DAVIS HIGH INCOME FUND INC, 497, 1998-10-06

DAVIS HIGH INCOME FUND INC
497, 1998-10-06

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<PAGE>
Filed Pursuant to Rule 497(e)
Registration File No.: 2-66935

PROSPECTUS DATED AUGUST 1, 1998
CLASS A, CLASS B AND CLASS C AS AMENDED OCTOBER 6, 1998

DAVIS INTERMEDIATE INVESTMENT
GRADE BOND FUND, INC.
124 EAST MARCY STREET
SANTA FE, NEW MEXICO 87501
1-800-279-0279

MINIMUM INVESTMENT PLANS AVAILABLE
Initial Purchase $1,000 Individual Retirement Account (IRA)
For Retirement Plans $250 Prototype Retirement Plans
Subsequent Investment $25 Exchange Privilege
Automatic Investment Plan
Automatic Withdrawals Plan

Davis Intermediate Investment Grade Bond Fund, Inc. (the "Fund") seeks
primarily to achieve a high level of current income. The Fund also seeks to
achieve capital growth so long as such objective is consistent with its primary
objective. The Fund will, under normal market conditions, invest at least 65%
of its total assets in a diversified portfolio of U.S. dollar denominated
investment grade debt securities while maintaining an average maturity of five
to ten years. Investors should carefully review the risks associated with an
investment in the Fund. See "Investment Objectives and Policies."

The Fund offers four classes of shares, Class A, B, C and Y, each
having different expense levels and sales charges. These alternatives permit
you to choose the method of purchasing shares that is most beneficial to you,
depending on the amount of the purchase, the length of time you expect to hold
the shares and other circumstances. The Class Y shares, available only to
certain qualified institutional investors, are offered through a separate
prospectus. For more information about the Class Y shares, see "Purchase of
Shares - Alternative Purchase Arrangements."

This Prospectus concisely sets forth information about the Class A,
Class B and Class C shares of the Fund that prospective investors should know
before investing. It should be read carefully and retained for future
reference. A Statement of Additional Information dated August 1, 1998 as
amended October 6, 1998 has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. A copy of the Statement of
Additional Information and other information about the Fund may be obtained
without charge by writing to or calling the Fund at the above address or
telephone number.

SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.

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.

<PAGE>

SUMMARY

FUND EXPENSES. The following table is intended to assist you in
understanding the various costs and expenses that an investor in the Class A,
B, and C shares of the Fund will bear directly or indirectly. The information
is based on the Fund's fiscal year ended March 31, 1998. Prior to October 6,
1998, the Fund invested primarily in high yield, high risk securities. The
management fees and total fund operating expenses for the fiscal year ended
March 31, 1998, reflected the higher fees associated with managing a portfolio
of high yield, high risk securities. As of October 6, 1998, the management fees
have been reduced. You can refer to the section "Adviser, Sub-Adviser and
Distributor" and "Purchase of Shares" for more information on transaction and
operating expenses of the Fund.

<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES Class A Class B Class C
- -------------------------------- ------- ------- -------
<S> <C> <C> <C>
Maximum sales load imposed on purchases............................. 4.75% None None
Maximum sales load imposed on reinvested dividends.................. None None None
Deferred sales load (a declining percentage of the
lesser of the net asset value of the shares
redeemed or the total cost of such shares)
Redeemed during first year................................. 0.75%(1) 4.00% 1.00%
Redeemed during second or third year....................... None 3.00% None
Redeemed during fourth or fifth year....................... None 2.00% None
Redeemed during sixth year................................. None 1.00% None
Redeemed after sixth year.................................. None None None
Exchange Fee........................................................ None None None

ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
- ----------------------------------------------------------------------

Management fees(2).................................................. 0.70% 0.70% 0.70%
12b-1 fees(3)....................................................... 0.23% 1.00% 1.00%
Other expenses...................................................... 0.47% 0.46% 0.39%
----- ----- -----
Total Fund operating expenses(2).................................... 1.40% 2.16% 2.09%
</TABLE>

(1) On certain Class A shares purchased at net asset value without a sales load
after August 1, 1997, and redeemed during the first year after purchase,
there is a 0.75% deferred sales charge.

(2) The Management fees and total fund operating expenses in the table reflect
the management fees through the fiscal year ended March 31, 1998. As of
October 6, 1998, management fees have been reduced.

(3) The effect of a Rule 12b-1 plan is that long-term shareholders may pay more
than the maximum front-end sales charge permitted under applicable rules of
the National Association of Securities Dealers, Inc.

Example:

You would pay the following expenses on a $1,000 investment, assuming
a 5% annual return and (except as provided below) redemption at the end of each
time period:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A.................................................. $61 $90 $120 $207
Class B.................................................. $62 $98 $136 $220
Class B (assuming no redemption at end of period)........ $22 $68 $116 $220
Class C ................................................. $31 $65 $112 $242
Class C (assuming no redemption at end of period)........ $21 $65 $112 $242
</TABLE>

2
<PAGE>

THE 5% RATE USED IN THE EXAMPLE IS ONLY FOR ILLUSTRATION AND IS NOT
INTENDED TO BE INDICATIVE OF THE FUTURE PERFORMANCE OF THE FUND, WHICH MAY BE
MORE OR LESS THAN THE ASSUMED RATE. FUTURE EXPENSES MAY BE MORE OR LESS THAN
THOSE SHOWN.

The Example is based upon total fund operating expenses which include
the management fees in effect through the fiscal year ended March 31, 1998. As
of October 6, 1998, management fees have been reduced.

THE FUND. Davis Intermediate Investment Grade Bond Fund, Inc. is an
open-end, diversified management investment company incorporated in Maryland in
1980, and is registered under the Investment Company Act of 1940.

The Fund offers four classes of shares, Class A, B, C and Y. Class A
shares may be purchased at a price equal to their net asset value per share
plus a front-end sales charge imposed at the time of purchase. Purchases of $1
million or more of Class A shares may be purchased at net asset value, but
shares purchased at net asset value without a sales load after August 1, 1997,
are subject to a 0.75% contingent deferred sales charge ("CDSC") on redemptions
made within one year of purchase. Class B shares may be purchased at net asset
value, with no front-end sales charge, but are subject to a CDSC on most
redemptions made within six years after purchase. Class C shares may also be
purchased at net asset value but are subject to a CDSC of 1% on redemptions
made within one year after purchase. These alternatives permit an investor to
choose the method of purchasing shares that is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares,
and other circumstances. Each class of shares pays a Rule 12b-1 distribution
fee at an annual rate not to exceed (i) for Class A shares, 0.25% of the Fund's
aggregate average daily net assets attributable to the Class A shares, and (ii)
for Class B and C shares, 1.00% of the Fund's aggregate average daily net
assets attributable to each such class. The purpose and function of the
deferred sales charge and distribution fee with respect to the Class B and
Class C shares is the same as those of the front-end sales charge and
distribution services fee with respect to the Class A shares. The Class Y
shares, available only to certain qualified institutional investors, are
offered through a separate prospectus. For more information about the Class Y
shares, see "Purchase of Shares--Alternative Purchase Arrangements."

Each share of the Fund represents an identical interest in the
investment portfolio of the Fund. However, shares differ by class in important
respects. For example, Class B shares incur higher distribution services fees
and bear certain other expenses and will thus have a higher expense ratio and
pay correspondingly lower dividends than Class A shares. Class B shares will
automatically convert to Class A shares eight years after the end of the
calendar month in which the shareholder's order to purchase was accepted, in
the circumstances, and subject to the qualifications described in this
Prospectus. Class C shares, like Class B shares, will also have a higher
expense ratio and pay correspondingly lower dividends than Class A shares, as a
result of higher distribution services fees and certain other expenses. Unlike
Class B shares, Class C shares do not have a conversion feature and therefore
will always be subject to higher distribution fees and other expenses than
Class A shares. The per share net asset value of the Class B and Class C shares
generally will be lower than the per share net asset value of the Class A
shares, reflecting the daily expense accruals of additional distribution fees
and certain other expenses applicable to Class B and Class C shares. The Fund
may offer additional classes of shares in the future and may at any time
discontinue the offering of any class of shares. See "Purchase of
Shares--Alternative Purchase Arrangements."

3
<PAGE>

dollar denominated investment grade debt securities while maintaining an
average maturity of five to ten years. Investors should carefully review the
risks associated with an investment in the Fund. There is no assurance that the
investment objective of the Fund will be achieved. See "Investment Objectives,
Policies and Strategy."

INVESTMENT ADVISER, SUB-ADVISER AND DISTRIBUTOR. Davis Selected
Advisers, L.P., (the "Adviser") is the investment adviser for the Fund
providing day-to-day management of the Fund's portfolio. Davis Distributors,
LLC (the "Distributor") serves as the principal underwriter for the Fund. The
Adviser has entered into a Sub-Advisory Agreement with its wholly-owned
subsidiary, Davis Selected Advisers - NY, Inc. ("DSA-NY"). DSA-NY performs
investment management, research and other services for the Fund on behalf of
the Adviser. For more information, see "Adviser, Sub-Adviser and Distributor."

PURCHASES, EXCHANGES AND REDEMPTIONS. Initial and subsequent minimum
investments in the Class A, B and C shares may be made in amounts equal to
$1,000 and $25, respectively, except that the minimum initial investment for
retirement plans is $250. Shares may be exchanged under certain circumstances
at net asset value for the same class of shares of certain other funds managed
by the Adviser. Accounts with a market value of less than $250 caused by
shareholder redemptions are redeemable by the Fund. See "Purchase of Shares,"
"Exchange of Shares" and "Redemption of Shares." Class A shareholders who are
eligible to purchase Class Y shares may exchange their shares for Class Y
shares of the Fund. See "Purchase of Shares -- Alternative Purchase Agreements"
for Class Y eligibility requirements.

SHAREHOLDER SERVICES. Questions regarding the Fund or your account may
be directed to Davis Distributors, LLC, at 1-800-279-0279 or to your sales
representative. Written inquiries may be directed to State Street Bank and
Trust Co., c/o The Davis Funds, P.O. Box 8406, Boston, MA, 02266-8406. During
severe market conditions, the Distributor may experience difficulty in
accepting telephone redemptions or exchanges. If you are unable to contact the
Distributor at the above telephone number, you should call 1-505-820-3000
Monday through Friday between 7:00 a.m. and 4:00 p.m. Mountain Time.

FINANCIAL HIGHLIGHTS

The following table provides you with information about the financial
history of the Fund's Class A, Class B, and Class C shares. The table expresses
the information in terms of a single Class A, B, or C share for the respective
periods presented and is supplementary information to the Fund's financial
statements which are included in the March 31, 1998, Annual Report to
Shareholders. Such Annual Report may be obtained by writing or calling the
Distributor. The Fund's financial statements and financial highlights for the
year ended March 31, 1998, have been audited by KPMG Peat Marwick LLP whose
opinion thereon is contained in the 1998 Annual Report. The information for the
periods prior to 1998 was audited by other auditors whose opinion thereon is
contained in the 1997 Annual Report.

Prior to October 6, 1998, the Fund invested primarily in high yield,
high risk securities. Beginning on October 6, 1998, the Fund began investing
primarily in intermediate investment grade debt securities. The following table
reflects the results of investing in high yield, high risk securities rather
than intermediate investment grade debt securities.

4
<PAGE>

<TABLE>
<CAPTION>
CLASS A YEAR ENDED MARCH 31,
----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period....... $4.71 $4.84 $4.86 $5.14 $5.18 $4.92 $4.75 $6.07 $8.09 $8.59
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
INCOME FROM INVESTMENT
OPERATIONS

Net Investment
Income.................. 0.34 0.39 0.43 0.46 0.50 0.61 0.53 0.56 0.79 1.20
Net Gains or Losses
on Securities (both
realized and
unrealized)............. 0.13 (0.06) 0.03 (0.24) 0.06 0.25 0.43 (0.85) (1.63) (0.59)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total From
Investment
Operations............ 0.47 0.33 0.46 0.22 0.56 0.86 0.96 (0.29) (0.84) 0.61
----- ----- ----- ----- ----- ----- ----- ----- ----- -----

LESS DISTRIBUTIONS

Dividends from (net
investment income)...... (0.34) (0.39) (0.43) (0.46) (0.50) (0.60) (0.53) (0.56) (0.88) (1.11)

Distributions in
excess of
realized gains.......... - - - - (0.10) - - - - -
Returns of Capital........ (0.08) (0.07) (0.05) (0.04) - - (0.26) (0.47) (0.30) -
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Distributions... (0.42) (0.46) (0.48) (0.50) (0.60) (0.60) (0.79) (1.03) (1.18) (1.11)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net Asset Value,
End of Period............. $4.76 $4.71 $4.84 $4.86 $5.14 $5.18 $4.92 $4.75 $6.07 $8.09
===== ===== ===== ===== ===== ===== ===== ===== ===== =====

TOTAL RETURN (1)............. 10.40% 7.08% 9.93% 4.69% 11.29% 18.81% 22.45% (5.32)% (11.69)% 7.24%

RATIOS/SUPPLEMENTAL DATA

Net Assets, End of
Period (000 omitted).... $44,058 $47,890 $53,816 $56,405 $64,663 $38,305 $24,986 $19,386 $29,909 $53,670
Ratio of Expenses to
Average Net Assets.... 1.40%(2) 1.48%(2) 1.51% 1.53% 1.48% 1.81% 1.93% 2.09% 1.52% 1.26%
Ratio of Net Income
to Average Net Assets. 7.11% 8.13% 8.92% 9.49% 9.31% 11.91% 11.01% 10.43% 10.64% 14.18%
Portfolio Turnover
Rate(3)................. 71.54% 66.10% 118.34% 98.94% 98.31% 84.93% 93.78% 76.92% 39.91% 85.91%
</TABLE>

(1) Assumes hypothetical initial investment on the business day before the
first day of the fiscal period, with all dividends and distributions
reinvested in additional shares on the reinvestment date, and redemption at
the net asset value calculated on the last business day of the fiscal
period. Sales charges are not reflected.

(2) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 1.39% for the year ended March 31,
1998 and 1.47% for the year ended March 31, 1997. Prior to 1997, such
reductions were reflected in the expense ratios.

(3) The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.

