shareholders, charges of State Street Bank and
Trust Company (the "Custodian", "Transfer Agent" and dividend paying agent), and
any persons hired by the Fund, Securities and Exchange Commission fees, fees and
expenses of unaffiliated directors, accounting and printing costs for reports
and similar materials sent to shareholders, the Fund's pro rata portion of
membership fees in trade organizations, fidelity bond coverage for the Fund's
officers and employees, interest, brokerage and other trading costs, taxes,
expenses of qualifying the Fund for sale in

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11
<PAGE>

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various jurisdictions, expense of the Fund's distribution plan adopted under
Rule 12b-1, expenses of personnel performing shareholder servicing functions,
litigation and other extraordinary or non-recurring expenses and other expenses
properly payable by the Fund.

Administrator

The Adviser has entered into an Administration Contract with BISYS Fund
Services, Inc. ("BISYS" or the "Administrator") pursuant to which the
Administrator provides certain administrative services necessary for the Fund's
operations. These services include the preparation and distribution of materials
for meetings of the Fund's Board of Directors, compliance testing of Fund
activities and assistance in the preparation of proxy statements, reports to
shareholders and other documentation. The Administrator's services do not
include the investment advisory and portfolio management services provided by
the Adviser. For the services and related expenses borne by BISYS, the Adviser
pays it a monthly fee at the annual rate of .10% of the average net assets of
all the funds advised by such Adviser, (with a minimum annual fee of $40,000 per
portfolio) on the first $350 million of funds advised by the Adviser and
administered by BISYS and 0.075% of any net assets above $350 million, and .06%
of any assets above $600 million, which, together with the services to be
rendered, are subject to negotiation between the parties and both parties retain
the right unilaterally to terminate the arrangement on not less than 60 days'
notice. BISYS has its office at 3435 Stelzer Road, Columbus, Ohio 43219.

DISTRIBUITION PLAN

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

The Board of Directors has initially implemented the Plan by having the
Corporation enter into an agreement with the Distributor authorizing
reimbursement of expenses (including overhead)

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12
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incurred by the Distributor and its affiliates up to the .25% rate authorized by
the Plan for distribution activities of the types listed above. To the extent
any of these payments are based on allocations by the Distributor, the Fund may
be considered to be participating in joint distribution activities with other
funds distributed by the Distributor. Any such allocations would be subject to
approval by the Fund's non-interested Directors and would be based on such
factors as the net assets of each Fund, the number of shareholder inquiries and
similar pertinent criteria. For the fiscal years ended September 30, 1994,
September 30, 1995 and September 30, 1996, the Fund incurred distribution costs
payable to the Adviser, of $525,520, $528,080 and $503,777, respectively, or
0.25% of average net assets, under the Plan.

PURCHASE OF SHARES

Shares of the Fund are sold at the net asset value per share next determined
after receipt of an order by the Fund's Distributor or Transfer Agent in proper
form with accompanying check or bank wire payments arrangements satisfactory to
the Fund. The minimum initial investment is $1,000. There is no minimum initial
investment for accounts establishing an Automatic Investment Plan. Custodial
accounts for minor children require only $1,000. There is no minimum for
subsequent investments. Although most shareholders elect not to receive stock
certificates, certificates for whole shares only can be obtained on specific
written request to the Transfer Agent.

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

Mail

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

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

Subsequent purchases do not require a completed application and can be made by
(1) mailing a check to the same address noted above or by (2) bank wire, as
indicated below. The exact

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13
<PAGE>

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name and number of the shareholder's account should be clearly indicated.

