GABELLI EQUITY SERIES FUNDS INC, N-30D, 1999-03-02

GABELLI EQUITY SERIES FUNDS INC
N-30D, 1999-03-02

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THE GABELLI EQUITY INCOME FUND

FIRST QUARTER REPORT

DECEMBER 31, 1998(A)

(GRAPHIC)

MORNINGSTAR RATING(TM) OF THE GABELLI EQUITY INCOME FUND WAS 4 STARS OVERALL
AND FOR THE THREE YEAR PERIOD ENDED 12/31/98 AMONG 2802 DOMESTIC EQUITY FUNDS,
AND FOR THE FIVE YEAR PERIOD ENDED 12/31/98 AMONG 1702 DOMESTIC EQUITY FUNDS.

TO OUR SHAREHOLDERS,

Income oriented equities closed 1998 with respectable gains, albeit well
below the returns of the Standard & Poor's 500 Index. Traditionally higher
yielding sectors such as electric utilities and energy stocks underperformed the
market indices, with the latter sustaining rather large losses as oil prices
declined to fifteen year lows. Telecommunications, media and drug stocks led the
equity income performance parade.

INVESTMENT PERFORMANCE

For the quarter ended December 31, 1998, The Gabelli Equity Income Fund's
(the "Fund") total return was 12.7% after adjusting for the $1.27 per share
dividend paid on December 21, 1998. The Lipper Analytical Services Equity Income
Fund Average and the Standard & Poor's ("S&P") 500 Index had returns of 13.4%
and 21.4%, respectively, over the same period. Each index is an unmanaged
indicator of investment performance. The Fund was up 12.6% for 1998. The Lipper
Equity Income Fund Average and S&P 500 rose 10.9% and 28.7%, respectively, over
the same twelve month period.

For the five year period ended December 31, 1998, the Fund's total return
averaged 17.1% annually versus average annual total returns of 16.6% and 24.1%
for the Lipper Equity Income Fund Average and S&P 500, respectively. Since
inception on January 2, 1992 through December 31, 1998, the Fund had a
cumulative total return of 184.9%, which equates to an average annual return of
16.1%. The Dividend History Chart details each dividend paid by the Fund since
inception.

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PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Morningstar proprietary
ratings reflect historical risk adjusted performance as of December 31, 1998 and
are subject to change every month. Morningstar ratings are calculated from a
Fund's three, five and ten year average annual returns in excess of 90-day
T-Bill returns with appropriate fee adjustments and a risk factor that reflects
fund performance below 90-day T-Bill returns. The top 10% of the funds in an
investment category receive five stars, the next 22.5% receive four stars, the
next 35% receive three stars, the next 22.5% receive two stars and the bottom
10% receive one star. (a) The Fund's fiscal year ends September 30.
<PAGE>
INVESTMENT RESULTS (a)(c)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Calendar Quarter
<S> <C> <C> <C> <C>
1st 2nd 3rd 4th Year
--- --- --- --- ----
1998: Net Asset Value $17.70 $17.72 $15.97 $16.70 $16.70
Total Return 10.1% 0.5% (9.7)% 12.7% 12.6%
- -----------------------------------------------------------------------------------------------------------------
1997: Net Asset Value $14.27 $16.03 $17.39 $16.12 $16.12
Total Return 1.2% 12.7% 8.8% 3.0% 27.9%
- -----------------------------------------------------------------------------------------------------------------
1996: Net Asset Value $13.47 $13.54 $13.81 $14.16 $14.16
Total Return 5.5% 1.0% 2.5% 8.0% 17.9%
- -----------------------------------------------------------------------------------------------------------------
1995: Net Asset Value $11.56 $11.99 $12.65 $12.84 $12.84
Total Return 8.5% 4.3% 6.1% 6.9% 28.3%
- -----------------------------------------------------------------------------------------------------------------
1994: Net Asset Value $11.26 $11.08 $11.54 $10.72 $10.72
Total Return (2.2)% (0.8)% 4.9% (0.7)% 1.1%
- -----------------------------------------------------------------------------------------------------------------
1993: Net Asset Value $11.35 $11.72 $12.15 $11.57 $11.57
Total Return 7.4% 3.8% 4.2% 1.5% 17.9%
- -----------------------------------------------------------------------------------------------------------------
1992: Net Asset Value $10.19 $10.36 $10.40 $10.64 $10.64
Total Return 2.4%(b) 2.3% 1.1% 3.7% 9.8%(b)
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Average Annual Returns - December 31, 1998 (a)

1 Year 12.6%
5 Year 17.1%
Life of Fund (b) 16.1%

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

The success of momentum investing in recent years and investors' desire
for instant gratification have combined to make value investing appear dull. At
the risk of being dull, we will once again describe the "boring" value approach
that has seen us through both good and bad markets over the last seven years at
The Gabelli Equity Income Fund and for over 21 years at Gabelli Asset Management
Company. In past reports, we have tried to articulate our investment philosophy
and methodology. The accompanying graphic further illustrates the interplay
among the four components of our valuation approach.

Our focus is on free cash flow; earnings before interest, taxes,
depreciation and amortization ("EBITDA") minus the capital expenditures
necessary to grow the business. We believe free cash flow is

(GRAPHIC)

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

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

Dividend History
- -----------------------------------------------------------------
Rate Reinvestment
Payment (ex) Date Per Share Price
----------------- --------- -----

December 21, 1998 $1.27 $16.36
September 28, 1998 $0.04 $16.20
June 26, 1998 $0.06 $17.65
March 27, 1998 $0.05 $17.70
- -----------------------------------------------------------------
December 29, 1997 $1.78 $15.94
September 30, 1997 $0.05 $17.39
June 30, 1997 $0.05 $16.03
March 31, 1997 $0.06 $14.27
- -----------------------------------------------------------------
December 27, 1996 $0.76 $14.28
September 30, 1996 $0.07 $13.81
June 28, 1996 $0.06 $13.54
March 31, 1996 $0.07 $13.47
- -----------------------------------------------------------------
December 29, 1995 $0.68 $12.84
September 29,1995 $0.07 $12.65
June 30, 1995 $0.07 $11.99
March 31, 1995 $0.07 $11.56
- -----------------------------------------------------------------
December 30, 1994 $0.74 $10.72
September 30, 1994 $0.08 $11.54
June 30, 1994 $0.09 $11.08
March 31, 1994 $0.06 $11.26
- -----------------------------------------------------------------
December 31, 1993 $0.76 $11.57
September 30, 1993 $0.06 $12.15
June 30, 1993 $0.06 $11.72
March 31, 1993 $0.08 $11.35
- -----------------------------------------------------------------
December 31, 1992 $0.15 $10.64
September 30, 1992 $0.07 $10.40
June 30, 1992 $0.06 $10.36
March 31, 1992 $0.05 $10.19