5
<PAGE>

<TABLE>
<CAPTION>
CLASS B DECEMBER 5, 1994
(COMMENCEMENT
YEAR ENDED OF OPERATIONS)
MARCH 31, THROUGH
------------------------------- MARCH 31,
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............ $4.68 $4.81 $4.85 $4.80
----- ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS

Net Investment Income........................ 0.33 0.36 0.40 0.11
Net Gains or Losses on
Securities (both realized and unrealized).. 0.10 (0.07) - 0.05
----- ----- ----- -----
Total From Investment Operations........ 0.43 0.29 0.40 0.16
----- ----- ----- -----
LESS DISTRIBUTIONS

Dividends (from net investment income)....... (0.33) (0.36) (0.40) (0.11)
Returns of Capital........................... (0.05) (0.06) (0.04) -
----- ----- ----- -----
Total Distributions...................... (0.38) (0.42) (0.44) (0.11)
----- ----- ----- -----
Net Asset Value, End of Period.................. $4.73 $4.68 $4.81 $4.85
===== ===== ===== =====

TOTAL RETURN(1)................................. 9.53% 6.26% 8.68% 4.28%

RATIOS/SUPPLEMENTAL DATA

Net Assets, End of Period (000 omitted)..... $21,624 $10,217 $6,599 $1,900
Ratio of Expenses to Average Net Assets...... 2.16%(2) 2.30%(2) 2.32% 2.36%*
Ratio of Net Income to Average Net Assets.... 6.35% 7.28% 8.11% 8.66%*
Portfolio Turnover Rate (3).................. 71.54% 66.10% 118.34% 98.94%
</TABLE>

(1) Assumes hypothetical initial investment on the business day before the
first day of the fiscal period (or inception of offering), with all
dividends and distributions reinvested in additional shares on the
reinvestment date, and redemption at the net asset value calculated on the
last business day of the fiscal period. Sales charges are not reflected in
the total returns. Total returns are not annualized for periods of less
than one full year.

(2) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 2.15% for the year ended March 31,
1998, and 2.29% for the year ended March 31, 1997. Prior to 1997 such
reductions were reflected in the expense ratios.

* Annualized

6
<PAGE>

<TABLE>
<CAPTION>
CLASS C AUGUST 12, 1997
(COMMENCEMENT OF
OPERATIONS)
THROUGH
MARCH 31,
1998
----
<S> <C>
Net Asset Value,
Beginning of Period...................... $4.71
-----
INCOME FROM INVESTMENT OPERATIONS

Net Investment Income................... 0.16
Net Gains or Losses on Securities
(both realized and unrealized)......... 0.10
-----
Total From Investment
Operations........................ 0.26
-----
LESS DISTRIBUTIONS

Dividends (from net
investment income)..................... (0.16)
Returns of Capital....................... (0.05)
-----
Total Distributions.................. (0.21)
Net Asset Value,
End of Period............................ $4.76
=====
TOTAL RETURN(1)............................. 5.61%

RATIOS/SUPPLEMENTAL DATA

Net Assets, End of Period
(000 omitted).......................... $1,928
Ratio of Expenses to
Average Net Assets..................... 2.09%(2)*
Ratio of Net Income to
Average Net Assets..................... 6.42%*
Portfolio Turnover Rate (3).............. 71.54%
</TABLE>

(2) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 2.08% for the period ended March 31,
1998.

* Annualized

7
<PAGE>

INVESTMENT OBJECTIVES, POLICIES AND STRATEGY

INVESTMENT OBJECTIVE. The Fund's primary investment objective is to
achieve a high level of current income. Secondarily, the Fund seeks capital
growth so long as such objective is consistent with the Fund's primary
objective. There is no assurance the Fund will succeed in achieving its
objectives.

INVESTMENT POLICIES. Under normal market conditions, the Fund invests
at least 65% of its total assets in U.S. dollar denominated investment grade
debt securities while maintaining an average maturity of five to ten years.
Investment grade debt securities are those rated in one of the four highest
categories by Standard & Poor's Corporation ("Standard & Poor's"), Moody's
Investors Service, Inc. ("Moody's"), Fitch Investors Service, Inc., and other
nationally recognized rating organizations, or which the Adviser deems to be of
comparable credit quality. A description of these rating categories is included
as Appendix A to this Prospectus. Debt securities (often referred to as
"fixed-income securities") are used by issuers to borrow money from investors.
The issuer promises to pay the investor interest at a fixed or variable rate,
and to pay back the amount it borrowed (the "principal") at maturity. Some debt
securities, such as zero coupon bonds (discussed below) do not pay current
interest. The Fund may invest up to 35% of its total assets in debt securities
rated less than investment grade or, if unrated, judged by the Adviser to be of
comparable quality to such lower-rated securities (collectively, "lower-grade
securities"). Lower-grade securities include securities rated BB, B, CCC, CC, C
and D by Standard & Poor's or Ba, B, Caa, Ca and C by Moody's. Lower-grade
securities (often called "junk bonds") are considered speculative and involve
greater risk. Until October 6, 1998 the Fund invested primarily in high yield,
high risk securities. During the transition period while the Fund is
implementing its strategy of investing primarily in intermediate investment
grade securities, the Fund may continue to invest more than 35% of its total
assets in debt securities rated less than investment grade. However, the Fund
will not purchase additional high yield, high risk securities until such
securities represent less than 35% of total assets.

INVESTMENT STRATEGY. The basic Davis investment philosophy is to
search for quality growth companies, which the market has overlooked. The Fund
seeks to purchase the investment grade debt securities issued by these
companies. At the heart of our approach is the recognition that managing risk
is the key to delivering superior long-term investment results. Two ways we
limit risk is by focusing primarily upon investment grade securities and by
maintaining an average maturity of five to ten years.

PRIMARY INVESTMENT RISKS

All investments carry risks to some degree, the yield and share price
of the Fund will change daily based on changes in interest rates and market
conditions, and in response to other economic, political, or financial events
and investors' of such conditions and events. The types and maturities of the
securities the Fund purchases, and the credit quality of their issuers will
impact the Fund's reaction to these events. The Fund is designed for those
investors who are investing for the long-term and who are willing to accept a
moderate risk of loss of their capital in the hope of achieving higher income.
There is no assurance that the Fund will achieve its objective, and when you
redeem your shares, they may be worth more or less than what you paid for them.

INTEREST RATE RISK. Most debt securities are subject to interest rate
risk. When prevailing interest rates fall, the values of already-issued debt
securities generally rise. When interest rates rise, the values of
already-issued debt securities generally decline. The magnitude of these
fluctuations will often be greater for longer-term debt securities than
shorter-term debt securities. The Fund seeks to limit its interest rate
exposure

8
<PAGE>

by maintaining an average maturity of five to ten years. Changes in the value
of securities held by the Fund means that the Fund's share price can go up or
down when interest rates change.

CREDIT RISK. Most debt securities are subject to credit risk. Credit
risk relates to the ability of the issuer of a debt security to make interest
and principal payments on the security as they become due. Generally,
higher-yielding, lower-rated bonds (the Fund may invest up to 35% of its total
assets in high yield, high risk securities) are subject to greater credit risk
than higher-rated bonds. Securities issued or guaranteed by the U.S. Government
are subject to little, if any, credit risk. While the Adviser may rely to some
extent on credit ratings by nationally recognized rating agencies, such as
Standard & Poor's or Moody's, in evaluating the credit risk of securities
selected for the Fund's portfolio, it may also use its own or broker research
and analysis. However, many factors affect an issuer's ability to make timely
payments, and there can be no assurance that the credit risks of a particular
security will change over time. An improved credit rating usually causes the
market value of a debt security to increase while a downgraded credit rating
usually causes the market value of a debt security to decline.

PREPAYMENT RISK. Many types of debt securities, including mortgage
securities and securities subject to call provisions, are subject to prepayment
risk. Prepayment risk occurs when the issuer of a security can prepay principal
prior to the security's maturity. Securities subject to prepayment risk
generally offer less potential for gains during a declining interest rate
environment, and similar or greater potential for loss in a rising interest
rate environment. In addition, the potential impact of prepayment features on
the price of a debt security may be difficult to predict and result in greater
volatility. Many bonds are subject to redemption or call provisions. If an
issuer exercises these provisions when investment rates are declining, the Fund
will likely replace such bonds with lower yielding bonds, resulting in a
decreased return.

SECURITIES AND INVESTMENT PRACTICES

CORPORATE SECURITIES. The Fund focuses its investments in securities
issued by investment grade companies that are established in their industries,
have favorable cash flows, and strong balance sheets. Investment grade debt
securities are those rated in one of the four highest categories nationally
recognized rating organizations or which the Adviser deems to be of comparable
credit quality. Corporate securities are subject to both interest rate and
credit risk. Many corporate securities also contain call provisions subjecting
the security to prepayment risk.

U.S. GOVERNMENT SECURITIES. Certain U.S. Government Securities,
including U.S. Treasury bills, notes and bonds, and mortgage participation
certificates guaranteed by the Government National Mortgage Association
("Ginnie Mae") are supported by the full faith and credit of the U.S.
Government, which in general terms means that the U.S. Treasury stands behind
the obligation to pay principal and interest. Ginnie Mae certificates are one
type of mortgage-related U.S. Government Security the Fund may invest in. Other
mortgage-related U.S. Government Securities the Fund may invest in that are
issued or guaranteed by federal agencies, or Government-sponsored entities, are
not supported by the full faith and credit of the U.S. Government. Those
securities include obligations supported by the right of the issuer to borrow
from the U.S. Treasury, such as obligations of Federal Home Loan Mortgage
Corporation ("Freddie Mac"), obligations supported only by the credit of the
instrumentality, such as Federal National Mortgage Association ("Fannie Mae"),
and obligations supported by the discretionary authority of the U.S. Government
to repurchase certain obligations of U.S. Government agencies or
instrumentalities such as the Federal Land Banks and the Federal Home Loan
Banks. Other U.S. Government Securities the Fund invests in are collateralized
mortgage obligations ("CMOs"). U.S. Government Securities have little or no
credit risk. They are, however, subject to interest rate risk and
mortgage-related securities are subject to prepayment risk.

9
<PAGE>

HIGH YIELD, HIGH RISK SECURITIES. The Fund may invest up to 35% of its
total assets in high yield, high risk securities. High yield, high risk
securities, whether rated or unrated, often have speculative characteristics.
High yield, high risk securities, often referred to as "junk bonds," have
special risks that make them riskier investments than investment grade
securities. They may be subject to greater market fluctuations and risk of loss
of income and principal than lower yielding, investment grade securities. There
may be less of a market for them, and therefore, they may be harder to sell at
an acceptable price. There is a relatively greater possibility that the
issuer's earnings may be insufficient to make the payments of interest due on
the bonds. The issuer's low creditworthiness may increase the potential for its
insolvency.

These risks mean that the Fund may not achieve the expected income
from lower-grade securities, and that the Fund's net asset value per share may
be affected by declines in value of these securities. The Fund is not obligated
to dispose of securities when issuers are in default or, if the rating of the
security is reduced. For foreign lower-grade securities, these risks are in
addition to the risks described in "Securities and Investment Practices --
Foreign Securities."

Until October 6, 1998, the Fund invested primarily in high yield, high
risk securities. On that date the Fund's Board of Directors approved changing
the Fund's investment strategy to focus upon investment grade debt securities.
Under its current investment strategy, the Fund will not purchase additional
high yield, high risk securities if, after giving effect to the purchase, more
than 35% of the Fund's total assets would be invested in high yield, high risk
securities. During the transition period while the Fund is implementing its
strategy of investing primarily in intermediate investment grade securities,
the Fund may continue to invest more than 35% of its total assets in debt
securities rated less than investment grade. However, the Fund will not
purchase additional high yield, high risk securities until such securities
represent less than 35% of total assets.

PORTFOLIO COMPOSITION. The table below reflects the Fund's portfolio
composition by quality rating for the year ended March 31, 1998, calculated on
the basis of the average weighted ratings of all bonds held at year end. The
table reflects the percentage of total assets represented by fixed-income
securities rated by Moody's or S&P, by unrated fixed-income securities and by
other assets. The percentages shown reflect the higher of the Moody's or S&P
rating. U.S. Government Securities, whether or not rated, are reflected as Aaa
and AAA (highest quality). Other assets may include money market instruments,
repurchase agreements, equity securities, net payables and receivables and
cash. The allocations in the table are not necessarily representative of the
composition of the Fund's portfolio at other times. Portfolio quality ratings
will change over time.

10
<PAGE>

COMPOSITION OF THE FUND'S PORTFOLIO BY QUALITY RATING AS A PERCENTAGE OF

TOTAL NET ASSETS AT MARCH 31, 1998*

<TABLE>
<CAPTION>
FUND'S ASSESSMENT OF GENERAL DEFINITION
MOODY'S/S&P RATING CATEGORY PERCENTAGE NON-RATED SECURITIES OF BOND QUALITY
- --------------------------- ---------- -------------------- ---------------
<S> <C> <C> <C>
Aaa/AAA ............................ 7.13% 0.00% Highest quality
Aa/AA ............................ 6.39% 0.00% High quality
A/A ............................ 0.41% 0.00% Upper medium grade
Baa/BBB ............................ 3.73% 0.00% Medium grade
Ba/BB ............................ 10.97% 0.51% Some speculative elements
B/B ............................ 37.20% 12.20% Speculative
Caa/CCC ............................ 4.14% 0.15% More speculative
Ca, C/CC, C, D...................... 0.13% 0.35% Very speculative, may be in default
Not Rated........................... 13.21% 0.00% Not rated by Moody's or S&P
Common and Preferred Stock.......... 2.15% 0.00%
Short-term Investments.............. 14.54% 0.00%
------ -----
100.00% 13.21%
</TABLE>

* As of March 31, 1998, the Fund still invested primarily in high yield, high
risk securities. Beginning October 6, 1998 the Fund will not purchase
additional high yield, high risk securities if, after giving effect to the
purchase, more than 35% of the Fund's total assets would be invested in high
yield, high risk securities.

The description of each bond quality category set forth in the table
above is intended to be a general guide and not a definitive statement as to
how Moody's and S&P define such rating category. A more complete description of
the rating categories is set forth in the Appendix. The ratings of Moody's and
S&P represent their opinions as to the quality of the securities that they
undertake to rate. It should be emphasized, however, that ratings are relative
and subjective, and are not absolute standards of quality. There is no
assurance that a rating assigned initially will not change. The Fund may retain
a security whose rating has changed or has become unrated.