Bank Wire

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

A/C #_______________________________

Account of (Registered Owner)
-----------------------------
225 Franklin Street, Boston, MA 02110

Personal Delivery

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

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

Telephone Investment Plan

Automatic Investment Plan

Systematic Withdrawal Plan

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14
<PAGE>

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Other Investors

REDEMPTION OF SHARES

Upon receipt by the Distributor or the Transfer Agent of a redemption request in
proper form, shares of the Fund will be redeemed at their next determined net
asset value. Redemption requests received after the time as of which the Fund's
net asset value is determined on a particular day will be redeemed at the net
asset value of the Fund determined on the next day that net asset value is
determined. Checks for redemption proceeds will normally be mailed to the
shareholder's address of record within seven days, but will not be mailed until
all checks in payment for the purchase of the shares to be redeemed have been
honored, which may take up to 15 days. Redemption requests may be made by letter
to the Transfer Agent, specifying the name of the Fund, the dollar amount or
number of shares to be redeemed, and the account number. The letter must be
signed in exactly the same way the account is registered (if there is more than
one owner of the shares, all must sign) and, if any certificates for the shares
to be redeemed are outstanding, presentation of such certificates properly
endorsed is also required. Signatures on a redemption request and/or
certificates must be guaranteed by an "eligible guarantor institution" as such
term is defined in Rule 17Ad-15 under the Securities Exchange Act of 1933, which
includes certain banks, brokers, dealers, credit unions, securities exchanges
and associations, clearing agencies and savings associations (signature
guarantees by notaries public are not acceptable). Shareholders may also redeem
Fund shares through certain registered broker-dealers, who have made
arrangements with the Fund permitting them to redeem shares by telephone or
facsimile transmission and who may charge shareholders a fee for this service if
they have not received any payments under the Distribution Plan.

To minimize expenses, the Fund reserves the right to redeem, upon not less than
30 days notice, all shares of the Fund in an account (other

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15
<PAGE>

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than an IRA) which as a result of shareholder redemption has a value below $500.
However, a shareholder will be allowed to make additional investments prior to
the date fixed for redemption to avoid liquidation of the account.

Telephone Redemption
By Check

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

By Bank Wire

RETIREMENT PLANS

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16
<PAGE>

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$1,000 and there is no minimum for additional investments. Under the Code,
individuals may make wholly or partly tax deductible IRA contributions of up to
$2,000 annually, depending on whether they are active participants in an
employer-sponsored retirement plan and on their income level. However, dividends
and distributions held in the account are not taxed until withdrawn in
accordance with the provisions of the Code. An individual with a non-working
spouse may establish a separate IRA for the spouse under the same conditions and
contribute a maximum of $4,000 annually (beginning for 1997 contributions) to
either or both IRAs provided that no more than $2,000 may be contributed to the
IRA of either spouse.

DIVIDENDS, DISTRIBUTIONS AND TAXES

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

GENERAL INFORMATION

Description of Shares, Voting Rights
and Liabilities

The Fund is a series of Gabelli Equity Series Funds, Inc., (the "Corporation")
which was incor-

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17
<PAGE>

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

Shareholder Approval

Performance Information

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18
<PAGE>

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based on investments at various sales charge levels or net asset values.

Custodian, Transfer Agent and
Dividend Disbursing Agent

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

Independent Auditors

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

Information for Shareholders

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

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19
<PAGE>

TABLE OF CONTENTS

Page
----
Prospectus Summary ......................... 2

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

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

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

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

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

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

Purchase of Shares ......................... 13

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

Retirement Plans ........................... 16

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

General Information ........................ 17

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<PAGE>

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GABELLI EQUITY SERIES FUNDS, INC.
THE GABELLI EQUITY INCOME FUND

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

STATEMENT OF ADDITIONAL INFORMATION

January 30, 1997

This Statement of Additional Information ("Additional Statement") relates to The
Gabelli Small Cap Growth Fund (the "Small Cap Fund") and The Gabelli Equity
Income Fund (the "Equity Income Fund") (each a "Fund" collectively the "Funds")
which are series of Gabelli Equity Series Funds, Inc., a Maryland corporation
(the "Corporation"), and is not a prospectus and is only authorized for
distribution when preceded or accompanied by the relevant Fund's prospectus
dated January 30, 1997, as supplemented from time to time (the "Prospectus").
This Statement of Additional Information contains additional and more detailed
information than that set forth in the Prospectus and should be read in
conjunction with the Prospectus, additional copies of which may be obtained
without charge by writing or telephoning the Fund at the address and telephone
number set forth above.