3
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COMMENTARY
OUTLOOK FOR 1999

Mario Gabelli, our Chief Investment Officer, has appeared in the
prestigious BARRON'S Roundtable discussion annually since 1980. Many of our
readers have enjoyed the inclusion of selected and edited comments from BARRON'S
Roundtable in previous reports to shareholders. Once again, we are including
selected comments of Mario Gabelli from BARRON'S 1999 Roundtable. For our
shareholders who prefer to view the entire interview, the complete text is
available on the Internet at www.barrons.com.

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January 18, 1999 BARRON'S o Roundtable'99
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(GRAPHIC)
BARRON'S
ROUNDTABLE'99
--------------------

MARIO GABELLI
CHAIRMAN AND CHIEF INVESTMENT OFFICER,
GABELLI FUNDS, RYE, NEW YORK
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Barron's ("Q"): A NEW YEAR, A NEW MARKET ENVIRONMENT? MEANING, ARE INVESTORS
GOING TO HAVE TO GRAPPLE WITH SEISMIC ECONOMIC SHIFTS AS WELL AS IMPEACHMENT AND
Y2K?

Gabelli ("G"): Let's focus on the U.S. economy. I'm in the camp that argues that
consumers are going to get another tailwind. There is going to be a major tax
cut that is going to be very stimulative to the consumer. If I'm a consumer
today, I feel good. I'm working. Gasoline, I just went and bought a tankful. I
paid 20 cents a gallon less than it cost me the last time I filled up.

Q: YOU OBVIOUSLY DON'T DO IT OFTEN.

G: What I mean is that on 500 gallons of gas, I save 100 bucks. That's two bucks
a week. That's terrific. There are 50 million vehicles on the road. At two bucks
a week, that's $100 million a week, that's around $5 billion annually going back
into consumers' pockets. I just refinanced my mortgage. I got a jumbo $240,000
loan at 67/8%. I'm saving 1%, that's $2,400, that's another $45 or so a week and
I'm going to get a tax cut. And I own Internet stocks. I think this is terrific.

Q: BUT YOU COULD SEE LONG-TERM INTEREST RATES GOING UP SOON BECAUSE JAPAN MAY BE
ASKING FOR THEIR SAVINGS BACK.

G: Well, they have gone up to 5.3%, but still, I just refinanced my house, so I
feel good. You can talk about long-term rates, but my mortgage is what I look at
as a consumer. Besides, looking at the redressing of imbalances, one of the
concerns we had was that the dollar was too strong. Now if you look at the
dollar versus the euro, this morning it was 114, and versus the yen it was 107.
So when translating Euroland earnings into U.S. dollars, companies that are
operating there could get a terrific tailwind. Reported S&P earnings, I think,
could

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January 18, 1999 BARRON'S o Roundtable'99
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be a lot better than people expect, because they've forgotten the currency
factor. Especially if I have 2% real growth in Euroland and I have companies
that are now rationalizing and getting the benefit of synergies. The companies I
talk to in the U.S. that have big operations in Europe are all saying, "Hey, in
the last couple of months, we are getting a big benefit from currency." That
could continue for the next half. So the U.S. economy is reasonably good.
Earnings and cash flow for the companies I follow should be up 5%, 7%, 8% in
1999. I think the U.S. portion of non-U.S. earnings could translate better. So I
can't make anything but an optimistic case, let's put it that way, for corporate
profits. The other element in 1999 that I have to factor in is that some of the
companies I'm talking to and listening to say they are worried about a Y2K
problem. So the fourth quarter of 1999 will likely have a big inventory bulge.
That is certainly a plus, from what I see, for shipments.

Let me give you one other element on earnings: A lot of corporate controllers
and a lot of CFOs squirreled away earnings in the first and second quarters of
last year. Then the accounting problems of Cendant and others emerged. So now
you will not squirrel away earnings in that fourth quarter or in the first half
anymore. You are not going to play that game -- as much. I can see reported
earnings doing better than economic earnings over the next couple of quarters,
just because you are not going to use the other side of your pencil or whatever
they use nowadays.

Another item to consider is that virtually every country in Europe now has a
socialist government. The Italians probably have a Communist government. I mean,
how are they going to sit back and not undo what they've done? They've
constrained, they constrained, until they could introduce their single economic
unit. Now, why not do the reverse of that? Why don't you factor that into your
thinking?

Q: IT MAY BE BULLISH FOR THOSE ECONOMIES. BUT IT MEANS REFLATION, IT MEANS
HIGHER INTEREST RATES, LOWER P/E RATIOS.

G:: Oh, yes. That's what I'm saying. It's the reflationary theme.

Changing gears to the manufacturing sector of the economy -- people are
asking, "Where is it?" It is being transported outside of the United States.

Machine-tool orders in November were $440 million, down from $532 million.
You see it in the farm-equipment industry, the domestic construction equipment
industry; and manufacturing jobs are disappearing, probably. When Cuba opens up,
labor rates will go from $1 an hour to $1 a day, if you are looking at Mexico
versus Cuba.

Q: BUT IS THIS A HOLLOWING-OUT OF THE ECONOMY? OR IS THIS A TRANSITION TO THE
BRAVE NEW INTERNET AGE?

G: Adam Smith is alive and well.

I have to stay with the bullish interpretation of all these dynamics. The
notion of globalization of the economy and the movement of capital around to the
lowest cost . . . every country, as long as you have free trade, is going to
contribute to global wealth at some point. What's more, the Japanese, as they
come out of their problems, eventually will be going from seeking share of
market on a global basis to seeking share of profits. That has to be good for
corporate profitability around the world.