FOREIGN SECURITIES DENOMINATED IN U.S. DOLLARS. The Fund may invest
without limit in foreign issuers so long as their debt is denominated in U.S.
dollars. By restricting the Fund's investments to debt securities denominated
in U.S. dollars the Fund avoids currency risk, which is a primary risk of
investing in foreign issuers. There are other risks of foreign investing. For
example, foreign issuers are not required to use generally accepted accounting
principles. If foreign securities are not registered for sale in the U.S. under
U.S. securities laws, the issuer does not have to comply with the disclosure
requirements of our laws, which are generally more stringent than foreign laws.
The values of foreign securities investments will be affected by other factors,
including exchange control regulations or currency blockage, and possible
expropriation or nationalization of assets. There may also be changes in
governmental administration or economic or monetary policy in the U.S. or
abroad that can affect foreign investing. In addition, it is generally more
difficult to obtain court judgments outside the U.S. if the Fund has to sue a
foreign broker or issuer. Additional costs may be incurred because foreign
broker commissions are generally higher than U.S. rates, and there are
additional custodial costs associated with holding securities abroad.

MORTGAGE-BACKED SECURITIES AND CMOS. Certain mortgage-backed
securities, whether issued by the U.S. Government or by private issuers,
"pass-through" to investors the interest and principal payments generated by a
pool of mortgages assembled for sale by government agencies or private issuers.
Pass-through mortgage-backed securities entail the risk that principal may be
repaid at any time because of prepayments on the underlying mortgages. That may
result in greater price and yield volatility than traditional fixed-income
securities that have a fixed maturity and interest rate.

11
<PAGE>

Some mortgage-backed securities are issued by private issuers, such as
commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers, and other secondary market issuers.
Mortgage-backed securities issued by such private issuers are not issued or
guaranteed by the U.S. Government or its agencies and are, therefore, also
subject to credit risk.

The Fund may also invest in collateralized mortgage-backed obligations
(referred to as "CMOs"), which generally are obligations fully collateralized
by a portfolio of mortgages or mortgage-related securities. Payment of the
interest and principal generated by the pool of mortgages is passed through to
the holders according to their class as the payments are received. CMOs are
issued with a variety of classes, or series which have different maturities.
Certain CMOs may be more volatile and less liquid than other types of
mortgage-related securities, because of the possibility of the prepayment of
principal due to prepayments on the underlying mortgage loans.

ASSET-BACKED SECURITIES. The Fund may invest in "asset-backed"
securities. These represent interests in pools of consumer loans and other
trade receivables, similar to mortgage-backed securities. They are issued by
trusts and "special purpose corporations." They are backed by a pool of assets,
such as credit card or auto loan receivables, which are the obligations of a
number of different parties. The income from the underlying pool is passed
through to holders, such as the Fund. These securities may be supported by a
credit enhancement, such as a letter of credit, a guarantee, or a preference
right. However, the extent of the credit enhancement may be different for
different securities and generally applies to only a fraction of the security's
value. These securities present special risks. For example, in the case of
credit card receivables, the issuer of the security may have no security
interest in the related collateral.

ZERO COUPON SECURITIES. Zero Coupon securities, which may be issued by
the U.S. Government, its agencies or instrumentalities or by private issuers,
pay no current interest and are purchased at a substantial discount from their
face value. They are subject to greater fluctuations in market value as
interest rates change than debt securities that pay interest periodically.
Interest accrues on zero coupon bonds even though cash is not actually
received.

TAXABLE MUNICIPAL OBLIGATIONS. Taxable municipal obligations are
issued by or on behalf of states, territories, and possessions of the U.S., and
their political subdivisions, agencies, and instrumentalities, and the District
of Columbia to obtain funds. Unlike traditional municipal bonds, the interest
earned on taxable municipal obligations is subject to federal income tax.
Taxable municipal obligations are subject to interest rate, credit, and
prepayment risks.

SHORT-TERM DEBT SECURITIES. The high quality, short-term money market
instruments in which the Fund may invest include U.S. Treasury and agency
obligations; commercial paper (short-term, unsecured, negotiable promissory
notes of a domestic or foreign company); short-term obligations of corporate
issuers; bank participation certificates; and certificates of deposit and
bankers' acceptances (time drafts drawn on commercial banks usually in
connection with international transactions) of banks and savings and loan
associations.

12
<PAGE>

a later date. Pay-in-kind or deferred interest bonds carry additional risk in
that, unlike bonds which pay interest in cash throughout the period to
maturity, the Fund will realize no cash until the cash payment date unless a
portion of such securities are sold. The Fund has no assurance of the value or
the liquidity of securities received from pay-in-kind bonds. If the issuer
defaults, the Fund may obtain no return at all on its investment.

NON-CONCENTRATION. The Fund shall not invest 25% or more of its total
assets in any industry; however, for the purposes of this restriction,
obligations of the U.S. Government, its agencies or instrumentalities are not
considered to be part of any single industry.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase
securities on a "when-issued" basis and may purchase or sell such securities on
a "delayed delivery" basis. These terms refer to securities that have been
created and for which a market exists, but which are not available for
immediate delivery or are to be delivered at a later date. There may be a risk
of loss to the Fund if the value of the security changes prior to the
settlement date.

REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements.
In a repurchase transaction, the Fund buys a security and simultaneously sells
it to the vendor for delivery at a future date. Repurchase agreements must be
fully collateralized. However, if the vendor fails to pay the resale price on
the delivery date, the Fund may incur costs in disposing of the collateral and
may experience losses if there is any delay in its ability to do so. The Fund
will not enter into a repurchase agreement that will cause more than 15% of the
Fund's net assets to be subject to repurchase agreements having maturities
beyond seven days. There is no limit on the amount of the Fund's net assets
that may be subject to repurchase agreements having maturities of seven days or
less.

RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in restricted
securities, i.e., securities which, if sold, would cause the Fund to be deemed
an "underwriter" under the Securities Act of 1933 (the "1933 Act"), or which
are subject to contractual restrictions on resale. The Fund's policy is to not
purchase or hold illiquid securities (which may include restricted securities)
if more than 15% of the Fund's net assets would then be illiquid. If at any
time more than 15% of the Fund's net assets are illiquid, steps will be taken
as soon as practicable to reduce the percentage of illiquid assets to 15% or
less.

The restricted securities which the Fund may purchase include
securities which have not been registered under the 1933 Act but are eligible
for purchase and sale pursuant to Rule 144A ("Rule 144A Securities"). This Rule
permits certain qualified institutional buyers, such as the Fund, to trade in
privately placed securities even though such securities are not registered
under the 1933 Act. The Adviser or Sub-Adviser, under criteria established by
the Fund's Board of Directors, will consider whether Rule 144A securities being
purchased or held by the Fund are illiquid, and thus, subject to the Fund's
policy limiting investments in illiquid securities. In making this
determination, the Adviser or Sub-Adviser will consider the frequency of trades
and quotes, the number of dealers and potential purchasers, dealer undertakings
to make a market, and the nature of the security, and the market place trades
(for example, the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). The liquidity of Rule 144A
Securities will also be monitored by the Adviser and Sub-Adviser and, if as a
result of changed conditions, it is determined that Rule 144A Securities are no
longer liquid, the Fund's holding of illiquid securities will be reviewed to
determine what, if any, action is required in light of the policy limiting
investments in such securities. Investing in Rule 144A Securities could have
the effect of increasing the amount of investments in illiquid securities if
qualified institutional buyers are unwilling to purchase such securities.

13
<PAGE>

BORROWING. The Fund may not borrow money except from banks for
extraordinary or emergency purposes in amounts not exceeding 10% of the value
of the Fund's total assets (excluding the amount borrowed) at the time of
borrowing. The Fund may not pledge or hypothecate any of its assets, except in
connection with permitted borrowing in amounts not exceeding 15% of the value
of the Fund's total assets (excluding the amount borrowed) at the time of such
borrowing.

TEMPORARY DEFENSIVE INVESTMENTS. When market conditions dictate a more
defensive strategy, the Fund may temporarily, without limitation, hold cash or
invest in short-term money market instruments. The yield on these instruments
will generally be lower than the yield on the Fund's regular portfolio.

PORTFOLIO TRANSACTIONS. The Adviser and Sub-Adviser are responsible
for the placement of portfolio transactions, subject to the supervision of the
Board of Directors. The Fund may trade to some degree in securities for the
short-term and may sell securities to buy others with greater income or profit
potential or when it has realized a profit and the proceeds can be more
advantageously utilized. The Fund may also sell a security when the Adviser or
Sub-Adviser believe such security will no longer continue to provide a
competitive yield or involves undue risk, or when the Adviser or Sub-Adviser
deem it advisable to take a more defensive position or return to a more
aggressive stance. Because of the Fund's policies, the Fund's portfolio
turnover rate will vary. A higher portfolio turnover rate could require the
payment of larger amounts in brokerage commissions. However, it is anticipated
that most securities transactions will be principal transactions, in which no
brokerage commissions are incurred. The Adviser and Sub-Adviser are authorized
to place portfolio transactions with Shelby Cullom Davis & Co., a member of the
New York Stock Exchange, which may be deemed to be an affiliate of the Adviser,
if the commissions are fair and reasonable and comparable to commissions
charged by non-affiliated qualified brokerage firms for similar services.
Research services and placement of orders by securities firms for shares of the
Fund may be taken into account as a factor in placing portfolio transactions.
Portfolio turnover rates are set forth in the Financial Highlights table,
however, prior to October 6, 1998, the Fund invested primarily in high yield,
high risk securities. Beginning on October 6, 1998, the Fund began investing
primarily in intermediate investment grade debt securities. The turnover rates
set forth in the Financial Highlights table reflect the results of investing in
high yield, high risk securities rather than intermediate investment grade debt
securities. Therefore, the turnover rates included in the Financial Highlights
table may not be indicative of turnover rates. Implementing the new investment
strategy of investing primarily in intermediate investment grade debt
securities will involve the sale of high yield, high risk securities and the
purchase of intermediate investment grade debt securities. Thus, portfolio
turnover may increase during the transition period.

FUNDAMENTAL POLICIES. The Fund has adopted certain investment
restrictions set forth in the Statement of Additional Information as
fundamental policies. These restrictions and the Fund's investment objectives
are fundamental policies and may not be changed unless authorized by a vote of
the shareholders. All other policies are non-fundamental and may be changed
without shareholder approval. Except for the restriction with respect to
illiquid securities, any percentage restrictions set forth in the prospectus or
in the Statement of Additional Information apply as of the time of investment
without regard to later increases or decreases in the values of securities or
total net assets.

ADVISER, SUB-ADVISER AND DISTRIBUTOR

14
<PAGE>

of the Fund. Davis Distributors, LLC (the "Distributor"), a subsidiary of the
Adviser, serves as the distributor or principal underwriter of the Fund's
shares. Davis Selected Advisers-NY, Inc. ("DSA-NY"), a wholly owned subsidiary
of the Adviser, performs investment management, research and other services for
the Fund on behalf of the Adviser under a Sub-Advisory Agreement with the
Adviser. The Adviser also acts as investment adviser for Davis Tax-Free High
Income Fund, Inc., Davis New York Venture Fund, Inc., Davis Series, Inc., Davis
International Series, Inc., (collectively with the Fund, the "Davis Funds"),
Selected American Shares, Inc., Selected Special Shares, Inc. and Selected
Capital Preservation Trust (collectively the "Selected Funds"). The Distributor
also acts as the principal underwriter for the Davis and Selected Funds.

The Fund pays the Adviser a fee at the annual rate of 0.55% on average
net assets. Prior to October 6, 1998, the Fund paid the Advisor a higher fee to
manage a portfolio of high yield, high risk securities. Under the former
schedule, the Fund paid the Adviser a fee at the annual rate of 0.70% on
average net assets up to $250 million, 0.60% on the next $250 million of
average net assets and 0.55% on average net assets over $500 million. The Fund
also reimburses the Adviser for its costs of providing certain accounting and
financial reporting, shareholder services, and compliance with state securities
laws. Under the Sub-Advisory Agreement with DSA-NY, the Adviser pays all of
DSA-NY's direct and indirect costs of operations. All the fees paid to DSA-NY
are paid by the Adviser and not the Fund.

PORTFOLIO MANAGEMENT. Carolyn H. Spolidoro has been the primary
portfolio manager of the Fund since October 6, 1998. She has served as the
primary portfolio manager of government bond funds managed by the Adviser since
May 1, 1995. Ms. Spolidoro serves as the primary portfolio manager of
government money market funds managed by the Adviser since 1987. Ms. Spolidoro
has been employed by the Adviser since August 1985. She is a Vice President of
the Adviser's General Partner and a Vice President of all of the Davis Funds.

YEAR 2000 ISSUES. Like all financial service providers, the Adviser,
Sub-Adviser, Distributor and third parties providing transfer agent, custodial
and other services (jointly the "Service Providers") utilize systems that may
be affected by Year 2000 transition issues. The services provided to the Fund
and the shareholders by the Service Providers depend on the smooth functioning
of their computer systems and those of other parties they deal with. Many
computer software systems in use today cannot distinguish the year 2000 from
the year 1900 because of the way dates are encoded and calculated. Such an
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. Although, at this time,
there can be no assurance that there will be no adverse impact on the Fund, the
Service Providers have advised the Fund that they have been actively working on
necessary changes to their computer systems to prepare for the year 2000 and
expect that their systems, and those of other parties they deal with, will be
adapted in time for that event.

DISTRIBUTION PLANS

Davis Distributors, LLC is reimbursed by the Fund for some of its
distribution expenses through Distribution Plans which have been adopted with
respect to the Class A, Class B and Class C shares and approved by the Fund's
Board of Directors in accordance with Rule 12b-1 under the Investment Company
Act of 1940. Rule 12b-1 regulates the manner in which a mutual fund may assume
costs of distributing and promoting the sale of its shares.

Payments under the Class A Distribution Plan are limited to an annual
rate of 0.25% of the average daily net asset value of the Class A shares. Such
payments are made to reimburse the Distributor for the fees it pays to its
salespersons and other firms for selling Fund shares, servicing shareholders,
and maintaining

15
<PAGE>

shareholder accounts. Where a commission is paid for purchases of $1 million or
more of Class A shares and as long as the limits of the Distribution Plan have
not been reached, such payment is also made from 12b-1 distribution fees
received from the Fund. Normally, such fees are at the annual rate of 0.25% of
the average net asset value of the accounts serviced and maintained on the
books of the Fund. Payments under the Class A Distribution Plan may also be
used to reimburse the Distributor for other distribution costs (excluding
overhead) not covered in any year by any portion of the sales charges the
Distributor retains. See "Purchase of Shares."

Payments under the Class B Distribution Plan are limited to an annual
rate of 1% of the average daily net asset value of the Class B shares. In
accordance with current applicable rules, such payments are also limited to
6.25% of gross sales of Class B shares plus interest at 1% over the prime rate
on any unpaid amounts. The Distributor pays broker/dealers up to 4% in
commissions on new sales of Class B shares. Up to an annual rate of 0.75% of
the average daily net assets is used to reimburse the Distributor for these
commission payments. Most or all of such commissions are reallowed to
salespersons and to firms responsible for such sales. No commissions are paid
by the Fund with respect to sales by the Distributor to officers, directors and
full-time employees of the Fund, the Distributor, the Adviser, the Adviser's
general partner, or DSA-NY. Up to 0.25% of average net assets is used to
reimburse the Distributor for the payment of service and maintenance fees to
its salespersons and other firms for shareholder servicing and maintenance of
shareholder accounts.