TABLE OF CONTENTS
Page
-----

Other Investment Techniques ................... B-2

The Adviser ................................... B-5

The Distributor ............................... B-6

Directors and Officers ........................ B-7

Investment Restrictions ....................... B-10

Portfolio Transactions and Brokerage .......... B-11

Purchase and Redemption of Shares ............. B-13

Determination of Net Asset Value .............. B-13

Dividends, Distributions and Taxes ............ B-13

Investment Performance Information ............ B-16

Appendix to Statement of Additional Information B-17

Financial Statements .......................... B-21

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<PAGE>

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OTHER INVESTMENT TECHNIQUES

Securities Subject to Reorganization

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

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

Nonconvertible Debt Securities

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

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B-2
<PAGE>

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

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

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

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

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

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B-3
<PAGE>

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Hedging Transactions

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

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

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

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

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

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B-4
<PAGE>

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THE ADVISER

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

Pursuant to an Investment Advisory Contract which was approved by each
Fund's sole shareholder on December 9, 1991 for the Equity Income Fund and
October 2, 1991 for the Small Cap Fund, the Adviser furnishes a continuous
investment program for each Fund's portfolio, makes the day-to-day investment
decisions for each Fund, arranges the portfolio transactions for each Fund and
generally manages each Fund's investments in accordance with the stated policies
of each Fund, subject to the general supervision of the Board of Directors of
the Corporation.

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

The Adviser has entered into an Administration Contract with BISYS Fund
Services ("BISYS" or the "Administrator") 3435 Stelzer Road, Columbus, Ohio
43219, pursuant to which the Administrator provides certain administrative
services necessary for the Fund's operations but which do not concern the
investment advisory and portfolio management services provided by the Adviser.
For such services and the related expenses borne by BISYS, the Adviser pays a
monthly fee at the annual rate of .10% of the average net assets of the Fund
(minimum annual fee of $40,000 per portfolio) on the first $350 million of funds
advised by such Adviser and administered by BISYS and .075% of any net assets
above $350 million, and .06% of any assets above $600 million which together
with the services to be rendered, is subject to negotiation between the parties
and both parties retain the right unilaterally to terminate the arrangement on
not less than 60 days' notice.

The Investment Advisory Contract provides that absent willful misfeasance,
bad faith, gross negligence or reckless disregard of its duty, the Adviser and
its employees, officers, directors and controlling persons are not liable to the
Funds or any of its investors for any act or omission by the Adviser or for any
error of judgment or for losses sustained by the Funds. However, the Contract
provides that each Fund is not waiving any rights it may have with respect to
any violation of law which cannot be waived. The Contract also provides
indemnification for the Adviser and each of these persons for any conduct for
which they are not liable to the Funds. The Investment Advisory Contract in no
way restricts the Adviser from acting as adviser to others. The Funds have
agreed by the terms of the Investment

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B-5
<PAGE>

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Advisory Contract that the word "Gabelli" in its name is derived from the name
of the Adviser which in turn is derived from the name of Mario J. Gabelli; that
such name is the property of the Adviser for copyright and/or other purposes;
and that therefore, such name may freely be used by the Adviser for other
investment companies, entities or products. The Funds have further agreed that
in the event that for any reason, the Adviser ceases to be its investment
adviser, the Funds will, unless the Adviser otherwise consents in writing,
promptly take all steps necessary to change its name to one which does not
include "Gabelli."

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

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

THE DISTRIBUTOR

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

The Distribution Agreement is terminable by the Distributor or the
Corporation at any time without penalty on not more than sixty nor less than
thirty days' written notice, provided, that termination by the Corporation must
be directed or approved by the Board of Directors of the Corporation, by the
vote of the holders of a majority of the outstanding securities of the Funds or
by written consent of a majority of the directors who are not interested persons
of the Corporation or the Distributor. The Distribution

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B-6
<PAGE>

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Agreement will automatically terminate in the event of its assignment, as
defined in the Act.The Distribution Agreement provides that, unless terminated,
it will remain in effect until October 1, 1993 for the Small Cap Fund and
December 15, 1993 for the Equity Income Fund and from year to year thereafter,
so long as continuance of the Distribution Agreement is approved annually by the
Corporation's Board of Directors or by a majority of the outstanding voting
securities of the Corporation, and in either case, also by a majority of the
Directors who are not interested persons of the Corporation or the Distributor.