Q: WHAT IS YOUR CONCLUSION ON THE MARKET?

G: Let me give you some numbers on the flow of funds. Cash into the market from
stock buybacks in 1998 was $207 billion, up from $181 billion. Mutual-fund
inflow was $176 billion, down from $232 billion. IPOs, which hit a big air
pocket, are starting to accelerate again but were $108 billion last year, down
from $118 billion. Other elements were foreign purchases of U.S. stocks and U.S.
purchases of non-stock assets. But the big element that makes those flows look
tiny was that deals in the U.S. alone amounted to $1.6 trillion. Now, for you
cynics who'd argue how much was in cash,

5
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January 18, 1999 BARRON'S o Roundtable'99
- --------------------------------------------------------------------------------

the cash portion was $672 billion, up from $414 billion last year. So money
moving from savers into the stock market wasn't as dynamic a flow-of-funds
element as how much came into the market being recycled from transactions.
Again, incrementally in 1998 an unprecedented $250 billion came into the market
from the cash portion of deals, that's 1 1/2 times the amount that came in via
mutual funds -- U.S. only, not globally. It is just a phenomenon that has to be
constantly hammered away at.

Q: [SOME OF THE BIGGEST CAP STOCKS ARE UP OVER 100%. SUCH MOVES ARE CLEARLY
UNSUSTAINABLE.]

G: Some of that is part of the migration of money into indexing -- which is
mindlessly buying stocks based on their index weightings. It's just
self-reinforcing. I don't know the numbers for 1998, but the trend has been more
mutual-fund purchases of index funds. More defined-benefit plans going into the
index funds. And those funds have to, by definition, buy mindlessly based on
capitalization. And that is going to continue.

Q: UNTIL YOU GET TO THE LAST GUY.

G: I will tell you a story. I'm creating this. But in 1973, it was conventional
wisdom that McDonald's had a market capitalization greater than all of the steel
industry's, and that we were going to become a nation of hamburger flippers --
indeed, that the world was going that way. Every cycle has the same thing. You
know, somebody sits up and says AOL and Amazon.com have caps greater than the
steel industry's. But that is what Schumpeter said, creative destruction is one
of the great virtues of capitalism. It's very positive.

Q: [HOW ABOUT WHAT IS GOING ON IN WASHINGTON?]

G: Going back to interest rates, I think there's plenty of margin of flexibility
on the short end. Real rates are much too high here. They should migrate down.
The dollar -- I don't know how Greenspan handles it. It is a challenge. The
balance-of-payments deficit is going to go way up. I believe, based on last
month's deficit, the run rate was about $180 billion. But $250 billion sounds
like a reasonable number. That has got to, with a new currency bloc in Europe,
create all sorts of question marks that I don't have an answer to. Those are
moving parts. We don't invest that way. We just think about these things.

Q: DOESN'T ANYONE FIND ALL THIS BLIND FAITH IN GREENSPAN AND RUBIN "DOING THE
RIGHT THING" A MITE DISCOMFORTING?

G: The concern isn't that they won't do the right thing, but that Rubin and
Greenspan retire like Mantle and Maris.

Q: BUT IN GENERAL, YOU ARE BULLISH?

G: On the world economy.

Q: AND ON EQUITIES?

G: No, not on equities. There is no margin of safety in stocks. Absolutely none.
But I do think Adam Smith is alive and well. Once you can start migrating labor
and goods to the highest efficiency, you create incredible opportunities on a
global scale. We don't have those efficiencies baked into the system. But there
are enormous birthing pains. You saw these birthing pains in Southeast Asia. But
I don't think that's a big depressive because the sunshine in the valley is that
we'll come out in a world in which profits are the driver. That is pretty
interesting.

Q: BUT MARIO, WHERE WILL RATES GO?

G: Like 5 3/4%-6%. Long rates have already started up. But I see short rates
coming down.

Q: IF ED HYMAN IS RIGHT AND THERE ISN'T MUCH NOMINAL GROWTH IN THE ECONOMY,
WON'T THAT MAKE IT DIFFICULT FOR SMALL COMPANIES?

G: The comment I want to make -- this is very important -- is that the business
people I talk to really were shocked by the virtual shutdown of the capital
markets following the [John] Meriwether debacle. Not only did the spreads widen,
but the market started closing on them. That is creating a backlash in terms of
either selling out -- the option which I happen to be fond of -- and also in
terms of bringing back

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January 18, 1999 BARRON'S o Roundtable'99
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a margin of safety to their balance sheets and their perspectives on how to run
their businesses. From the market's point of view, looking out over the next
five years, I still think we are in a world in which corporate profits can rise
- -- not return on equity, where I can't see much improvement, not return on
sales, where I can't see much improvement from here. But I can see maintaining
some of these levels. I see these global synergies, the Exxon-Mobils, adding to
profitability. There won't necessarily be revenue synergies in some of these,
but there will certainly be margin synergies, capital synergies, and efficiency
elements. So I still see a 6%-8% secular growth rate over the next five years in
corporate profits. For 1999 I am in the camp that has S&P earnings up, because
over one-third of the earnings mix in the S&P is non-U.S. Now, that's leaving
Brazil aside, because it is part of my wall of worry -- I have my A-B-C-D
issues: Asia, Brazil, Clinton and the Dollar are the things I worry about. But
in terms of my model, where I have interest rates backing up, and earnings at
that level, the market has absolutely no margin of safety. So we could see it up
3%, down 20%. Probably somewhere in-between at the end of the year. With much
more volatility. I think volatility is increased by the new generation of
traders. Individuals now come in to work and trade. Or they don't even come in
to work. There is nothing between them and a buy/sell decision except their
finger on a mouse. There is no broker who has a boss asking, "Hey, is he
churning? Is he overinvesting?" There is nothing there. So the volatility you
saw from July through the beginning of January I think is just the way the
world's going to be. As long as you are treating stocks like commodities, you
have to expect that to continue. And they are trading stocks like they are
soybeans.

Q: SO THE STOCK MARKET WILL BE THE PITS?