If, due to the foregoing payment limitations, the Fund is unable to
pay the Distributor the 4% commission on new sales of Class B shares, the
Distributor intends, but is not obligated, to accept new orders for shares and
pay commissions in excess of the payments it receives from the Fund. The
Distributor intends to seek full payment from the Fund of any excess amounts
with interest at 1% over the prime rate at such future date, when and to the
extent such payments on new sales would not be in excess of the limitations.
The Fund is not obligated to make such payments; the amount (if any), timing
and condition of any such payments are solely within the discretion of the
directors of the Fund, who are not interested persons of the Distributor or the
Fund, and have no direct or indirect financial interest in the Class B
Distribution Plan (the "Independent Directors"). If the Class B Distribution
Plan is terminated, the Distributor will ask the Independent Directors to take
whatever action they deem appropriate with regard to the payment of any excess
amounts. As of March 31, 1998, the Distributor paid $582,180 in commissions for
which the Distributor had not yet received reimbursement.

Payments under the Class C Distribution Plan are also limited to an
annual rate of 1% of the average daily net asset value of the Class C shares,
and are subject to the same 6.25% and 1% limitations applicable to the Class B
Distribution Plan. The entire amount of payments may be used to reimburse the
Distributor for the payments of commissions, service, and maintenance fees to
its salespersons and other firms for selling new Class C shares, shareholder
servicing and maintenance of shareholder accounts.

In addition, to the extent that any investment advisory fees paid by
the Fund may be deemed to be indirectly financing any activity which is
primarily intended to result in the sale of Fund shares within the meaning of
Rule 12b-1, the Distribution Plan authorize the payment of such fees.

Each of the Distribution Plans may be terminated at any time by vote
of the Independent Directors or by vote of the respective class. Payments
pursuant to a Distribution Plan are included in the operating expenses of the
class.

As described herein, dealers or others may receive different levels of
compensation depending on which class of shares they sell. The Distributor may
make expense reimbursements for special training of a

16
<PAGE>

dealer's registered representatives or personnel of dealers and other firms who
provide sales or other services in respect to the Fund and/or its shareholders,
or to defray the expenses of meetings, advertising or equipment. Any such
amounts may be paid by the Distributor from the fees it receives under the
Class A, Class B and Class C Distribution Plans.

In addition, the Distributor may, from time to time, pay additional
cash compensation or other promotional incentives to authorized dealers or
agents that sell shares of the Fund. In some instances, such cash compensation
or other incentives may be offered only to certain dealers or agents who employ
registered representatives who have sold or may sell significant amounts of
shares of the Fund and/or the other Davis Funds managed by the Adviser during a
specified period of time.

Shares of the Fund may also be sold through banks or bank-affiliated
dealers. Any determination that such banks or bank-affiliated dealers are
prohibited from selling shares of the Fund under the Glass-Steagall Act would
have no material adverse effects on the Fund. State securities laws may require
such firms to be licensed as securities dealers in order to sell shares of the
Fund.

PURCHASE OF SHARES

GENERAL. You can purchase Class A, Class B or Class C shares of the
Fund from any dealer or other person having a sales agreement with the
Distributor.

There are three ways to make an initial investment in the Fund. One
way is to fill out the Application Form included in this Prospectus and mail it
to State Street Bank and Trust Company ("State Street") at the address on the
Form. The dealer must also sign the Form. Your dealer or sales representative
will help you fill out the Form. All purchases made by check should be in U.S.
dollars (minimum $1,000, except $250 for retirement plans) and made payable to
THE DAVIS FUNDS, or in the case of a retirement account, the custodian or
trustee. THIRD PARTY CHECKS WILL NOT BE ACCEPTED. When purchases are made by
check, redemptions will not be allowed until the investment being redeemed has
been in the account for 15 calendar days.

Another way to make an initial investment is to have your dealer order
and pay for the shares. In this case, you must pay your dealer. The dealer can
order the shares from the Distributor by telephone or wire. You can also use
this method for additional investments of at least $1,000.

The third way to purchase shares is by wire. Shares may be purchased
at any time by wiring federal funds directly to State Street. Prior to an
initial investment by wire, the shareholder should telephone Davis
Distributors, LLC at 1-800-279-0279 to advise them of the investment and class
of shares and to obtain an account number and instructions. A completed Plan
Adoption Agreement or Application Form should be mailed to State Street after
the initial wire purchase. To assure proper credit, the wire instructions
should be made as follows:

State Street Bank and Trust Company
Boston, MA 02210
Attn.: Mutual Fund Services
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
Shareholder Name
Shareholder Account Number
Federal Routing Number 011000028
DDA Number 9904-606-2

17
<PAGE>

After your initial investment, you can make additional investments of
at least $25. Simply mail a check payable to "The Davis Funds" to State Street
Bank and Trust Company, c/o The Davis Funds, P.O. Box 8406, Boston, MA
02266-8406. For overnight delivery, please send your check to State Street Bank
and Trust Company, c/o the Davis Funds, 66 Brooks Drive, Braintree, MA 02184.
THIRD PARTY CHECKS WILL NOT BE ACCEPTED. The check should be accompanied by a
form which State Street will provide after each purchase. If you do not have a
form, you should tell State Street that you want to invest the check in shares
of the Fund. If you know your account number, you should also give it to State
Street.

The Fund does not issue certificates for Class A shares unless you
request a certificate each time you make a purchase. Certificates are not
issued for Class B or Class C shares or for accounts using the Automatic
Withdrawls Plan. Instead, shares purchased are automatically credited to an
account maintained for you on the books of the Fund by State Street. You will
receive a statement showing the details of the transaction and any other
transactions you had during the current year each time you add to or withdraw
from your account.

ALTERNATIVE PURCHASE ARRANGEMENTS. The Fund offers four classes of
shares. With certain exceptions described below, Class A shares are sold with a
front-end sales charge at the time of purchase and are not subject to a
front-end sales charge when they are redeemed. Class B shares are sold without
a sales charge at the time of purchase, but are subject to a deferred sales
charge if they are redeemed within six years after purchase. Class B shares
will automatically convert to Class A shares eight years after the end of the
calendar month in which the shareholder's order to purchase was accepted. Class
C shares are purchased at their net asset value per share without the
imposition of a front-end sales charge but are subject to a 1% deferred sales
charge if redeemed within one year after purchase and do not have a conversion
feature. Class Y shares are offered through a separate prospectus to (i) trust
companies, bank trusts, pension plans, endowments or foundations acting on
behalf of their own account or one or more clients for which such institution
acts in a fiduciary capacity and investing at least $5,000,000 at any one time
("Institutions"); (ii) any state, county, city, department, authority or
similar agency which invests at least $5,000,000 at any one time ("Governmental
Entities"); and (iii) any investor with an account established under a "wrap
account" or other similar fee-based program sponsored and maintained by a
registered broker-dealer approved by the Distributor ("Wrap Program
Investors"). Class Y shares are sold at net asset value without the imposition
of Rule 12b-1 charges. For more information about the Class Y shares, call the
Distributor at 1-800-279-0279.

Depending on the amount of the purchase and the anticipated length of
time of the investment, investors may choose to purchase one class of shares
rather than another. Investors who would rather pay the entire cost of
distribution at the time of investment, rather than spreading such cost over
time, might consider Class A shares. Other investors might consider Class B or
Class C shares, in which case 100% of the purchase price is invested
immediately. The Fund will not accept any purchase of Class B shares in the
amount of $250,000 or more per investor. Such purchase must be made in Class A
shares. Class C shares may be more appropriate for the short-term investor. The
Fund will not accept any purchase of Class C shares when Class A shares may be
purchased at net asset value. See also "Distribution Plans" for more
information.

Wrap Program Investors should be aware that both Class A and Class Y
shares are made available by the Fund at net asset value to sponsors of wrap
programs. However, Class A shares are subject to additional expenses under the
Fund's Rule 12b-1 Plan and sponsors of wrap programs utilizing Class A shares
are generally entitled to payments under the Plan. If the sponsor has selected
Class A shares, investors should discuss these charges with their program's
sponsor and weigh the benefits of any services to be provided by the sponsor
against the higher expenses paid by Class A shareholders.

18
<PAGE>

CLASS A SHARES. Class A shares are sold at their net asset value plus
a sales charge. The amounts of the sales charges are shown in the following
table.

<TABLE>
<CAPTION>
CUSTOMARY
SALES CHARGE CHARGE AS CONCESSION TO
AS APPROXIMATE YOUR DEALER AS
PERCENTAGE PERCENTAGE PERCENTAGE
OF OFFERING OF AMOUNT OF OFFERING
AMOUNT OF PURCHASE PRICE INVESTED PRICE
- ------------------ ----- -------- -----
<S> <C> <C> <C>
$99,999 or less .......................................... 4 3/4% 5.0% 4%
$100,000 to $249,999 .......................................... 3 1/2% 3.6% 3%
$250,000 to $499,999 .......................................... 2 1/2% 2.6% 2%
$500,000 to $749,999 .......................................... 2% 2.0% 1 3/4%
$750,000 to $999,999 .......................................... 1% 1.0% 3/4 of 1%
$1,000,000 or more .......................................... 0% 0.0% 0%*
</TABLE>

* On purchases of $1 million or more, the investor pays no front-end sales
charge, but a contingent deferred sales charge of 0.75% is imposed if shares
purchased at net asset value without a sales load after August 1, 1997, are
redeemed within the first year after purchase. The Distributor may pay the
financial service firm a commission during the first year after such purchase
at an annual rate as follows:

<TABLE>
<CAPTION>
PURCHASE AMOUNT COMMISSION
--------------- ----------
<S> <C>
First $3,000,000................................................ .75%
Next $2,000,000................................................ .50%
Over $5,000,000................................................ .25%
</TABLE>

Where a commission is paid for purchases of $1 million or more, such
payment will be made from 12b-1 distribution fees received from the Fund and,
in cases where the limits of the distribution plan in any year have been
reached, from the Distributor's own resources.

There are a number of ways to reduce the front-end sales charge on the
purchase of Class A shares, as set forth below.

(i) Family Purchases: Purchases made by an individual, such
individual's spouse, and children under 21, are combined and treated as a
purchase of a single person.

(ii) Group Purchases: The purchases of an organized group, whether or
not incorporated, are combined and treated as the purchase of a single person.
The organization must have been organized for a purpose other than to purchase
shares of mutual funds.

(iii) Purchases for Employee Benefit Plans: Trusteed or other
fiduciary accounts and Individual Retirement Accounts ("IRA") of a single
employer are treated as purchases of a single person. Purchases of and
ownership by an individual and such individual's spouse under an IRA are
combined with their other purchases and ownership.

(iv) Purchases under a Statement of Intention: By executing the
"Statement of Intention" included in the Application Form at the back of the
Prospectus, purchases of Class A shares of $100,000 or more made over a
13-month period may be made at the applicable price for the aggregate shares
actually purchased during the period. Please see "Terms and Conditions" at the
back of this prospectus.

19
<PAGE>

(v) Rights of Accumulation: If you notify your dealer or the
Distributor, you may include the Class A, B and C shares you already own
(except shares of Davis Government Money Market Fund) in calculating the price
applicable to your current purchase.

(vi) Combined Purchases with other Davis Funds: Purchases of Class A
shares of the Fund may be combined with your purchases of Class A shares of
other Davis Funds, including Davis New York Venture Fund, Davis Growth & Income
Fund, Davis Tax-Free High Income Fund, Davis International Total Return Fund,
and all funds offered by Davis Series, Inc. (other than Davis Government Money
Market Fund), separately or under combined Statements of Intention or Rights of
Accumulation to determine the price applicable to your purchases of Class A
shares of the Fund.

(vii) Sales at Net Asset Value: The sales charge will not apply to:
(1) Class A shares purchased through the automatic reinvestment of dividends
and distributions (see "Dividends and Distributions"); (2) Class A shares
purchased by directors, officers and employees of any fund for which the
Adviser acts as investment adviser or officers and employees of the Adviser,
Sub-Adviser, or Distributor including former directors and officers and any
spouse, child, parent, grandparent, brother or sister ("immediate family
members") of all of the foregoing, and any employee benefit or payroll
deduction plan established by or for such persons; (3) Class A shares purchased
by any registered representatives, principals, and employees (and any immediate
family member) of securities dealers having a sales agreement with the
Distributor; (4) initial purchases of Class A shares totaling at least $250,000
but less than $5,000,000, made at any one time by banks, trust companies and
other financial institutions on behalf of one or more clients for which such
institution acts in a fiduciary capacity; (5) Class A shares purchased by any
single account covering a minimum of 250 participants (this 250 participant
minimum may be waived for certain fee based mutual fund marketplace programs)
and representing a defined benefit plan, defined contribution plan, cash or
deferred plan qualified under 401(a) or 401(k) of the Internal Revenue Code or
a plan established under section 403(b), 457 or 501(c)(9) of such Code or
"rabbi trusts"; (6) Class A shares purchased by persons participating in a
"wrap account" or similar fee-based program sponsored and maintained by a
registered broker-dealer approved by the Fund's Distributor or by investment
advisers or financial planners who place trades for their own accounts or the
accounts of their clients and who charge a management, consulting, or other fee
for their services; and clients of such investment advisers or financial
planners who place trades for their own accounts, if the accounts are linked to
the master account of such investment adviser or financial planner on the books
and records of the broker or agent; and (7) Class A shares amounting to less
than $5,000,000 purchased by any state, county, city, department, authority or
similar agency. Investors may be charged a fee if they effect purchases in Fund
shares through a broker or agent. The Fund may also issue Class A shares at net
asset value incident to a merger with or acquisition of assets of an investment
company.