DIRECTORS AND OFFICERS

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

Principal Occupations During
Name, Position with the Funds Last Five Years; Affiliations
and Address with the Adviser or Administrator.
- --------------------------------- ---------------------------------------------

Mario J. Gabelli* Mr. Gabelli is Chairman, Chief Executive
President, Director and Officer, Chief Investment Officer and a
Chief Investment Officer Director of Gabelli Funds, Inc. and GAMCO
Age: 54 Investors, Inc.; President and Chairman of
The Gabelli Equity Trust Inc.; The Gabelli
Global Multimedia Trust Inc.; President,
Chief Investment Officer and Director of The
Gabelli Value Fund Inc., The Gabelli
Convertible Securities Fund, Inc., Gabelli
Investor Funds, Inc., Gabelli Capital Asset
Fund and Gabelli Global Series Funds, Inc.
Director of Gabelli International Growth
Fund, Inc. and Gabelli Gold Fund, Inc.
Trustee of The Gabelli Asset Fund; The
Gabelli Money Market Funds; and The Gabelli
Growth Fund; Chairman and Director of Lynch
Corporation. Director and Adviser of Gabelli
International Ltd. and Gabelli Associates,
Ltd. Director of The Morgan Group, Inc. and
Spinnaker Industries, Inc.

James E. McKee Vice President and General Counsel and
Secretary Secretary of Gabelli Funds, Inc.; Secretary
Age: 33 of all Funds Advised by Gabelli Funds, Inc.
and Teton Advisers LLC. Secretary of The
Westwood Funds since August 1995. Vice
President and General Counsel of GAMCO
Investors, Inc. since 1993. Formerly Branch
Chief with the U.S. Securities and Exchange
Commission in New York from 1992 through
1993. Staff attorney with the Securities and
Exchange Commission in New York from 1989
through 1992.

Bruce N. Alpert Vice President and Chief Financial Officer of
Vice President and the investment advisory division of the
Treasurer Adviser, President and Treasurer of The
Age: 45 Gabelli Asset Fund and The Gabelli Growth
Fund; Vice President and Treasurer of The
Gabelli Equity Trust Inc., The Gabelli Global
Multimedia Trust Inc., The Gabelli
Convertible Securities Fund, Inc., Gabelli
Investor Funds, Inc., Gabelli International
Growth Fund, Inc., Gabelli Gold Fund, Inc.,
Gabelli Capital Asset Fund, Gabelli Global
Series Funds, Inc. and The Gabelli Money
Market Funds, and since November 1994 Vice
President of The Westwood Funds and Manager
of Teton Advisers LLC.

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

B-7
<PAGE>

Felix J. Christiana Formerly Senior Vice President of Dry Dock
Director Savings Bank. Mr. Christiana is also a
Age: 72 Director of The Gabelli Value Fund Inc., The
Gabelli Convertible Securities Fund, Inc.,
Gabelli Investor Funds, Inc., and Gabelli
Global Series Funds, Inc., The Gabelli Global
Multimedia Trust Inc., The Gabelli Equity
Trust Inc., and The Treasurer's Fund, Inc.,
and a Trustee of The Gabelli Asset Fund and
The Gabelli Growth Fund.

Anthony J. Colavita President and Attorney at Law in the law firm
Director of Anthony J. Colavita, P.C.; Director of The
Age: 61 Gabelli Value Fund Inc. and The Gabelli
Convertible Securities Fund, Inc., Gabelli
Investor Funds Inc., and Gabelli Global
Series Funds, Inc.; Trustee of The Gabelli
Asset Fund, The Gabelli Growth Fund, The
Gabelli Money Market Funds and The Westwood
Funds.

Vincent D. Enright Senior Vice President and Chief Financial
Director Officer of Brooklyn Union Gas Company.
Age: 55 Trustee of The Gabelli Money Market Funds.
Director of Gabelli Investor Funds, Inc., and
Gabelli Global Series Funds, Inc.