G: There'll be great opportunities to make a lot of money if you short. If you
go long, then it's just going to be a terrific eclectic market.

Q: WHAT WILL MAKE THE SMALL-FRY GO UP, ESPECIALLY IF THE S&P SELLS OFF AND THE
ECONOMY IS NO GREAT SHAKES?

G: Forcing transactions, by managements, that narrow the spreads between their
intrinsic values and the stock prices.

Q: IT LOOKS LIKE MARIO WANTS TO TALK TULIPS NEXT.

G: Our goal always has been to make 10% real by picking stocks that we hope,
after taxes, after inflation, accomplish that. So we try to find companies at a
significant margin of safety to intrinsic value. The second part of our strategy
is to try to buy things for the long term, because it's not only what you make,
but what you keep. We'd rather pay 20% long-term capital-gains taxes than 40% on
ordinary income from trading. But we're here in January of 1999, and even 25%
looks awfully dull when you make that in one week -- 50%, in Amazon. So I have
succumbed and I am going to recommend only stocks that have grown to the sky --
Excite, uBid, eBay, Amazon and that's it. Nothing else! You can also have my
tulips, Arthur. Don't say I never gave you anything. They're starting to wilt --

ART SAMBERG: Am I allowed to eat them?

G: Do anything you like. Charles MacKay wrote about all this in 1841, in
EXTRAORDINARY POPULAR DELUSIONS AND THE MADNESS OF CROWDS.

Anyway, when we look at stocks, we also look for a catalyst. Forcing
transactions. That is, a management, if they are alert and sensitive, can do
things like buying back stock, like LBOs or financial engineering. One of the
dynamics that have been in place for the last four years is deals. Deals will
continue in 1999 -- a year in which the Exxons and the Mobils are driving values
by becoming global, further reinforcing their positions. There are a lot of
areas where that's happening.

Q: THANKS , MARIO.

7
<PAGE>
YEAR END REVIEW

For the fourth quarter of 1998, rather than repeating the economic and
market dynamics that we discussed in our third quarter report to shareholders,
we invite our shareholders to review these comments from the third quarter
report. The report is available on our website at www.gabelli.com.

Income oriented equities underperformed during the market's sharp rise in
the first half of the year. This is fairly common during growth stock oriented
market spurts. Somewhat uncharacteristically, higher yielding stocks did not
hold up particularly well during the market's sharp third quarter decline. The
fourth quarter recovery was once again led by the big cap growth favorites,
particularly surging high technology stocks.

WINNERS AND LOSERS

Telecommunications, media and drug stocks were the portfolio's biggest
winners in 1998, with France Telecom, Deutsche Telekom, Telefonica de Espana,
Cable & Wireless, Sprint, Viacom, Pharmacia & Upjohn and Glaxo Wellcome all
making our Top Twenty performance list. Electric utility returns were mixed,
with Niagara Mohawk Power, Orange & Rockland Utilities and Florida Public
Utilities posting strong gains while portfolio holdings such as Citizens
Utilities and Eastern Enterprises sustained losses.

The worst portfolio news can be summed up in one word--energy. Atlantic
Richfield, Pennzoil, and Halliburton all closed the year with substantial
losses. We are not prepared to make a case for a big pop in oil prices in the
immediate future. However, we question the current consensus viewpoint that oil
will remain near $10 per barrel or lower forever. We note the last time we saw
such a consensus on oil prices was in the mid-to-late 1970s, when all the
"experts" were predicting $60 per barrel of oil. If OPEC can enforce some
production discipline among its members, and as Asian economies recover, oil
prices will rebound. In the interim, there will continue to be consolidation in
the group. We have already seen two big deals, British Petroleum/Amoco and
Exxon/Mobil. In the year ahead, we expect to see more deals, particularly in the
oil services industry, as energy companies cut costs in response to lower oil
prices. Remember, John D. Rockefeller built Standard Oil and an enormous
personal fortune by buying oil companies during periods when oil prices were
severely depressed.

THE INVASION OF THE UTILITY SNATCHERS

The pace of domestic deals in the utilities group is quickening. In 1998,
Con Edison bid for Orange & Rockland Utilities, BEC Energy proposed to
Commonwealth Energy System, AES Corp. became engaged to Cilcorp and most
recently, Oneok has won the hand of Southwest Gas. Now the British are pursuing
American utilities, with Scottish Power signing a deal with Pacificorp and
National Grid plc cozying up to New England Electric System. Clearly, the
deregulation of the electric and gas utility industry is surfacing attractive
acquisition opportunities for domestic and foreign companies. New York and
Massachusetts, the two states with the most clearly written regulatory
guidelines, are attracting a

8
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significant amount of attention. As more states clarify their regulatory
posture, more deals are likely to ensue. Consolidation makes a good deal of
economic sense as efficiencies in scale lower costs in this newly competitive
environment. We believe more corporate bargain hunters will plug into our
utility holdings in the year ahead.

LET'S TALK STOCKS

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

AMERICAN EXPRESS CO. (AXP - $102.25 - NYSE) and its subsidiaries provide
travel-related services, financial advisory services and international banking
services worldwide. Founded in 1850, the company operates in 160 countries
around the world. Best known for its "green" charge card and its travel-related
services, including travelers checks, American Express also offers financial
planning, brokerage services, mutual funds, insurance and other investment
products. Harvey Golub, Chairman and CEO, has focused AXP on its core charge
card and investment management businesses. The company is expanding the
competitive reach of its credit card operations which should benefit if the U.S.
Department of Justice prevails in its antitrust suit against the Visa and
MasterCard associations.

BCE INC. (BCE - $37.9375 - NYSE) is Canada's global communications company. BCE
owns 100% of Bell Canada, Canada's largest telecom services provider. BCE has
controlling interests in Northern Telecom (NT - $50.125 -NYSE) and BCEMobile
Communications (BCX - $27.02 - TSE). These are substantial values for BCE. For
example, "behind" each share of BCE are 0.4 shares of Northern Telecom. This NT
interest, marked to market, is worth about $20 per BCE share. BCE is a possible
candidate for break-up. In the interim, the Canadian Radio and Television
Commission is providing a more attractive operating environment in which BCE is
becoming more competitive.