CLASS B SHARES. Class B shares are offered at net asset value, without
a front-end sales charge. The Distributor receives and usually reallows
commissions to firms responsible for the sale of such shares. See "Distribution
Plans." With certain exceptions described below, the Fund imposes a deferred
sales charge of 4% on shares redeemed during the first year after purchase, 3%
on shares redeemed during the second or third year after purchase, 2% on shares
redeemed during the fourth or fifth year after purchase and 1% on shares
redeemed during the sixth year after purchase. However, on Class B shares of
the Fund which are acquired in exchange from Class B shares of other Davis
Funds which were purchased prior to December 1, 1994, the Fund will impose a
deferred sales charge of 4% on shares redeemed during the first calendar year
after purchase; 3% on shares redeemed during the second calendar year after
purchase; 2% on shares redeemed during the third calendar year after purchase;
and 1% on shares redeemed during the fourth calendar year after purchase, and
no deferred sales charge is imposed on amounts redeemed after four calendar
years from purchase. Class B shares will be subject to a maximum Rule 12b-1 fee
at the annual rate of 1% of the class's average daily net asset

20
<PAGE>

value. The Fund will not accept any purchase of Class B shares in the amount of
$250,000 or more per investor.

Class B shares that have been outstanding for eight years will
automatically convert to Class A shares without imposition of a front-end sales
charge. The Class B shares so converted will no longer be subject to the higher
expenses borne by Class B shares. Because the net asset value per share of the
Class A shares may be higher or lower than that of the Class B shares at the
time of conversion, although the dollar value will be the same, a shareholder
may receive more or less Class A shares than the number of Class B shares
converted. Under a private Internal Revenue Service Ruling, such a conversion
will not constitute a taxable event under the federal income tax law. In the
event that this ceases to be the case, the Board of Directors will consider
what action, if any, is appropriate and in the best interest of the Class B
shareholders. In addition, certain Class B shares held by certain defined
contribution plans automatically convert to Class A shares based on increases
of plan assets as described in the Statement of Additional Information.

CLASS C SHARES. Class C shares are offered at net asset value without
front-end a sales charge at the time of purchase. Class C shares redeemed
within one year of purchase will be subject to a 1% charge upon redemption.
Class C shares do not have a conversion feature. The Fund will not accept any
purchases of Class C shares when Class A shares may be purchased at net asset
value.

The Distributor will pay a commission to the firm responsible for the
sale of Class C shares. No other fees will be paid by the Distributor during
the one-year period following the purchase. The Distributor will be reimbursed
for the commission paid from 12b-1 fees paid by the Fund during the one-year
period. If Class C shares are redeemed within the one-year period after
purchase, the 1% redemption charge will be paid to the Distributor. After Class
C shares have been outstanding for more than one year, the Distributor will
make quarterly payments to the firm responsible for the sale of the shares in
amounts equal to 0.75% of the annual average daily net asset value of such
shares for sales fees and 0.25% of the annual average daily net asset value of
such shares for service and maintenance fees.

CONTINGENT DEFERRED SALES CHARGES. Any contingent deferred sales
charge ("CDSC") imposed upon the redemption of Class A, Class B or Class C
shares is a percentage of the lesser of (i) the net asset value of the shares
redeemed or (ii) the original cost of such shares. No CDSC is imposed when you
redeem amounts derived from (a) increases in the value of shares redeemed above
the net cost of such shares or (b) certain shares with respect to which the
Fund did not pay a commission on issuance, including shares acquired through
reinvestment of dividend income and capital gains distributions. Upon request
for redemption, shares not subject to the CDSC will be redeemed first.
Thereafter, shares held the longest will be the first to be redeemed.

The CDSC on Class A, B, and C shares that are subject to a CDSC will
be waived if the redemption relates to the following: (a) in the event of the
total disability (as evidenced by a determination by the federal Social
Security Administration) of the shareholder (including registered joint owner)
occurring after the purchase of the shares being redeemed; (b) in the event of
the death of the shareholder (including a registered joint owner); (c) for
redemptions made pursuant to an automatic Withdrawls plan in an amount, on an
annual basis, up to 12% of the value of the account at the time the shareholder
elects to participate in the automatic Withdrawls plan; (d) for redemptions
from a qualified retirement plan or IRA that constitute a tax-free return of
contributions to avoid tax penalty; (e) on redemptions of shares sold to
directors, officers, and employees of any Fund for which the Adviser acts as
investment adviser, or officers and employees of the Adviser, Sub-Adviser or
Distributor including former directors and officers and immediate family
members of all of the foregoing, and any employee benefit or payroll deduction
plan established by or for such persons; (f) on redemptions pursuant to the
right of the Fund to liquidate a shareholder's account if the aggregate net
asset value of the

21
<PAGE>

shares held in such account falls below an established minimum amount, and (g)
certain other exceptions related to defined contribution plans as described in
the Statement of Additional Information.

PROTOTYPE RETIREMENT PLANS. The Distributor and certain qualified
dealers have available prototype retirement plans (e.g. 401(k), profit sharing,
money purchase, Simplified Employee Pension ("SEP") plans, model 403(b) and 457
plans for charitable, educational and governmental entities) sponsored by the
Funds for corporations and self-employed individuals. The Distributor and
certain qualified dealers also have prototype Individual Retirement Account
("IRA") plans (deductible IRAs, non-deductible IRAs, including "Roth IRAs", and
educational IRAs) and SIMPLE IRA plans for both individuals and employers.
These plans utilize the shares of the Fund and other Davis Funds as their
investment vehicle. State Street acts as custodian or trustee for the plans and
charges the participant $10 to establish each account and an annual maintenance
fee of $10 per social security number. Such fees will be redeemed automatically
at year end from your account, unless you elect to pay the fee directly.

AUTOMATIC INVESTMENT PLAN. You may arrange for automatic monthly
investing whereby State Street will be authorized to initiate a debit to your
bank account of a specific amount (minimum $25) each month which will be used
to purchase Fund shares. The account minimums of $1,000 for non-retirement
accounts and $250 for retirement accounts will be waived if, pursuant to the
automatic investment plan, the account balance will meet the minimum investment
requirements within twelve months of the initial investment. For institutions
that are members of the Automated Clearing House system (ACH), such purchases
can be processed electronically on any day of the month between the 4th and
28th day of each month. After each automatic investment, you will receive a
transaction confirmation, and the debit should be reflected on your next bank
statement. You may terminate the Automatic Investment Plan at any time. If you
desire to utilize this plan, you may use the appropriate designation on the
Application Form.

DIVIDEND DIVERSIFICATION PROGRAM. You may also establish a dividend
diversification program which allows you to have all dividends and any other
distributions automatically invested in shares of one or more of the Davis
Funds, subject to state securities law requirements, and the minimum investment
requirements set forth below. You must receive a current prospectus for the
other fund or funds prior to investment. Shares will be purchased at the chosen
fund's net asset value on the dividend payment date. A dividend diversification
account must be in the same registration as the distributing fund account and
must be of the same class of shares. All accounts established or utilized under
this program must have a minimum initial value of at least $250 and all
subsequent investments must be at least $25. This program can be amended or
terminated at any time, upon at least 60 days' notice. If you would like to
participate in this program, you may use the appropriate designation on the
Application Form.

TELEPHONE PRIVILEGE

Unless you have provided in your application that the telephone
privilege is not to be available, the telephone privilege is automatically
available under certain circumstances for exchanging shares and for redeeming
shares. BY EXERCISING THE TELEPHONE PRIVILEGE TO SELL OR EXCHANGE SHARES, YOU
AGREE THAT THE FUND SHALL NOT BE LIABLE FOR FOLLOWING TELEPHONE INSTRUCTIONS
REASONABLY BELIEVED TO BE GENUINE. Reasonable procedures will be employed to
confirm that such instructions are genuine and if not employed, the Fund may be
liable for unauthorized instructions. Such procedures will include a request
for personal identification (account or social security number) and tape
recording of the instructions. You should be aware that during unusual market
conditions, we may have difficulty in accepting telephone requests in which
case you should contact us by mail. See "Exchange of Shares - By Telephone,"
"Redemption of Shares - By Telephone" and "Redemption of Shares - Expedited
Redemption Privilege."

22
<PAGE>

EXCHANGE OF SHARES

GENERAL. The exchange privilege is a convenient way to buy shares in
other Davis Funds in order to respond to changes in your goals or in market
conditions. If such goals or market conditions change, the Davis Funds offer a
variety of investment objectives that includes common stock funds, tax-exempt,
government and corporate bond funds, and a money market fund. However, the Fund
is intended as a long-term investment and is not intended for short-term
trades. Shares of a particular class of the Fund may be exchanged only for
shares of the same class of another Davis Fund except that Class A shareholders
who are eligible to purchase Class Y shares may exchange their shares for Class
Y shares of the Fund. All of the Davis Funds offer Class A, Class B and Class C
shares. The shares to be received upon exchange must be legally available for
sale in your state. The net asset value of the initial shares being acquired
must be at least $1,000 unless such exchange is under the Automatic Exchange
Program described below. See "Purchase of Shares--Alternative Purchase
Arrangements" for Class Y eligibility requirements.

Shares may be exchanged at relative net asset value without any
additional charge. However, if any shares being exchanged are subject to an
escrow or segregated account pursuant to the terms of a Statement of Intention
or a CDSC, such shares will be exchanged at relative net asset value, but the
escrow or segregated account will continue with respect to the shares acquired
in the exchange. In addition, the terms of any CDSC, or redemption fee
applicable at the time of exchange will continue to apply to any shares
acquired upon exchange.

Before you decide to make an exchange, you must obtain the current
prospectus of the desired fund. Call your broker or the Distributor for
information and a prospectus for any of the other Davis Funds registered in
your state. Read the prospectus carefully. If you decide to exchange your
shares, send State Street a written unconditional request for the exchange and
follow the instructions regarding delivery of share certificates contained in
the section on "Redemption of Shares." A medallion signature guarantee is not
required for such an exchange. However, if shares are also redeemed for cash in
connection with the exchange transaction, a medallion signature guarantee may
be required. A medallion signature guarantee is a written confirmation from an
eligible guarantor institution, such as a securities broker-dealer or a
commercial bank, that the signature(s) on the account is (are) valid.
Unfortunately, no other form of signature verification can be accepted. Your
dealer may charge an additional fee for handling an exercise of the exchange
privilege.

An exchange involves both a redemption and a purchase, and normally
both are done on the same day. However, in certain instances such as where a
large redemption is involved, the investment of redemption proceeds into shares
of other Davis Funds may take up to seven days. For federal income tax
purposes, exchanges between funds are treated as a sale and purchase.
Therefore, there will usually be a recognizable capital gain or loss due to an
exchange. An exchange between different classes of the same fund is not a
taxable event.

The number of times you may exchange shares among the Davis Funds
within a specified period of time may be limited at the discretion of the
Distributor. Currently, more than four exchanges out of the Fund during a
twelve-month period are not permitted without the prior written approval of the
Distributor. The Fund reserves the right to terminate or amend the exchange
privilege at any time upon 60 days' notice.

BY TELEPHONE. You may exchange shares by telephone into accounts with
identical registrations. Please see the discussion of procedures in respect to
telephone instructions in the section entitled "Telephone Privilege," as such
procedures are also applicable to exchanges.

23
<PAGE>

AUTOMATIC EXCHANGE PROGRAM. The Fund also offers an automatic monthly
exchange program. All accounts established or utilized under this program must
have the same registration and a minimum initial value of at least $250. All
subsequent exchanges must have a value of at least $25. Each month, shares will
be simultaneously redeemed and purchased at the chosen fund's applicable price.
If you would like to participate in this program, you may use the appropriate
designation on the Application Form.

REDEMPTION OF SHARES

GENERAL. You can redeem, or sell back to the Fund, all or part of your
shares at any time at net asset value less any applicable sales charges. You
can do this by sending a written request to State Street Bank and Trust
Company, c/o The Davis Funds, P.O. Box 8406, Boston, MA 02266-8406, indicating
how many of your shares or what dollar amount you want to redeem. If more than
one person owns the shares to be redeemed, all owners must sign the request.
The signatures on the request must correspond to the account from which the
shares are being redeemed.

Sometimes State Street needs more documents to verify authority to
make a redemption. This usually happens when the owner is a corporation,
partnership or fiduciary (such as a trustee or the executor of an estate) or if
the person making the request is not the registered owner of the shares.

If shares to be redeemed are represented by a certificate, the
certificate, signed by the owner or owners, must be sent to State Street with
the request.

For the protection of all shareholders, the Fund also requires that
signatures appearing on a share certificate, stock power or redemption request
where the proceeds would be more than $50,000, must be guaranteed by a bank,
credit union, savings association, securities exchange, broker, dealer or other
guarantor institution. A medallion signature guarantee is also required in the
event that any modification to the Fund's application is made after the account
is established, including the selection of the Expedited Redemption Privilege.
In some situations such as where corporations, trusts or estates are involved,
additional documents may be necessary to effect the redemption. The transfer
agent may reject a request from any of the foregoing eligible guarantors, if
such guarantor does not satisfy the transfer agent's written standards or
procedures, or if such guarantor is not a member or participant of a medallion
signature guarantee program. This provision also applies to exchanges when
there is also a redemption for cash. A medallion signature guarantee on
redemption requests where the proceeds would be $50,000 or less is not
required, provided that such proceeds are being sent to the address of record
and, in order to ensure authenticity of an address change, such address of
record has not been changed within the last 30 days. All notifications of
address changes must be in writing.

Redemption proceeds are normally paid to you within seven days after
State Street receives your proper redemption request. Payment for redemptions
can be suspended under certain emergency conditions determined by the
Securities and Exchange Commission or if the New York Stock Exchange is closed
for other than customary or holiday closings. If any of the shares redeemed
were just bought by you, payment to you may be delayed until your purchase
check has cleared (which usually takes up to 15 days from the purchase date).
You can avoid a redemption delay by paying for your shares with a bank wire or
federal funds.

Redemptions are ordinarily paid to you in cash. However, the Fund's
Board of Directors is authorized to decide if conditions exist making cash
payments undesirable, although the Board has never reached such a decision. If
the Board should decide to make payment in other than cash, redemptions could
be paid in securities, valued at the value used in computing the Fund's net
asset value. There would be brokerage costs

24
<PAGE>

incurred by the shareholder in selling such redemption proceeds. We must,
however, redeem shares solely in cash up to the lesser of $250,000 or 1% of the
Fund's net asset value, whichever is smaller, during any 90-day period for any
one shareholder.

Your shares may also be redeemed through participating dealers. Under
this method, the Distributor repurchases the shares from your dealer, if your
dealer is a member of the Distributor's selling group. Your dealer may, but is
not required to, use this method in selling back your shares and may place any
repurchase request by telephone or wire. Your dealer may charge you a service
fee or commission. No charge is payable if you redeem your own shares through
State Street rather than having a dealer arrange for a repurchase.