John D. Gabelli* Vice President of Gabelli & Company, Inc.,
Director Director of Gabelli Investor Funds, Inc., and
Age: 52 Gabelli Global Series Funds, Inc. Manager of
Teton Advisers LLC.

Robert J. Morrissey Partner in the law firm of Morrissey &
Director Hawkins. Former partner in the law firm of
Age: 57 Withington Cross Park & Groden. Director of
The Gabelli Value Fund Inc.

Anthony R. Pustorino Mr. Pustorino is a Professor of Accounting at
Director Pace University. Formerly President and
Age: 71 shareholder, Pustorino Puglisi & Co.,
certified public accountants (1961-1989). Mr.
Pustorino is a Director of The Gabelli
Convertible Securities Fund, Inc., Gabelli
Investor Funds, Inc., The Gabelli Capital
Series Fund, Inc., and Gabelli Global Series
Funds, Inc., The Gabelli Value Fund Inc., The
Gabelli Global Multimedia Trust Inc., The
Gabelli Equity Trust Inc., The Treasurer's
Fund, Inc., and a Trustee of The Gabelli
Asset Fund and The Gabelli Growth Fund.

Anthonie C. van Ekris Managing Director of Balmac International,
Director Ltd. Director of Stahal Hardmeyer A.Z. and
Age: 62 Spinnaker Industries, Inc. Trustee of The
Gabelli Asset Fund, The Gabelli Growth Fund
and The Gabelli Money Market Funds. Director
of Gabelli Convertible Securities Fund, Inc.,
Gabelli International Growth Fund, Inc.,
Gabelli Investor Funds, Inc., Gabelli Global
Series Funds, Inc. and Gabelli Gold Fund,
Inc.

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

B-8
<PAGE>

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

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

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

The following table sets forth certain information regarding the
compensation of the Corporation's directors and officers. Except as disclosed
below, no executive officer or person affiliated with the Funds received
compensation from either Fund for the calendar year ended December 31, 1996 in
excess of $60,000.

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

B-9
<PAGE>

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

COMPENSATION TABLE
- --------------------------------------------------------------------------------

Aggregate Compensa-
tion from Registrant
(Fiscal Year) Total Compensation
Equity- Small from Registrant and
Name of Person, Income Cap Fund Complex Paid
Position Fund Fund to Directors*
- --------------------------------------------------------------------------------

Mario J. Gabelli $ 0 $ 0 $ 0
President, Director and
Chief Investment Officer
Felix J. Christiana
Director 5,000 5,000 74,000(9)
Anthony J. Colavita
Director 5,000 5,000 70,000(10)
Vincent D. Enright
Director 5,000 5,000 17,000(4)
John D. Gabelli
Director 0 0
Robert J. Morrissey
Director 4,500 4,500 24,500(3)
Anthony R. Pustorino
Director 5,000 5,000 84,000(8)
Anthonie C.van Ekris
Director 5,000 5,000 49,000(12)
Karl Otto Pohl
DIrector 4,500 4,500 77,750(15)

- ----------
* Represents the total compensation paid to such persons during the
calendar year ended December 31, 1996 (and, with respect to the Funds, estimated
to be paid during a full calendar year). The parenthetical number represents the
number of investment companies (including each Fund) from which such person
receives compensation that are considered part of the same fund complex as the
Funds, because, among other things, they have a common investment adviser.

INVESTMENT RESTRICTIONS

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

(1) with respect to 75% of its total assets, invest more than 5% of
the value of its total assets (taken at market value at time of purchase)
in the outstanding securities of any one issuer or own more than 10% of
the outstanding voting securities of any one issuer, in each case other
than securities issued or guaranteed by the U.S. Government or any agency
or instrumentality thereof;

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

B-10
<PAGE>

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

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

(3) issue senior securities (including borrowing money, including on
margin if margin securities are owned and through entering into reverse
repurchase agreements) in excess of 331 1/43% of its total assets
(including the amount of senior securities issued but excluding any
liabilities and indebtedness not constituting senior securities) except
that a Fund may borrow up to an additional 5% of its total assets for
temporary purposes; or pledge its assets other than to secure such
issuances or in connection with hedging transactions, short sales,
when-issued and forward commitment transactions and similar investment
strategies. A Fund's obligations under the foregoing types of transactions
and investment strategies are not treated as senior securities;