COLONIAL GAS CO. (CLG - $34.875 - NYSE), a Massachusetts corporation formed in
1849, is primarily a regulated natural gas distribution utility. Colonial Gas is
the fastest growing natural gas utility in New England with over 150,000
residential and business customers in 24 communities northwest of Boston and on
Cape Cod. The company's subsidiary, Transgas Inc., is the largest over-the-road
transporter of liquefied natural gas, propane and other commodities. On October
19, 1998, Eastern Enterprises (EFU - $43.75 - NYSE) announced an agreement to
acquire Colonial Gas. The transaction, with an equity value of approximately
$330 million to be paid for with $150 million in cash and the balance in Eastern
common stock, is expected to close in mid-1999.

EASTERN ENTERPRISES (EFU - $43.75 - NYSE) owns and operates Boston Gas Company,
Essex Gas Company, Midland Enterprises and ServicEdge Partners. Together, Boston
Gas and Essex Gas are New England's largest distributor of natural gas, serving
575,000 residential, commercial and industrial customers in Boston and 90 other
eastern and central Massachusetts communities. Midland Enterprises,
headquartered in Cincinnati, Ohio, is the leading carrier of coal and a major
carrier of other dry bulk cargoes on the nation's inland waterways, with a fleet
of 2,404 barges and 87 towboats. ServicEdge

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provides HVAC equipment installation and service to customers in eastern
Massachusetts. Eastern has announced an agreement to acquire Colonial Gas
Company, a regulated natural gas distribution company servicing customers
northwest of Boston and on Cape Cod.

EXXON CORP. (XON - $73.125 - NYSE), with an equity market value of $170 billion,
is the world's largest, publicly-owned integrated oil company. Nevertheless,
Exxon is about to become even bigger. Its planned merger with Mobil (MOB -
$87.125 - NYSE), the largest industrial merger ever, would produce a combination
with a current market capitalization of $250 billion. On a stand-alone basis,
roughly one-half of Exxon's production comes from overseas reserves. Major,
promising oil and gas exploration projects include West Africa, the Caspian Sea,
Russia, the Gulf of Mexico and South America. Profitability, in a period of
falling energy prices, has obviously suffered but the expected $2.8 billion in
pre-tax synergies from combining Exxon and Mobil would represent a significant
offset. Dividends have been paid by Exxon since 1882 and have been increased
annually since 1983.

MONSANTO CO. (MTC - $47.50 - NYSE) is a St. Louis-based, life sciences company.
MTC operates in three business segments: Agricultural (crop protection,
biotechnology), Nutrition (NutraSweet, food ingredients) and Pharmaceuticals
(its G.D. Searle Division). The merger with American Home Products, which would
have had favorable impact on the company's marketing and finances, has been
aborted. A promising new product is the rollout of Celebrex for treatment of
arthritis-related pain.

ORANGE & ROCKLAND UTILITIES INC. (ORU - $57.00 - NYSE) has agreed to be acquired
by Consolidated Edison (ED - $52.875 - NYSE) for $1.15 billion in cash and
assumed debt, allowing Con Edison to boost its power transmission business in a
growing part of the New York City area. Orange & Rockland is a small utility,
with most of its customers in New York's northern suburbs. Con Edison is to pay
$58.50 per share for all of Orange & Rockland's 13.5 million outstanding shares.
Orange & Rockland shareholders approved the merger on August 20, 1998 and the
companies have filed all necessary regulatory applications. The transaction is
expected to be completed once all state and federal regulatory approvals are
obtained which is expected during the second quarter of 1999. In addition to the
$58.50 per share, we will also receive Orange & Rockland's $0.645 quarterly
dividend.

PHILIP MORRIS COMPANIES INC. (MO - $53.50 - NYSE) is a leading consumer products
company concentrating on tobacco (55% of revenues), food (38% of revenues) and
beverages (6% of revenues). The company's Marlboro brand commands an increasing
share of the domestic and international cigarette markets and its Miller brand
is number two (behind Anheuser-Busch's Budweiser) in the beer market. Food
brands include Jell-O, Kool-Aid, Kraft, Sealtest and Post cereals. The company
generates significant amounts of excess cash which is being used to repurchase
stock and to support healthy dividend payments to shareholders.

SOUTHWEST GAS CORP. (SWX - $26.875 - NYSE) is a natural gas utility based in Las
Vegas, providing natural gas service to over 1.2 million residential, commercial
and industrial customers in one of the most economically vibrant areas of the
United States: Arizona, Nevada and parts of northeastern and southeastern
California. The company added more than 59,000 customers during 1997. This
represents

10
<PAGE>

the fourth year in a row in which Southwest's customer growth rate has been at
least double the industry average. Southwest is the nation's fastest-growing
natural gas distribution company. Southwest and Oneok (OKE - $36.125 - NYSE)
have announced that their boards of directors have approved a definitive merger
agreement. Oneok, headquartered in Tulsa, Oklahoma, has offered to purchase all
outstanding SWX shares for $28.50 per share in cash.

SPRINT CORP. (FON - $84.125 - NYSE) is the third largest long distance carrier
and the second largest independent local telephone company in the U.S. Sprint
has positioned itself globally through a joint venture called GlobalOne. Its
joint venture partners, France Telecom and Deutsche Telekom, also have a direct
20% stake in Sprint. The company has a promising national personal
communications services ("PCS") and wireless joint venture with three major
cable operators: Tele-Communications Inc., Comcast and Cox Communications. FON
faces risks from prospective new entrants in its long distance business which
may be offset by the PCS venture and its own pursuit of the $100 billion local
telephone market.

MINIMUM INITIAL INVESTMENT - $1,000

The Fund's minimum initial investment for both regular and retirement
accounts is $1,000. There are no subsequent investment minimums. No initial
minimum is required for those establishing an Automatic Investment Plan.
Additionally, The Gabelli Equity Income Fund and other Gabelli Funds are
available through the no-transaction fee programs at many major discount
brokerage firms.