EXPEDITED REDEMPTION PRIVILEGE. Investors with accounts other than
prototype retirement plans and IRAs may designate on the Expedited Redemption
Privilege Form (included in this prospectus), an account with any commercial
bank and have the cash proceeds from redemptions sent, by either wire or
electronically through the Automated Clearing House system ("ACH"), to a
pre-designated bank account. State Street will accept instructions to redeem
shares and make payment to a pre-designated commercial bank account by (a)
written request signed by the registered shareholder, (b) telephone request by
any Qualified Dealer to Davis Distributors, LLC (1-800-279-0279), and (c) by
facsimile request by the shareholder to State Street. At the time of
redemption, the shareholder must request that federal funds be wired or
transferred by ACH to the bank account designated on the application. The
redemption proceeds under this procedure may not be directed to a savings bank,
savings and loan or credit union account except by arrangement with its
correspondent bank or unless such institution is a member of the Federal
Reserve System. The Distributor, in its discretion, may limit the amount that
may be redeemed by a shareholder in any day under the Expedited Redemption
Privilege to $25,000. There is a $5 charge by State Street for wire service,
and receiving banks may also charge for this service. Payment by ACH will
usually arrive at your bank two banking days after you call. Payment by wire is
usually credited to your bank account on the next business day after your call.
The Expedited Redemption Privilege may be terminated, modified or suspended by
the Fund at any time.

See "Telephone Privilege."

The name of the registered shareholder and corresponding Fund account
number must be supplied. The Expedited Redemption Privilege Form provides for
the appropriate information concerning the commercial bank and account number.
Changes in ownership, account number (including the identity of your bank), or
authorized signatories of the pre-designated account, may be made by written
notice to State Street with your signature, and those of new owners or signers
on the account, guaranteed by a commercial bank or trust company. Additional
documentation may be required to change the designated account when shares are
held by a corporation, partnership, executor, administrator, trustee, or
guardian.

BY TELEPHONE. You can redeem shares by telephone and receive a check
by mail, but please keep in mind:

The check can only be issued for up to $25,000;
The check can only be issued to the registered owner (who
must be an individual);
The check can only be sent to the address of record; and
Your current address of record must have been on file for 30 days.

AUTOMATIC WITHDRAWALS PLAN. Under the Automatic Withdrawals Plan, you
can indicate to State Street how many dollars you would like to receive each
month or each quarter. Your account must have a value of at least $10,000 to
start a plan. Shares are redeemed so that you will receive the payment you have
requested approximately on the 25th day of the month. Withdrawals involve
redemption of shares and may produce gain or loss for income tax purposes.
Shares of the Fund initially acquired by exchange from any of the other Davis

25
<PAGE>

Funds will remain subject to an escrow or segregated account to which any of
the exchanged shares were subject. If you utilize this program, any applicable
CDSCs will be imposed on such shares redeemed. Purchase of additional shares
concurrent with withdrawals may be disadvantageous to you because of tax and
sales load consequences. If the amount you withdraw exceeds the dividends on
your shares, your account will suffer depletion. Your Automatic Withdrawals
Plan may be terminated by you at any time without charge or penalty. The Fund
reserves the right to terminate or modify the Automatic Withdrawals Plan at any
time.

INVOLUNTARY REDEMPTIONS. To relieve the Fund of the cost of
maintaining uneconomical accounts, the Fund may effect the redemption of shares
at net asset value in any account if the account, due to shareholder
redemptions, has a value of less than $250. At least 60 days prior to such
involuntary redemption, the Fund will mail a notice to the shareholder so that
an additional purchase may be effected to avoid such redemption.

SUBSEQUENT REPURCHASES. After some or all of your shares are redeemed
or repurchased, you may decide to put back all or part of your proceeds into
the same class of the Fund's shares. Any such shares will be issued without
sales charge at the net asset value next determined after you have returned the
amount of your proceeds. In addition, any applicable CDSC assessed on such
shares will be returned to the account. Shares will be deemed to have been
purchased on the original purchase date for purposes of calculating the CDSC
and conversion period. This can be done by sending the Fund or the Distributor
a letter, together with a check for the reinstatement amount. The letter must
be received, together with the payment, within 30 days after the redemption or
repurchase. You can only use this privilege once.

DETERMINING THE PRICE OF SHARES

NET ASSET VALUE. The net asset value per share of each class is
determined daily by dividing the total value of investments and other assets,
less any liabilities, by the total outstanding shares. The net asset value of
the Fund is determined daily as of the earlier of the close of the New York
Stock Exchange (the "Exchange") or 4:00 p.m., Eastern Time, on each day that
the Exchange is open for trading.

The price per share for purchases or redemptions made directly through
State Street normally is such value next computed after State Street receives
the purchase order or redemption request. In order for your purchase order or
redemption request to be effective on the day you place your order with your
broker-dealer or other financial institution, such broker-dealer or financial
institution must (i) receive your order before 4:00 p.m. Eastern time and (ii)
promptly transmit the order to State Street. The broker-dealer or financial
institution is responsible for promptly transmitting purchase orders or
redemption requests to State Street so that you may receive the same day's net
asset value. Note that in the case of redemptions and repurchases of shares
owned by corporations, trusts, or estates, or of shares represented by
outstanding certificates, State Street may require additional documents to
effect the redemption and the applicable price will be determined as of the
close of the next computation following the receipt of the required
documentation or outstanding certificates. See "Redemption of Shares."

VALUATION OF PORTFOLIO SECURITIES. Portfolio securities are normally
valued using current market valuations. Fixed-income securities may be valued
on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. (Pricing services
generally take into account institutional size trading in similar groups of
securities). Securities not priced in this manner will be priced at the last
published sales price if traded on that day, and if not traded, at the mean
between the most recent quoted bid and asked prices provided by investment
dealers. The pricing service and valuation procedures are reviewed and subject
to approval by the Board of Directors. Short-term securities maturing in 60
days or less will be valued at amortized cost (unless the Board of Directors
determines that amortized cost

26
<PAGE>

would not represent a fair value). If there is a material difference in the
market value and amortized cost value of short-term securities, market value
will be used. Assets for which there are no quotations available will be valued
at a fair value as determined by or at the direction of the Board of Directors.

DIVIDENDS AND DISTRIBUTIONS

There are two sources for the payments made to you by the Fund. The
first is net investment income. Payments from this source are made monthly. The
second source is realized capital gains, distribution of which is paid at least
annually. You will receive monthly confirmation statements for dividends
declared and shares purchased through reinvestment of dividends. You will
receive monthly confirmation statements for dividends which are not reinvested.
You will also receive confirmations after each purchase (other than through
dividend reinvestment) and after each redemption. Because Class B and Class C
shares incur higher distribution services fees and bear certain other expenses,
such shares will have higher expense ratios and will pay correspondingly lower
dividends than Class A shares. For tax purposes, information concerning
distributions will be mailed annually to shareholders.

The Fund currently declares monthly distributions based on the
Adviser's projections of estimated net investment income. The amount of each
distribution may differ from actual net investment income determined in
accordance with generally accepted accounting principles. The Fund at times may
continue to pay distributions based on expectation of future investment results
and provide stable distributions for its shareholders even though, as a result
of temporary market conditions or other factors, the Fund may have failed to
achieve projected investment results for a given period. In such cases, the
Fund's distributions may include a return of capital to shareholders.
Shareholders who reinvest their distributions are largely unaffected by such
returns of capital. In the case of shareholders that do not reinvest, a return
of capital is equivalent to a partial redemption of the shareholder's
investment.

Shareholders have the option to receive all dividends and
distributions in cash, to have all dividends and distributions reinvested, or
to have income dividends paid in cash and capital gain distributions
reinvested. Reinvestment of all dividends and distributions is automatic for
accounts utilizing the Automatic Withdrawls Plan. The reinvestment of dividends
and distributions is made at net asset value (without any initial or contingent
deferred sales charge) on the payment date.

FEDERAL INCOME TAXES

This section is not intended to be a full discussion of all the
aspects of the federal income tax law and its effects on the Fund and its
shareholders. Shareholders may be subject to state and local taxes on
distributions. Each investor should consult his or her own tax adviser
regarding the effect of foreign, federal, state, and local taxes on an
investment in the Fund.

The Fund intends to continue to qualify as a regulated investment
company under the Internal Revenue Code (the "Code") and, if so qualified, will
not be liable for federal income tax to the extent its earnings are
distributed. If, for any calendar year, the distributed earnings required under
the Code exceed the amount distributed, an excise tax equal to 4% of the excess
will be imposed on the Fund. The Fund intends to make distributions during each
calendar year sufficient to prevent imposition of the excise tax.

27
<PAGE>

for tax purposes whether received in cash or in additional shares. Dividends
declared in the last calendar month to shareholders of record in such month and
paid by the end of the following January are treated as received by the
shareholder in the year in which they are declared. A gain or loss for tax
purposes may be realized on the redemption of shares. If the shareholder
realizes a loss on the sale or exchange of any shares held for six months or
less and if the shareholder received a capital gain distribution during that
period, then the loss is treated as a long-term capital loss to the extent of
such distribution.

Interest on indebtedness incurred by non-corporate shareholders to
purchase or carry shares of the Fund will be deductible only up to the amount
of the shareholders' net investment income.

FUND SHARES

Shares issued by the Fund are currently divided into four classes,
Class A, Class B, Class C and Class Y shares. The Board of Directors may offer
additional classes in the future and may at any time discontinue the offering
of any class of shares. Each share, when issued and paid for in accordance with
the terms of the offering, is fully paid and non-assessable. Shares have no
preemptive or subscription rights and are freely transferable. Each share of
the Fund represents an interest in the assets of the Fund and has identical
voting, dividend, liquidation and other rights and the same terms and
conditions as any other shares except that (i) each dollar of net asset value
per share is entitled to one vote, (ii) the expenses related to a particular
class, such as those related to the distribution of each class and the transfer
agency expenses of each class are borne solely by each such class and (iii)
each class of shares votes separately with respect to provisions of the Rule
12b-1 Distribution Plan which pertains to a particular class and other matters
for which separate class voting is appropriate under applicable law. Each
fractional share has the same rights, in proportion, as a full share. Shares do
not have cumulative voting rights; therefore, the holders of more than 50% of
the voting power of the Fund can elect all of the directors of the Fund. Due to
the differing expenses of the classes, dividends of Class B and Class C shares
are likely to be lower than for Class A shares, and are likely to be higher for
Class Y shares than for any other class of shares. For more information about
Class Y shares, call the Distributor at 1-800-279-0279 to obtain the Class Y
prospectus.

In accordance with Maryland law and the Fund's By-laws, the Fund does
not hold regular annual shareholder meetings. Shareholder meetings are held
when they are required under the Investment Company Act of 1940 or when
otherwise called for special purposes. Special shareholder meetings may be
called upon the written request of shareholders holding at least 10% of the
voting power of the Fund.

PERFORMANCE DATA

From time to time, the Fund may advertise information regarding its
performance. Such information may consist of its "yield," "distribution rate,"
"average annual total return," and "total return," and will be calculated
separately for each class. These performance figures are based upon historical
results and are not intended to indicate future performance.

"Yield" is computed by dividing the net investment income per share
(as defined in applicable regulations of the Securities and Exchange
Commission) during a specified 30-day period by the maximum offering price per
share on the last day of such period. Yield is an annualized figure, in that it
assumes that the same level of net investment income is generated over a one
year-period. The yield formula annualizes net investment income by providing
for semi-annual compounding.

28
<PAGE>

"Distribution rate" is determined by dividing the income dividends per
share for a stated period by the net asset value per share on the last day of
such period. Distribution rates published are measures of the level of income
dividends distributed during a specified period. Thus, such rates differ from
yield (which measures income actually earned by a Fund) and total return (which
measures actual income, plus realized and unrealized gains or losses of the
Fund's investments). Consequently, distribution rates alone should not be
considered complete measures of performance.

"Average annual total return" refers to the Fund's average annual
compounded rate of return over a stated period that would equate to an initial
amount invested at the beginning of the period to the ending redeemable value
of the investment.

"Total return" refers to the Fund's compounded rate of return over a
stated period that would equate to an initial amount invested at the beginning
of the period to the ending redeemable value of the investment. Total return is
not annualized. In the event the Fund advertises its total return or average
annual total return, the stated periods will be one, five and ten years, and
may also include longer or shorter periods, including the life of the Fund. The
computation of total and average annual total return assumes reinvestment of
all dividends and distributions, and deduction of all charges and expenses. In
addition, a table showing the performance of an assumed investment of $10,000
may be used from time to time.

The Fund may also quote average annual total return and total return
on net asset value. Such data will be calculated substantially as described
above except that sales charges will not be deducted.

In reports or other communications to shareholders and in advertising
material, the performance of the Fund may be compared to recognized unmanaged
indices or averages of the performance of similar securities. Also, the
performance of the Fund may be compared to that of other funds of similar size
and objectives as listed in the rankings prepared by Lipper Analytical
Services, Inc., Morningstar, Inc. or similar independent mutual fund rating
services, and the Fund may use evaluations published by nationally recognized
independent ranking services and publications.

The Fund's 1998 Annual Report contains additional performance
information and will be made available upon request and without charge.

SHAREHOLDER INQUIRIES

Shareholder inquiries should be directed to Davis Distributors, LLC,
by writing to State Street Bank and Trust Company, c/o the Davis Funds, P.O.
Box 8406, Boston, MA 02266-8406 or by calling 1-800-279-0279. Davis Direct
Access is the Davis Funds' automated telephone system that enables shareholders
to perform a number of account transactions automatically by using a touch-tone
phone. Shareholders may obtain Fund and account specific information and make
purchases, exchanges, and redemptions.

29
<PAGE>

APPENDIX

QUALITY RATINGS OF DEBT SECURITIES

MOODY'S 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 edged." 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
unlikely to impair the fundamentally strong position of such issues.

Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than 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 longer 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.

30
<PAGE>

STANDARD & POOR'S CORPORATE BOND RATINGS

AAA--Debt rated AAA has the highest rating assigned by Standard and
Poor'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 an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate 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 in higher rated categories.

BB--Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments. The
BB rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.

B--Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.

CCC--Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The CCC rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied B or B- rating.

CC--The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.

C--The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.

CI--The rating CI is reserved for income bonds on which no interest is
being paid.

D--Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P 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.

31
<PAGE>

TERMS AND CONDITIONS FOR A STATEMENT OF INTENTION (CLASS A SHARES ONLY)

TERMS OF ESCROW:

1. Out of my initial purchase (or subsequent purchases if necessary) 5% of the
dollar amount specified in this Statement will be held in escrow by State
Street in the form of shares (computed to the nearest full share at the public
offering price applicable to the initial purchase hereunder) registered in my
name. For example, if the minimum amount specified under this statement is
$100,000 and the public offering price applicable to transactions of $100,000
is $10 a share, 500 shares (with a value of $5,000) would be held in escrow.