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

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

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

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

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

PORTFOLIO TRANSACTIONS AND BROKERAGE

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

The Adviser currently serves as Adviser to a number of investment company
clients and may in the future act as adviser to others. Affiliates of the
Adviser act as investment adviser to numerous private accounts and adviser to
other investment companies. It is the practice of the Adviser and its affiliates
to cause purchase and sale transactions to be allocated among the Funds and
others whose assets they

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

B-11
<PAGE>

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

manage in such manner as it deems equitable. In making such allocations among
the Funds and other client accounts, the main factors considered are the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for investment, the size
of investment commitments generally held and the opinions of the persons
responsible for managing the portfolios of the Funds and other client accounts.

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

The Adviser may also place orders for the purchase or sale of portfolio
securities with Gabelli & Company, Inc. ("Gabelli"), a broker-dealer member of
the National Association of Securities Dealers, Inc. and an affiliate of the
Adviser, when it appears that, as an introducing broker or otherwise, Gabelli
can obtain a price and execution which is at least as favorable as that
obtainable by other qualified brokers. The Adviser may also consider sales of
shares of the Funds and any other registered investment companies managed by the
Adviser and its affiliates by brokers and dealers other than the Distributor as
a factor in its selection of brokers and dealers to execute portfolio
transactions for the Funds. The Funds paid the following brokerage commissions:

Small Cap Fund Equity Income Fund
-------------- ------------------
1994 1995 1996 1994 1995 1996
-------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Affiliated Commissions $ 15,687 $ 17,243 $ 25,682 $ 7,796 $ 6,176 $10,065

Total Commissions 213,534 135,080 133,633 35,227 39,037 25,191

% of affiliated
Commission to total 7.3% 12.8% 19.2% 22.1% 15.8% 40.0%
</TABLE>

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

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

B-12
<PAGE>

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

To obtain the best execution of portfolio trades on the New York Stock
Exchange ("Exchange"), Gabelli controls and monitors the execution of such
transactions on the floor of the Exchange through independent "floor brokers" or
through the Designated Order Turnaround ("DOT") System of the Exchange. Such
transactions are then cleared, confirmed to the Fund for the account of Gabelli,
and settled directly with the Custodian of the Funds by a clearing house member
firm which remits the commission less its clearing charges to Gabelli. Gabelli
may also effect Fund portfolio transactions in the same manner and pursuant to
the same arrangements on other national securities exchanges which adopt direct
access rules similar to those of the New York Stock Exchange.

PURCHASE AND REDEMPTION OF SHARES

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

DETERMINATION OF NET ASSET VALUE

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

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

DIVIDENDS, DISTRIBUTIONS AND TAXES
General

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

Each Fund will determine either to distribute, or to retain for
reinvestment, all or part of any net long-

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

B-13
<PAGE>

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

term capital gain. If any such gains are retained, the Fund will be subject to a
tax of 35% of such amount. In that event, the Fund expects to designate the
retained amount as undistributed capital gain in a notice to its shareholders,
each of whom (1) will be required to include in income for tax purposes as
long-term capital gain its share of undistributed amount, (2) will be entitled
to credit its proportionate share of the tax paid by the Fund against its
Federal income tax liability and to claim refunds to the extent the credit
exceeds such liability, and (3) will increase its basis in its shares of the
Fund by an amount equal to 65% of the amount of undistributed capital gain
included in such shareholder's gross income.

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

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

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

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

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

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

B-14
<PAGE>

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

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

Distributions

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

Sales of Shares

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

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

Backup Withholding

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

Foreign Withholding Taxes

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

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

B-15
<PAGE>

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

Corporate Matters

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

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

INVESTMENT PERFORMANCE INFORMATION

The Funds may furnish data about their investment performance in
advertisements, sales literature and reports to shareholders. "Total return"
represents the annual percentage change in value of $1,000 invested at the
maximum public offering price for the one year period and the life of the Fund
through the most recent calendar quarter, assuming reinvestment of all dividends
and distributions. The Funds may also furnish total return calculations for
these and other periods, based on investments at various sales charge levels or
net asset value.