THE ROTH IRA

The Taxpayer Relief Act of 1997 included new tax incentives and more
opportunities to save for retirement and other major expenditures. The Roth IRA
is just one of these new opportunities now available at Gabelli Funds. Our
investor representatives are available at 1-800-GABELLI (1-800-422-3554) to
speak with you about the advantages of converting to a Roth IRA and to discuss
your investment choices.

INTERNET

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

IN CONCLUSION
Despite ongoing global economic uncertainty, the popular market indices
are once again in record territory. While we will always have a "wall of worry",
we believe the economy and the capital market landscape for 1999 will provide
stock pickers like us the opportunity to unearth well-managed companies, trading
at significant discounts to their private market value, that should benefit from
sustainable long term economic dynamics.

11
<PAGE>
Historically, half of all equity returns have come from dividends. This
fact has been lost in the midst of investors' infatuation with lower yielding
growth stocks. If growth slows in the years ahead, a reasonable proposition
considering the record length of the current economic expansion, income
generating securities should attract a wider following. We believe this bodes
well for higher yielding equities in general and our portfolio in particular.

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

Sincerely,

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

January 29, 1999

TOP TEN HOLDINGS
DECEMBER 31, 1998
-----------------

Philip Morris Companies Inc. Orange & Rockland Utilities Inc.
Eastern Enterprises Monsanto Co.
American Express Co. Southwest Gas Corp.
BCE Inc. Sprint Corp.
Exxon Corp. Colonial Gas Co.

NOTE: THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER
ONLY THROUGH THE END OF THE PERIOD STATED IN THIS REPORT. THE MANAGER'S VIEWS
ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET AND OTHER CONDITIONS.

12
<PAGE>
THE GABELLI EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS -- DECEMBER 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCKS -- 88.6%
AEROSPACE -- 1.1%
18,000 Boeing Co. ...................................... $ 587,250
2,500 Northrop Grumman Corp. .......................... 182,812
1,000 Raytheon Co., Cl. A ............................. 51,688
2,000 Rockwell International Corp. .................... 97,125
----------
918,875
----------
AGRICULTURE -- 2.3%
41,500 Monsanto Co. .................................... 1,971,250
----------
AUTOMOTIVE -- 1.3%
4,500 Ford Motor Co. .................................. 264,094
12,000 General Motors Corp. ............................ 858,750
----------
1,122,844
----------
AUTOMOTIVE: PARTS AND ACCESSORIES -- 1.4%
2,500 Dana Corp. ...................................... 102,188
6,000 Ethyl Corp. ..................................... 34,875
20,000 GenCorp Inc. .................................... 498,750
14,000 Genuine Parts Co. ............................... 468,125
4,000 Meritor Automotive Inc. ......................... 84,750
----------
1,188,688
----------
AVIATION: PARTS AND SERVICES -- 1.7%
10,000 Barnes Group Inc. ............................... 293,750
19,000 Curtiss-Wright Corp. ............................ 724,375
4,000 United Technologies ............................. 435,000
----------
1,453,125
----------
BUSINESS SERVICES -- 0.5%
4,000 Dun & Bradstreet Corp. .......................... 126,249
1,000 Imation Corp.+ .................................. 17,500
1,000 IMS Health Inc. ................................. 75,438
1,500 Landauer Inc. ................................... 48,563
1,666 Nielsen Media Research Inc. ..................... 29,988
7,000 R. H. Donnelley Corp. ........................... 101,938
----------
399,676
----------
COMMUNICATIONS EQUIPMENT -- 0.1%
1,000 Motorola Inc. ................................... 61,063
----------
COMPUTER SOFTWARE AND SERVICES -- 1.4%
6,500 International Business Machines Corp. ........... 1,200,875
----------
CONSUMER PRODUCTS -- 7.5%
11,000 Eastman Kodak Co. ............................... 792,000
2,000 Fortune Brands Inc. ............................. 63,250
40,000 Gallaher Group plc, ADR ......................... 1,087,500
5,000 General Cigar Holdings Inc., Cl. B+(b) .......... 43,438
8,000 General Electric Co. ............................ 816,500
6,000 Gillette Co. .................................... 289,875
18,000 National Presto Industries Inc. ................. 767,250
50,000 Philip Morris Companies Inc. .................... 2,674,999
200 Rothmans Inc. ................................... 26,043
----------
6,560,855
----------
CONSUMER SERVICES -- 0.6%
30,000 Rollins Inc. .................................... 525,000
----------

MARKET
SHARES VALUE
------ -----
DIVERSIFIED INDUSTRIAL -- 3.5%
30,000 GATX Corp. ...................................... $1,136,250
7,000 Honeywell Inc. .................................. 527,188
5,000 Minnesota Mining & Manufacturing Co. ............ 355,625
17,000 Tenneco Inc. .................................... 579,062
20,000 Thomas Industries Inc. .......................... 392,500
1,000 Trinity Industries Inc. ......................... 38,500
----------
3,029,125
----------
ENERGY AND UTILITIES -- 1.0%
41,270 Citizens Utilities Co., Cl. B+ .................. 335,321
24,000 United Water Resources Inc. ..................... 574,500
----------
909,821
----------
ENERGY AND UTILITIES: ELECTRIC -- 7.3%
8,000 Central & South West Corp. ...................... 219,500
5,000 Central Hudson Gas & Electric Corp. ............. 223,750
7,300 Cilcorp Inc. .................................... 446,669
11,000 Energy East Corp. ............................... 621,500
2,000 Florida Progress Corp. .......................... 89,625
21,000 Florida Public Utilities Co. .................... 359,625
1,000 FPL Group Inc. .................................. 61,625
10,000 New England Electric System ..................... 481,250
95,000 Niagara Mohawk Power Corp.+ ..................... 1,531,875
35,000 Orange & Rockland Utilities Inc. ................ 1,994,999
8,000 PacifiCorp ...................................... 168,500
5,000 Public Services Enterprise Group Inc. ........... 200,000
----------
6,398,918
----------
ENERGY AND UTILITIES: NATURAL GAS -- 14.9%
45,000 AGL Resources Inc. .............................. 1,037,812
30,000 Bay State Gas Co. ............................... 1,194,375
50,000 Colonial Gas Co. ................................ 1,743,750
40,000 Commonwealth Energy System ...................... 1,620,000
54,000 Eastern Enterprises ............................. 2,362,499
58,000 ENI SpA ......................................... 379,891
10,000 Fall River Gas Co. .............................. 168,750
42,000 KeySpan Energy Corp. ............................ 1,301,999
4,000 Peoples Energy Corp. ............................ 159,500
10,000 Piedmont Natural Gas Co. ........................ 361,250
70,000 Southwest Gas Corp. ............................. 1,881,250
41,000 Wicor Inc. ...................................... 894,313
----------
13,105,389
----------
ENERGY AND UTILITIES: OIL -- 9.8%
13,000 Atlantic Richfield Co. .......................... 848,250
18,000 British Petroleum Co. plc, ADR .................. 1,710,000
16,000 Burlington Resources Inc. ....................... 573,000
10,000 Chevron Corp. ................................... 829,375
3,500 Conoco Inc., Cl. A+ ............................. 73,063
6,000 Elf Aquitaine SA ................................ 339,750
30,000 Exxon Corp. ..................................... 2,193,749
18,000 Halliburton Co. ................................. 533,250
10,000 PennzEnergy Co. ................................. 163,125
10,000 Pennzoil-Quaker State Co.+ ...................... 148,125
21,000 Texaco Inc. ..................................... 1,110,375
----------
8,522,062
----------
</TABLE>