2. In the event I should exchange some or all of my shares to those of another
mutual fund for which Davis Distributors, LLC acts as distributor, according to
the terms of this prospectus, I hereby authorize State Street to escrow the
applicable number of shares of the new fund, until such time as this Statement
is complete.

3. If my total purchases are at least equal to the intended purchases, the
shares in escrow will be delivered to me or to my order.

4. If my total purchases are less than the intended purchases, I will remit to
Davis Distributors, LLC the difference in the dollar amount of sales charge
actually paid by me and the sales charge which I would have paid if the total
purchase had been made at a single time. If remittance is not made within 20
days after written request by Davis Distributors, LLC or my dealer, State
Street will redeem an appropriate number of the escrowed shares in order to
realize such difference.

5. I hereby irrevocably constitute and appoint State Street my attorney to
surrender for redemption any or all escrowed shares with full power of
substitution in the premises.

6. Shares remaining after the redemption referred to in Paragraph No. 4 will be
credited to my account.

7. The duties of State Street are only such as are herein provided being purely
ministerial in nature, and it shall incur no liability whatever except for
willful misconduct or gross negligence so long as it has acted in good faith.
It shall be under no responsibility other than faithfully to follow the
instructions herein. It may consult with legal counsel and shall be fully
protected in any action taken in good faith in accordance with advice from such
counsel. It shall not be required to defend any legal proceedings which may be
instituted against it in respect of the subject matter of this Agreement unless
requested to do so and indemnified to its satisfaction against the cost and
expense of such defense.

8. If my total purchases are more than the intended purchases and such total is
sufficient to qualify for an additional quantity discount, a retroactive price
adjustment shall be made for all purchases made under such Statement to reflect
the quantity discount applicable to the aggregate amount of such purchases
during the thirteen-month period.

32
<PAGE>

TABLE OF CONTENTS

PAGE

Summary.................................................................... 2
Financial Highlights....................................................... 4
Investment Objectives, Policies and Strategy.............................. 8
Primary Investment Risks................................................... 8
Securities and Investment Practices....................................... 9
Adviser, Sub-Adviser and Distributor....................................... 14
Distribution Plans......................................................... 15
Purchase of Shares......................................................... 17
Telephone Privilege........................................................ 22
Exchange of Shares......................................................... 23
Redemption of Shares....................................................... 24
Determining the Price of Shares............................................ 26
Dividends and Distributions................................................ 27
Federal Income Taxes....................................................... 27
Fund Shares................................................................ 28
Performance Data........................................................... 28
Shareholder Inquiries...................................................... 29
Appendix - Quality Ratings of Debt Securities.............................. 30
===============================================================================

33
<PAGE>

PROSPECTUS AUGUST 1, 1998
CLASS Y SHARES AS AMENDED OCTOBER 6, 1998

DAVIS INTERMEDIATE INVESTMENT
GRADE BOND FUND, INC.
124 EAST MARCY STREET
SANTA FE, NEW MEXICO 87501
1-800-279-0279

MINIMUM INVESTMENT PLANS AVAILABLE

Initial Purchase $5,000,000 Exchange Privilege
Wrap Fee Program Minimum
Investment subject to Sponsor's Minimums

The Fund offers four classes of shares, Class A, B, C and Y, each
having different expense levels and sales charges. This Prospectus provides
information regarding the Class Y shares offered by the Fund. Class Y shares
are offered only to certain qualified purchasers, as described in this
Prospectus. Class A, Class B and Class C shares are offered under a separate
prospectus.

This Prospectus concisely sets forth information about the Class Y
shares of the Fund that prospective investors should know before investing. It
should be read carefully and retained for future reference. A Statement of
Additional Information dated August 1, 1998, as amended October 6, 1998 has
been filed with the Securities and Exchange Commission and is incorporated
herein by reference. A copy of the Statement of Additional Information and
other information may be obtained without charge by writing to or calling the
Fund at the above address or telephone number.

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

SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.

<PAGE>

SUMMARY

FUND EXPENSES. The following table is intended to assist you in
understanding the various costs and expenses that an investor in the Class Y
shares of the Fund will bear directly or indirectly. The information is based
on the Fund's fiscal year ended March 31, 1998. Prior to October 6, 1998, the
Fund invested primarily in high yield, high risk securities. The management
fees and total fund operating expenses for the fiscal year ended March 31,
1998, reflected the higher fees associated with managing a portfolio of high
yield, high risk securities. As of October 6, 1998, the management fees have
been reduced. You can refer to the section "Adviser, Sub-Adviser and
Distributor" and "Purchase of Shares" for more information on transaction and
operating expenses of the Fund.

<TABLE>
<CAPTION>
Shareholder Transaction Expenses Class Y
- -------------------------------- -------
<S> <C>
Maximum sales load imposed on purchases............................. None
Maximum sales load imposed on reinvested dividends.................. None

Deferred sales load (a declining percentage of the
lesser of the net asset value of the shares
redeemed or the total cost of such shares)

Redeemed during first year................................... None
Redeemed during second or third year......................... None
Redeemed during fourth or fifth year......................... None
Redeemed during sixth year................................... None
Redeemed after sixth year.................................... None
Exchange Fee..................................................... None

Annual Fund operating expenses (as a percentage of average net assets)
- ----------------------------------------------------------------------

Management fees*........................................... 0.70%
12b-1 fees................................................. 0.00%
Other expenses............................................. 0.35%
-----
Total Fund operating expenses..................... 1.05%
</TABLE>

* The management fees and total fund operating expenses in the table
reflect the management fees through the fiscal year ended March 31,
1998. As of October 6, 1998, Management Fees have been reduced.

Example:

You would pay the following expenses on a $1,000 investment, assuming
a 5% annual return and redemption at the end of each time period:

1 year 3 years 5 years 10 years
------ ------- ------- --------
Class Y.............................. $11 $33 $58 $128

THOSE SHOWN.

THE FUND. Davis Intermediate Investment Grade Bond Fund, Inc. is an
open-end, diversified management investment company incorporated in Maryland in
1980 and is registered under the Investment Company Act of 1940.

The Fund offers four classes of shares. Class A, B and C shares are
sold through a separate Prospectus. Class Y shares are offered through this
Prospectus to (i) trust companies, bank trusts, endowments, pension plans or
foundations acting on behalf of their own account or one or more clients for
which such institution acts in a fiduciary capacity and investing at least
$5,000,000 at any one time ("Institutions"); (ii) any state, county, city,
department, authority or similar agency which invests at least $5,000,000
("Government Entities"); and (iii) any investor with an account established
under a "wrap

2
<PAGE>

account" or other fee based program, sponsored and maintained by a registered
broker-dealer approved by the Distributor ("Wrap Program Investors").

INVESTMENT OBJECTIVES. The Fund's primary objective is to achieve a
high level of current income. The Fund also seeks capital growth so long as
such objective is consistent with its primary objective. The Fund will, under
normal market conditions, invest at least 65% of its total assets in a
diversified portfolio of U.S. dollar denominated investment grade debt
securities while maintaining an average maturity of five to ten years.
Investors should carefully review the risks associated with an investment in
the Fund. There is no assurance that the investment objectives of the Fund will
be achieved. See "Investment Objectives, Policies and Strategies."

INVESTMENT ADVISER, SUB-ADVISER AND DISTRIBUTOR. Davis Selected
Advisers, L.P., (the "Adviser") is the investment adviser for the Fund
providing day-to-day management of the Fund's portfolio. Davis Distributors,
LLC (the "Distributor") serves as the principal underwriter for the Fund. The
Adviser has entered into a Sub-Advisory Agreement with its wholly owned
subsidiary, Davis Selected Advisers - NY, Inc. ("DSA-NY"). DSA-NY performs
investment management, research and other services for the Fund on behalf of
the Adviser. For more information, see "Adviser, Sub-Adviser and Distributor."

PURCHASES, EXCHANGES AND REDEMPTIONS. Class Y shares are sold at net
asset value without a sales charge. The initial minimum investment for
Institutions and Government Entities is $5,000,000. The initial minimum
investment for Wrap Program Investors is set by the sponsor of the program.
Shares may be exchanged under certain circumstances at net asset value for the
same class of shares of certain other funds managed by the Adviser. See
"Purchase of Shares," "Exchange of Shares," and "Redemption of Shares."

Class A shareholders who are eligible to purchase Class Y shares may
exchange their shares for Class Y shares of the Fund.

SHAREHOLDER SERVICES. Questions regarding the Fund or your account may
be directed to Davis Distributors, LLC at 1-800-279-0279 or to your sales
representative. Written inquiries may be directed to State Street Bank and
Trust Co., c/o The Davis Funds, P.O. Box 8406, Boston, MA, 02266-8406. During
severe market conditions, the Distributor may experience difficulty in
accepting telephone redemptions or exchanges. If you are unable to contact the
Distributor at the above telephone number, you should call 1-505-820-3000
Monday through Friday between 7:00 a.m. and 4:00 p.m. Mountain Time.

FINANCIAL HIGHLIGHTS

The following table expresses the information in terms of a single
Class Y share for the period presented and is supplementary information to the
Fund's financial statements which are included in the 1998 Annual Report to
Shareholders. The Report may be obtained by writing or calling the Fund. The
Fund's financial statements and financial highlights for the fiscal year ended
March 31, 1998 have been audited by KPMG Peat Marwick whose opinion thereon is
contained in the Annual Report. The information for the period prior to 1998
was audited by other auditors whose opinion thereon is contained in the 1997
Annual Report.

3
<PAGE>

<TABLE>
<CAPTION>
CLASS Y MARCH 20, 1997
(COMMENCEMENT
YEAR OF OPERATIONS)
ENDED THROUGH
MARCH 31, MARCH 31,
1998 1997
---- ----
<S> <C> <C>
Net Asset Value,
Beginning of Period...................... $4.72 $4.74
----- -----
Income From Investment Operations
Net Investment Income.................... 0.34 -
Net Gains or Losses on Securities
(both realized and unrealized)......... 0.14 (0.02)
----- -----
Total From Investment
Operations........................ 0.48 (0.02)
----- -----
Less Distributions
Dividends (from net
investment income)..................... (0.34) -
Returns of Capital....................... (0.07) -
----- -----
Total Distributions.................. (0.41) -
-
Net Asset Value,
End of Period............................ $4.79 $4.72
===== =====
Total Return (1)............................ 10.64% (0.42)%

Ratios/Supplemental Data

Net Assets, End of Period
(000 omitted).......................... $4,187 $7
Ratio of Expenses to
Average Net Assets..................... 1.05%(2) 1.21%(2)*
Ratio of Net Income to
Average Net Assets..................... 7.46% 8.89%*

Portfolio Turnover Rate (3).............. 71.54% 66.10%
</TABLE>

(1) Assumes hypothetical initial investment on the business day before the
first day of the fiscal period (or inception of offering), with all
dividends and distributions reinvested in additional shares on the
reinvestment date, and redemption at the net asset value calculated on the
last business day of the fiscal period. Total returns are not annualized
for periods of less than one full year.

(2) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 1.04% for the year ended March 31,
1998, and 1.20% for the period ended March 31, 1997.

* Annualized

4
<PAGE>

INVESTMENT OBJECTIVES, POLICIES AND STRATEGY

INVESTMENT OBJECTIVE. The Fund's primary investment objective is to
achieve a high level of current income. Secondly, the Fund seeks capital growth
so long as such objective is consistent with the Fund's primary objective.
There is no assurance the Fund will succeed in achieving its objectives.

INVESTMENT POLICIES. Under normal market conditions, the Fund invests
at least 65% of its total assets in U.S. dollar denominated investment grade
debt securities while maintaining an average maturity of five to ten years.
Investment grade debt securities are those rated in one of the four highest
categories by Standard & Poor's Corporation ("Standard & Poor's"), Moody's
Investors Service, Inc. ("Moody's"), Fitch Investors Service, Inc., and other
nationally recognized rating organizations, of which the Adviser deems to be of
comparable credit quality. A description of these rating categories is included
as Appendix A to this Prospectus. Debt securities (often referred to as
"fixed-income securities") are used by issuers to borrow money from investors.
The issuer promises to pay the investor interest at a fixed or variable rate,
and to pay back the amount it borrowed (the "principal") at maturity. Some debt
securities, such as zero coupon bonds (discussed below) do not pay current
interest. The Fund may invest up to 35% of its total assets in debt securities
rated less than investment grade or, if unrated, judged by the Adviser to be of
comparable quality to such lower-rated securities (collectively, "lower-grade
securities"). Lower-grade securities include securities rated BB, B, CCC, CC, C
and D by Standard & Poor's or Ba, B, Caa, Ca and C by Moody's. Lower-grade
securities (often called "junk bonds") are considered speculative and involve
greater risk. Until October 6, 1998, the Fund invested primarily in high yield,
high risk securities. During the transition period while the Fund is
implementing its strategy of investing primarily in intermediate investment
grade securities, the Fund may continue to invest more than 35% of its total
assets in debt securities rated less than investment grade. However, the Fund
will not purchase additional high yield, high risk securities until such
securities represent less than 35% of total assets.

INVESTMENT STRATEGY. The basic Davis investment philosophy is to
search for quality growth companies that the market has overlooked. The Fund
seeks to purchase the investment grade debt securities issued by these
companies. At the heart of our approach is the recognition that managing risk
is the key to delivering superior long-term investment results. Two ways we
limit risk is by focusing primarily upon investment grade securities and by
maintaining an average maturity of five to ten years.

PRIMARY INVESTMENT RISKS

INTEREST RATE RISK. Most debt securities are subject to interest rate
risk. When prevailing interest rates fall, the values of already-issued debt
securities generally rise. When interest rates rise, the values of
already-issued debt securities generally decline. The magnitude of these
fluctuations will often be greater for long-term debt securities than
short-term debt securities. The Fund seeks to limit its interest rate exposure
by maintaining an average maturity of five to ten years. Changes in the value
of securities held by the Fund means that the Fund's share price can go up or
down when interest rates change.

CREDIT RISK. Most debt securities are subject to credit risk. Credit
risk relates to the ability of the issuer of a debt security to make interest
and principal payments on the security as they become due. Generally,
higher-yielding, lower-rated bonds (the Fund may invest up to 35% of its total
assets in high yield, high risk securities) are subject to greater credit risk
than higher-rated bonds. Securities issued or guaranteed by the U.S. Government
are subject to little, if any credit risk. While the Adviser may rely to some
extent on credit ratings by nationally recognized rating agencies, such as
Standard & Poor's or Moody's in evaluating the credit risk of securities
selected for the Fund's portfolio, it may also use its own or broker research
and analysis. However, many factors affect an issuer's ability to make timely
payments, and there can be no assurance that the credit risks of a particular
security will change over time. An improved credit rating usually causes the
market value of a debt security to increase while a downgraded credit rating
usually causes the market value of a debt security to decline.