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

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

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

For the 30 day period ended December 31, 1996, the Small Cap Fund's annualized
yield was -0.62% and for the Equity Income Fund the annualized yield was 1.84%.

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

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

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

B-16
<PAGE>

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

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

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

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

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

For the period from October 22, 1991 (commencement of operations) through
September 30, 1996, The Small Cap Fund's cumulative total return was 138.7% and
the average annual total return for the period from October 22, 1991
(commencement of operations) through September 30, 1996 was 19.2% and for the 12
months ended September 30, 1996 it was 11.0%.

For the period from January 2, 1992 (commencement of operations) through
September 30, 1996, the Equity Income Fund's cumulative total return was 83.2%
and the average annual total return for the period from January 2, 1992
(commencement of operations) through September 30, 1996 was 13.6% and for the 12
months ended September 30, 1996 it was 16.6%

SHARES OF BENEFICIAL INTEREST

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

The following persons were known to own of record 5% or more of the
outstanding voting securities of the Small Cap Fund as of December 27, 1996:

Name and Address of
Holder of Record Percentage of Fund
------------------------- ------------------
Charles Schwab & Co., Inc. 7.6%
101 Montgomery Street
San Francisco, CA

APPENDIX TO STATEMENT OF ADDITIONAL INFORMATION

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

Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong

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

B-17
<PAGE>

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

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

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

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

AAA: Debt rated AAA has the highest rating assigned by S&P's. Capacity to
pay interest and repay principal is extremely strong. AA: Debt rated AA has a
very strong capacity to pay interest and repay principal and differs from the
highest rated issues only in small degree. A: Debt rated A has a strong capacity
to pay interest and repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
debt in higher rated categories. BBB: Debt rated BBB is regarded as having
adequate capacity to pay interest and repay principal. Whereas it normally
exhibits protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than for debt in higher rated
categories. BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions. CI: The rating CI is reserved for income bonds on which no interest
is being paid. D: Debt rated D is in payment default. The D rating category is
used when interest payments or principal

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

B-18
<PAGE>

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

payments are not made on the date due even if the applicable grace period has
not expired, unless S&P's believes that such payments will be made during such
grace period. The D rating also will be used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.

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

Description of Moody's Preferred Stock Ratings

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

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

Description of S&P's Preferred Stock Ratings

AAA: This is the highest rating that may be assigned by S&P's to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations. AA: A preferred stock issue rated AA also qualifies
as a high-quality fixed income security. The capacity to pay preferred stock
obligations is very strong, although not as overwhelming as for issues rated
AAA. A: An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effect of changes in circumstances and economic conditions. BBB: An issue rated
BBB is regarded as backed by an adequate capacity to pay the preferred stock
obligations. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to make payments for a preferred stock in this category than
for issues in the A category. BB, B, CCC: Preferred stock rated BB, B, and CCC
are regarded, on balance, as predominantly speculative with respect to the
issuer's capacity to pay preferred stock obligations. BB indicates the lowest
degree of speculation and CCC the

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

B-19
<PAGE>

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

highest degree of speculation. While such issues will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions. CC: The rating CC is reserved for a
preferred stock in arrears on dividends or sinking fund payments but that is
currently paying. C: A preferred stock rated C is a non-paying issue. D: A
preferred stock rated D is a non-paying issue with the issuer in default on debt
instruments.

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

FINANCIAL STATEMENTS

Each Fund's Financial Statements for the year ended September 30, 1996,
including the Report of Ernst &Young LLP, independent accountants, is included
herein.

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

B-20
<PAGE>

- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------

[PHOTO]

The
Gabelli
Equity
Income
Fund

ANNUAL REPORT
SEPTEMBER 30, 1996

B-21
<PAGE>

The Gabelli Equity Income Fund
Portfolio of Investments -- September 30, 1996

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

Shares Cost Value
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

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

B-22
<PAGE>

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

B-23
<PAGE>

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. BH 436,032 701,719
5,333 Freeport-McMoRan Inc. 116,854 166,656
--------- ---------
603,821 939,175
--------- ---------

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 SpACSocieta
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.