13
<PAGE>

THE GABELLI EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- DECEMBER 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ENTERTAINMENT -- 0.3%
1,500 USA Networks Inc.+ .............................. $ 49,688
3,000 Viacom Inc., Cl. A+ ............................. 220,688
----------
270,376
----------
EQUIPMENT AND SUPPLIES -- 3.4%
30,000 Aeroquip-Vickers Inc. ........................... 898,125
3,000 Caterpillar Inc. ................................ 138,000
2,000 Cooper Industries Inc. .......................... 95,375
28,000 Deere & Co. ..................................... 927,500
9,000 EG&G Inc. ....................................... 250,313
2,000 Ingersoll Rand Co. .............................. 93,875
1,500 Minerals Technologies Inc. ...................... 61,406
18,000 Smith (A.O.) Corp., Cl. B ....................... 442,125
1,000 Union Carbide Corp. ............................. 42,500
----------
2,949,219
----------
FINANCIAL SERVICES -- 12.7%
23,000 American Express Co. ............................ 2,351,749
8,000 Argonaut Group Inc. ............................. 196,000
1,500 Banco Popular Espanol ........................... 113,274
57,000 Banco Santander SA, ADR ......................... 1,125,749
2,000 Banco Santiago .................................. 29,750
9,052 BankAmerica Co. ................................. 544,251
2,500 Bankers Trust Co. ............................... 213,594
3,500 Banque Nationale de Paris ....................... 288,345
5,000 Chase Manhattan Corp. ........................... 340,312
27,000 Commerzbank AG, ADR ............................. 854,329
20,000 Deutsche Bank AG, ADR ........................... 1,177,409
3,000 Dresdner Bank AG, ADR ........................... 126,087
2,000 Fidelity National Corp. ......................... 21,500
1,500 First Union Corp. ............................... 91,219
10,000 Mellon Bank Corp. ............................... 687,500
2,000 Merrill Lynch & Co. ............................. 133,500
2,000 MONY Group Inc.+ ................................ 62,625
8,200 Morgan (J.P.) & Co. Inc. ........................ 861,513
3,000 Municipal Mortgage & Equity LLC ................. 50,438
3,000 Northern Trust Co. .............................. 261,938
1,000 Pioneer Group Inc. .............................. 19,750
5,000 Sterling Bancorp ................................ 114,063
12,000 SunTrust Banks Inc. ............................. 918,000
2,200 Transamerica Corp. .............................. 254,100
4,000 U.S. Trust Corp. ................................ 304,000
----------
11,140,995
----------
FOOD AND BEVERAGE -- 2.2%
4,000 Bestfoods Inc. .................................. 213,000
6,000 Coca-Cola Amatil Ltd., ADR ...................... 44,751
12,000 Coca-Cola Beverages plc+ ........................ 21,164
3,000 Corn Products International Inc. ................ 91,125
10,000 Diageo plc, ADR ................................. 462,500
6,000 Heinz (H.J.) Co. ................................ 339,750
18,000 Kellogg Co. ..................................... 614,250
2,000 Quaker Oats Co. ................................. 119,000
----------
1,905,540
----------

MARKET
SHARES VALUE
------ -----
HEALTH CARE -- 1.3%
1,000 Glaxo Wellcome plc, ADR ......................... $ 69,500
3,000 Johnson & Johnson ............................... 251,625
10,000 Pharmacia & Upjohn Inc. ......................... 566,250
3,000 SmithKline Beecham plc, ADR ..................... 208,500
----------
1,095,875
----------
METALS AND MINING -- 0.2%
15,000 Freeport-McMoRan Copper & Gold Inc.,
Cl. B ........................................... 156,563
----------
PUBLISHING -- 2.5%
10,000 Dow Jones & Co. Inc. ............................ 481,250
3,000 Harcourt General Inc. ........................... 159,563
3,000 McGraw-Hill Companies Inc. ...................... 305,625
28,000 Reader's Digest Association Inc., Cl. A ......... 705,250
21,000 Reader's Digest Association Inc., Cl. B ......... 506,625
----------
2,158,313
----------
REAL ESTATE -- 0.0%
2,500 Griffin Land & Nurseries Inc.+ .................. 31,875
----------
RETAIL -- 0.1%
2,000 Sears, Roebuck & Co. ............................ 85,000
----------
SATELLITE -- 0.6%
15,000 COMSAT Corp. .................................... 540,000
----------
SPECIALTY CHEMICALS -- 1.1%
2,000 du Pont de Nemours (E.I.) and Co. ............... 106,125
7,500 Ferro Corp. ..................................... 195,000
10,000 Grace (W.R.) & Co.+ ............................. 156,875
12,000 Hoechst AG, ADR ................................. 492,000
1,500 IMC Global Inc. ................................. 32,063
----------
982,063
----------
TELECOMMUNICATIONS -- 9.8%
3,000 Alltel Corp. .................................... 179,438
4,000 AT&T Corp. ...................................... 301,000
18,000 BC Telecom Inc. ................................. 489,863
60,000 BCE Inc. ........................................ 2,276,249
4,608 Bell Atlantic Corp. ............................. 244,224
1,500 British Telecommunications plc, ADR ............. 227,531
10,000 Cable & Wireless plc, ADR ....................... 367,500
7,000 Deutsche Telekom AG, ADR ........................ 229,250
1,000 France Telecom SA, ADR .......................... 78,938
24,000 GTE Corp. ....................................... 1,560,000
10,000 Hong Kong Telecommunications
Ltd., ADR ....................................... 175,625
30,000 SBC Communications Inc. ......................... 1,608,749
3,500 Telecom Italia SpA, ADR ......................... 304,500
4,080 Telefonica de Espana, ADR ....................... 552,330
1,000 US West Inc. .................................... 64,625
----------
8,659,822
----------
TOTAL COMMON STOCKS ............................. 77,343,207
----------
</TABLE>