B-24
<PAGE>

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

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

B-25
<PAGE>

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

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 AssetsC(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
===========

Number of Proceeds
Contracts Received Value
--------- -------- -----

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
------ -------
- ----------
* For Federal income purposes:

Aggregate cost............ $43,463,678
===========
Gross unrealized appreciation 14,471,701
Gross unrealized depreciation (736,491)
---------

B-26
<PAGE>

Net unrealized appreciation $13,735,210
===========

+ 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.

B-27
<PAGE>

The Gabelli Equity Income Fund

Statement of Assets and Liabilities
September 30, 1996

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

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

B-28
<PAGE>

Statement of Operations
Year Ended September 30, 1996

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

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
==========

B-29
<PAGE>

Statement of Changes in Net Assets

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

Year Ended September 30,
------------------------
1996 1995
---- ----
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 transactionsCnet (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
=========== ===========

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

B-30
<PAGE>

The Gabelli Equity Income Fund
Notes To Financial Statements

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

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

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

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

B-31
<PAGE>

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.

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:

Purchased put
Written call options: options:
--------------------- --------
Number of Number of
Contracts Premium Contracts Premium
--------- ------- --------- -------

<S> <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>

B-32
<PAGE>

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 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.

B-33
<PAGE>

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
--------- ---------- ---------- ---------- -----------
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.

B-34
<PAGE>

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

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

Shareholders and Board of Directors
The Gabelli Equity Income Fund

We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Gabelli Equity Income Fund (a series of
Gabelli Equity Series Funds, Inc.) as of September 30, 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.

B-35
<PAGE>

This page left intentionally blank

B-36
<PAGE>

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.)

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

DISTRIBUTOR
Gabelli & Company, Inc.

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

LEGAL COUNSEL
Skadden, Arps, Slate, Meagher & Flom

B-37
<PAGE>

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

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.

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

[PHOTO]

The
Gabelli
Small Cap
Growth
Fund

ANNUAL REPORT
SEPTEMBER 30, 1996

B-38
<PAGE>

The Gabelli Small Cap Growth Fund
Portfolio of Investments -- September 30, 1996

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

Shares Cost Value
- ------ ---- -----
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

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

B-39
<PAGE>

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

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

B-40
<PAGE>

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

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

B-41
<PAGE>

37,854 Germany Fund, Inc. 429,141 482,639
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

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

B-42
<PAGE>

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
-------- --------
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.

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

B-43
<PAGE>

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

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

B-44
<PAGE>

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

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

B-45
<PAGE>

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
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

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

B-46
<PAGE>

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
----------- -----------
Principal CONVERTIBLE CORPORATE BONDS -- 0.79%
Amount 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

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

B-47
<PAGE>

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

- ----------
* 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
=============

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

B-48
<PAGE>

+ 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.

Top Ten Holdings
September 30, 1996

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

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

B-49
<PAGE>

The Gabelli Small Cap Growth Fund

Statement of Assets and Liabilities
September 30, 1996

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

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

B-50
<PAGE>

Statement of Operations
For the Year Ended September 30, 1996
- --------------------------------------------------------------------------------

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

Statement of Changes in Net Assets
- --------------------------------------------------------------------------------

Year Ended September 30,
------------------------
1996 1995
---- ----
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
============= =============

B-51
<PAGE>

The Gabelli Small Cap Growth Fund
Notes To Financial Statements

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

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

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

B-52
<PAGE>

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.

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>

B-53
<PAGE>

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.

(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.

B-54
<PAGE>

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

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

Shareholders and Board of Directors
The Gabelli Small Cap Growth Fund

We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Gabelli Small Cap Growth Fund (a series of
Gabelli Equity Series Funds, Inc.) as of September 30, 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.

B-55
<PAGE>

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.)

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

DISTRIBUTOR
Gabelli & Company, Inc.

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

LEGAL COUNSEL
Skadden, Arps, Slate, Meagher & Flom

B-56