14
<PAGE>

PRINCIPAL
AMOUNT
------

CONVERTIBLE CORPORATE BONDS -- 2.9%
BUSINESS SERVICES -- 0.1%
$ 100,000 BBN Corp., Sub. Deb. Cv.
6.00%, 04/01/12 (b) ................. 96,625
---------
CONSUMER PRODUCTS -- 0.6%
700,000 Fieldcrest Cannon Inc., Sub. Deb. Cv.
6.00%, 03/15/12 ..................... 560,000
---------
ENTERTAINMENT -- 0.2%
150,000 Savoy Pictures Entertainment Inc.,
Sub. Deb. Cv.
7.00%, 07/01/03 ..................... 149,438
---------
EQUIPMENT AND SUPPLIES -- 0.5%
377,000 Kollmorgen Corp., Sub. Deb. Cv.
8.75%, 05/01/09 ..................... 389,253
---------

PRINCIPAL MARKET
AMOUNT VALUE
------ -----
<S> <C> <C>
FOOD AND BEVERAGE -- 0.0%
$ 28,000 Chock Full o' Nuts Corp.,
7.00%, 04/01/12 ......................... $ 26,705
-----------
HOTELS AND GAMING -- 0.3%
300,000 Hilton Hotels Corp., Sub. Deb. Cv.
5.00%, 05/15/06 ......................... 275,250
-----------
PUBLISHING -- 1.0%
100,000 News America Holdings Inc.,
Sub. Deb. Cv.
Zero Cpn., 03/31/02 ..................... 108,688
700,000 Thomas Nelson Inc., Sub. Deb. Cv.
5.75%, 11/30/99 (a) ..................... 706,999
-----------
815,687
-----------
TRANSPORTATION -- 0.2%
200,000 Greyhound Lines Inc., Sub. Deb. Cv.
8.50%, 03/31/07 ......................... 202,500
-----------
TOTAL CONVERTIBLE
CORPORATE BONDS ......................... 2,515,458
-----------
U.S. GOVERNMENT OBLIGATIONS -- 2.5%
2,212,000 U.S. Treasury Bills,
3.87% to 4.49%++,
due 01/07/99 to 02/04/99 ................ 2,203,138
-----------
TOTAL INVESTMENTS -- 99.9%
(Cost $59,448,221)....................... 87,179,616
OTHER ASSETS AND
LIABILITIES (NET) -- 0.1% ............... 52,532
-----------
NET ASSETS -- 100.0%
(5,224,306 shares outstanding) .......... $87,232,148
===========
NET ASSET VALUE,
OFFERING AND REDEMPTION
PRICE PER SHARE ......................... $ 16.70
===========

NET
SETTLEMENT UNREALIZED
DATE DEPRECIATION
------------ -------------
FORWARD FOREIGN EXCHANGE CONTRACTS
1,600,000(c) Sold Hong Kong Dollars
in exchange for
USD 206,531 .......... 02/26/99 $(7,092)
</TABLE>

- ---------------------
(a) Security exempt from registration under Rule 144A of the Securities Act
of 1933, as amended. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers.
At December 31, 1998, the market value of Rule 144A securities amounted
to $837,499 or 1.0% of net assets.
(b) Security fair valued as determined by the Board of Directors.
(c) Principal amount denoted in Hong Kong Dollars.
+ Non-income producing security.
ADR -- American Depositary Receipt.

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 Robert J. Morrissey
CHAIRMAN AND CHIEF ATTORNEY-AT-LAW
INVESTMENT OFFICER MORRISSEY, HAWKINS & LYNCH
GABELLI ASSET MANAGEMENT INC.
Felix J. Christiana Karl Otto P|f-hl
FORMER SENIOR VICE PRESIDENT FORMER PRESIDENT
DOLLAR DRY DOCK SAVINGS BANK DEUTSCHE BUNDESBANK
Anthony J. Colavita Anthony R. Pustorino
ATTORNEY-AT-LAW CERTIFIED PUBLIC ACCOUNTANT
ANTHONY J. COLAVITA, P.C. PROFESSOR, PACE UNIVERSITY
Vincent D. Enright Anthonie C. van Ekris
FORMER SENIOR VICE PRESIDENT MANAGING DIRECTOR
AND CHIEF FINANCIAL OFFICER BALMAC INTERNATIONAL INC.
KEYSPAN ENERGY CORP.
John D. Gabelli
VICE PRESIDENT
GABELLI & COMPANY, INC.

OFFICERS

Mario J. Gabelli, CFA Bruce N. Alpert
PRESIDENT AND CHIEF VICE PRESIDENT AND TREASURER
INVESTMENT OFFICER
James E. McKee
SECRETARY

DISTRIBUTOR

Gabelli & Company, Inc.

CUSTODIAN, TRANSFER AGENT AND DIVIDEND AGENT

State Street Bank and Trust Company

LEGAL COUNSEL

Skadden, Arps, Slate, Meagher & Flom LLP

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

[PICTURE GRAPHIC HERE]

THE
GABELLI
EQUITY
INCOME
FUND

FIRST QUARTER REPORT

DECEMBER 31, 1998