5
<PAGE>

SECURITIES AND INVESTMENT PRACTICES

CORPORATE SECURITIES. The Fund focuses its investments in securities
issued by investment grade companies that are established in their industries,
have favorable cash flows, and strong balance sheets. Investment grade debt
securities are those rated in one of the four highest categories of nationally
recognized rating organizations, or which the Adviser deems to be of comparable
credit quality. Corporate securities are subject to both interest rate and
credit risk. Many corporate securities also contain call provisions subjecting
the security to prepayment risk.

U.S. GOVERNMENT SECURITIES. Certain U.S. Government Securities,
including U.S. Treasury bills, notes and bonds, and mortgage participation
certificates guaranteed by the Government National Mortgage Association
("Ginnie Mae") are supported by the full faith and credit of the U.S.
Government, which in general terms means that the U.S. Treasury stands behind
the obligation to pay principal and interest. Ginnie Mae certificates are one
type of mortgage-related U.S. Government Security the Fund may invest in. Other
mortgage-related U.S. Government Securities the Fund may invest in that are
issued or guaranteed by federal agencies, or government-sponsored entities, are
not supported by the full faith and credit of the U.S. Government. Those
securities include obligations supported by the right of the issuer to borrow
from the U.S. Treasury, such as obligations of Federal Home Loan Mortgage
Corporation ("Freddie Mac"), obligations supported only by the credit of the
instrumentality, such as Federal National Mortgage Association ("Fannie Mae"),
and obligations supported by the discretionary authority of the U.S. Government
to repurchase certain obligations of U.S. Government agencies or
instrumentalities such as the Federal Land Banks and the Federal Home Loan
Banks. Other U.S. Government Securities the Fund invests in are collateralized
mortgage obligations ("CMOs"). U.S. Government Securities have little or no
credit risk. They are, however, subject to interest rate risk and
mortgage-related securities are subject to prepayment risk.

These risks mean that the Fund may not achieve the expected income
from lower-grade securities, and that the Fund's net asset value per share may
be affected by declines in value of these securities. The Fund is not obligated
to dispose of securities when issuers are in default, or if the rating of the
security is reduced. For foreign lower-grade securities, these risks are in
addition to the risks described in "Foreign Securities Denominated in U.S.
Dollars."

6
<PAGE>

PORTFOLIO COMPOSITION. The table below reflects the Fund's portfolio
composition by quality rating for the year ended March 31, 1998, calculated on
the basis of the average weighted ratings of all bonds held at year end. The
table reflects the percentage of total assets represented by fixed-income
securities rated by Moody's or S&P, by unrated fixed-income securities, and by
other assets. The percentages shown reflect the higher of the Moody's or S&P
rating. U.S. Government Securities, whether or not rated, are reflected as Aaa
and AAA (highest quality). Other assets may include money market instruments,
repurchase agreements, equity securities, net payables and receivables and
cash. The allocations in the table are not necessarily representative of the
composition of the Fund's portfolio at other times. Portfolio quality ratings
will change over time.

7
<PAGE>

COMPOSITION OF THE FUND'S PORTFOLIO BY QUALITY RATING AS A PERCENTAGE OF
TOTAL NET ASSETS AT MARCH 31, 1998*

<TABLE>
<CAPTION>
FUND'S ASSESSMENT OF GENERAL DEFINITION
MOODY'S/S&P RATING CATEGORY PERCENTAGE NON-RATED SECURITIES OF BOND QUALITY
- --------------------------- ---------- -------------------- ---------------
<S> <C> <C> <C>
Aaa/AAA ........................... 7.13% 0.00% Highest quality
Aa/AA ........................... 6.39% 0.00% High quality
A/A ........................... 0.41% 0.00% Upper medium grade
Baa/BBB ........................... 3.73% 0.00% Medium grade
Ba/BB ........................... 10.97% 0.51% Some speculative elements
B/B ........................... 37.20% 12.20% Speculative
Caa/CCC ........................... 4.14% 0.15% More speculative
Ca, C/CC, C, D..................... 0.13% 0.35% Very speculative, may be in default
Not Rated.......................... 13.21% 0.00% Not rated by Moody's or S&P
Common and Preferred Stock......... 2.15% 0.00%
Short-term Investments............. 14.54% 0.00%
------ -----
100.00% 13.21%
</TABLE>

* As of March 31, 1998, the Fund still invested primarily in high yield, high
risk securities. Beginning October 6, 1998, the Fund will not purchase
additional high yield, high risk securities if, after giving effect to the
purchase, more than 35% of the Fund's total assets would be invested in high
yield, high risk securities.

The description of each bond quality category set forth in the table
above is intended to be a general guide, and not a definitive statement as to
how Moody's and S&P define such rating category. A more complete description of
the rating categories is set forth in the Appendix. The ratings of Moody's and
S&P represent their opinions as to the quality of the securities that they
undertake to rate. It should be emphasized, however, that ratings are relative
and subjective, and are not absolute standards of quality. There is no
assurance that a rating assigned initially will not change. The Fund may retain
a security whose rating has changed or has become unrated.

8
<PAGE>

ZERO COUPON SECURITIES. Zero Coupon securities, which may be issued by
the U.S. Government, its agencies or instrumentalities, or by private issuers,
pay no current interest and are purchased at a substantial discount from their
face value. They are subject to greater fluctuations in market value as
interest rates change than debt securities that pay interest periodically.
Interest accrues on zero coupon bonds even though cash is not actually
received.

OTHER DEBT SECURITIES. The Fund may also invest in other debt
securities including "busted" convertible securities, pay-in-kind and deferred
interest bonds. Convertible securities may be converted into the issuer's
common stock. A convertible security is "busted" if the conversion right is so
far out of the money that the convertible bond is priced in the market as if it
did not include a conversion right. Pay-in-kind bonds pay interest in the form
of other securities rather than cash. Deferred interest bonds defer the payment
of interest to a later date. Pay-in-kind or deferred interest bonds carry
additional risk in that, unlike bonds which pay interest in cash throughout the
period to maturity, the Fund will realize no cash until the cash payment date
unless a portion of such securities are sold. The Fund has no assurance of the
value or the liquidity of securities received from pay-in-kind bonds. If the
issuer defaults, the Fund may obtain no return at all on its investment.

REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements.
In a repurchase transaction, the Fund buys a security and simultaneously sells
it to the vendor for delivery at a future date. Repurchase agreements must be
fully collateralized. However, if the vendor fails to pay the resale price on
the delivery date, the Fund may incur costs in disposing of the collateral, and
may experience losses if there is any delay in its ability to do so. The Fund
will not enter into a repurchase agreement that will cause more than 15% of the
Fund's net assets to be subject to repurchase agreements having maturities
beyond seven days. There is no limit on the amount of the Fund's net assets
that may be subject to repurchase agreements having maturities of seven days or
less.

9
<PAGE>

securities) if more than 15% of the Fund's net assets would then be illiquid.
If at any time more than 15% of the Fund's net assets are illiquid, steps will
be taken as soon as practicable to reduce the percentage of illiquid assets to
15% or less.

The restricted securities which the Fund may purchase include
securities which have not been registered under the 1933 Act, but are eligible
for purchase and sale pursuant to Rule 144A ("Rule 144A Securities"). This Rule
permits certain qualified institutional buyers, such as the Fund, to trade in
privately placed securities even though such securities are not registered
under the 1933 Act. The Adviser or Sub-Adviser, under criteria established by
the Fund's Board of Directors, will consider whether Rule 144A Securities being
purchased or held by the Fund are illiquid, and thus, subject to the Fund's
policy limiting investments in illiquid securities. In making this
determination, the Adviser or Sub-Adviser will consider the frequency of trades
and quotes, the number of dealers and potential purchasers, dealer undertakings
to make a market, the nature of the security, and the market place trades (for
example, the time needed to dispose of the security, the method of soliciting
offers, and the mechanics of transfer). The liquidity of Rule 144A Securities
will also be monitored by the Adviser and Sub-Adviser and, if as a result of
changed conditions, it is determined that Rule 144A Securities are no longer
liquid, the Fund's holding of illiquid securities will be reviewed to determine
what, if any, action is required in light of the policy limiting investments in
such securities. Investing in Rule 144A Securities could have the effect of
increasing the amount of investments in illiquid securities if qualified
institutional buyers are unwilling to purchase such securities.

PORTFOLIO TRANSACTIONS. The Adviser and Sub-Adviser are responsible
for the placement of portfolio transactions, subject to the supervision of the
Board of Directors. The Fund may trade to some degree in securities for the
short-term and may sell securities to buy others with greater income or profit
potential, or when it has realized a profit and the proceeds can be more
advantageously utilized. The Fund may also sell a security when the Adviser or
Sub-Adviser believe such security will no longer continue to provide a
competitive yield or involves undue risk, or when the Adviser or Sub-Adviser
deems it advisable to take a more defensive position or return to a more
aggressive stance. Because of the Fund's policies, the Fund's portfolio
turnover rate will vary. A higher portfolio turnover rate could require the
payment of larger amounts in brokerage commissions. However, it is anticipated
that most securities transactions will be principal transactions, in which no
brokerage commissions are incurred. The Adviser and Sub-Adviser are authorized
to place portfolio transactions with Shelby Cullom Davis & Co., a member of the
New York Stock Exchange, which may be deemed to be an affiliate of the Adviser,
if the commissions are fair and reasonable and comparable to commissions
charged by non-affiliated qualified brokerage firms for similar services.
Research services and placement of orders by securities firms for shares of the
Fund may be taken into account as a factor in placing portfolio transactions.
Portfolio turnover rates are set forth in the Financial Highlights table,
however, prior to October 6, 1998, the Fund invested primarily in high yield,
high risk securities. Beginning on October 6, 1998, the Fund began investing
primarily in intermediate investment grade debt securities. The turnover rates
set forth in the Financial Highlights table reflect the results of investing in
high yield, high risk securities rather than intermediate investment grade debt
securities. Therefore, the turnover rates included in the Financial Highlights
table may not be indicative of turnover rates. Implementing the new investment
strategy of investing primarily in intermediate investment grade debt
securities will involve the sale of high yield, high risk securities, and the
purchase of intermediate investment grade debt securities. Thus, portfolio
turnover may increase during the transition period.

ADVISER, SUB-ADVISER AND DISTRIBUTOR

10
<PAGE>

Davis Selected Advisers, L.P. (the "Adviser") whose principal office
is at 124 East Marcy Street, Santa Fe, New Mexico 87501, serves as the
investment adviser of the Fund. Venture Advisers, Inc. is the Adviser's sole
general partner. Shelby M.C. Davis is the controlling shareholder of the
general partner. Subject to the direction and supervision of the Board of
Directors, the Adviser manages the business operations of the Fund. Davis
Distributors, LLC (the "Distributor"), a subsidiary of the Adviser, serves as
the distributor or principal underwriter of the Fund's shares. Davis Selected
Advisers-NY, Inc. ("DSA-NY"), a wholly owned subsidiary of the Adviser,
performs investment management, research and other services for the Fund on
behalf of the Adviser under a Sub-Advisory Agreement with the Adviser. The
Adviser also acts as investment adviser for Davis Tax-Free High Income Fund,
Inc., Davis New York Venture Fund, Inc., Davis Series, Inc., Davis
International Series, Inc., (collectively with the Fund, the "Davis Funds"),
Selected American Shares, Inc., Selected Special Shares, Inc. and Selected
Capital Preservation Trust (collectively the "Selected Funds"). The Distributor
also acts as the principal underwriter for the Davis and Selected Funds.

PURCHASE OF SHARES

GENERAL. Class Y shares are offered through this Prospectus to (i)
trust companies, bank trusts, endowments, pension plans or foundations
("Institutions") acting on behalf of their own account or one or more clients
for which such Institution acts in a fiduciary capacity and investing at least
$5,000,000 at any one time; (ii) any state, county, city, department, authority
or similar agency which invests at least $5,000,000 ("Government Entities");
and (iii) any investor with an account established under a "wrap account" or
other similar fee-based program sponsored and maintained by a registered
broker-dealer approved by the Fund's Distributor ("Wrap Program Investors").
Wrap Program Investors may only purchase Class Y shares through the sponsors of
such programs who have entered into agreements with Davis Distributors, LLC.

Wrap Program Investors should be aware that both Class A and Class Y
shares are made available by the Fund at net asset value to sponsors of wrap
programs. However, Class A shares are subject to additional expenses under the
Fund's Rule 12b-1 Plan, and sponsors of wrap programs utilizing Class A shares
are generally entitled to payments under the Plan. If the sponsor has selected
Class A shares, investors should discuss these charges with their program's
sponsor and weigh the benefits of any services to be provided by the sponsor
against the higher expenses paid by Class A shareholders.

PURCHASE BY BANK WIRE. Shares may be purchased at any time by wiring
federal funds directly to State Street Bank and Trust Company. Prior to an
initial investment by wire, the institutional shareholder or wrap program
sponsor should telephone Davis Distributors, LLC at 1-800-279-0279 to advise
them of the investment and class of shares and to obtain an account number and
instructions. To assure proper credit, the wire instructions should be made as
follows:

11
<PAGE>

State Street Bank and Trust Company,
Boston, MA 02210
Attn.: Mutual Fund Services
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
Shareholder Name,
Shareholder Account Number,
Federal Routing Number 011000028,
DDA Number 9904-606-2

You may make additional investments by wire or you may simply mail a
check payable to "The Davis Funds" to State Street Bank and Trust Company, c/o
The Davis Funds, P.O. Box 8406, Boston, MA 02266-8406. For overnight delivery,
please send your check to State Street Bank and Trust Company, c/o the Davis
Funds, 66 Brooks Drive, Braintree, MA 02184. Where purchases are made by check,
redemptions will not be allowed until the check has cleared, usually about 15
calendar days. The check should be accompanied by a form which State Street
will provide after each purchase. If you do not have a form, you should tell
State Street that you want to invest the check in Class Y shares of the Fund.
If you know your account number, you should also give it to State Street.

The Fund does not issue certificates for Class Y shares. Each time you
add to or withdraw from your account, you will receive a statement showing the
details of the transaction and any other transactions you had during the
current year.

12
<PAGE>

TELEPHONE PRIVILEGE

Unless you have provided in your application that the telephone
privilege is not to be available, the telephone privilege is automatically
available under certain circumstances for exchanging shares and for redeeming
shares. BY EXERCISING THE TELEPHONE PRIVILEGE TO SELL OR EXCHANGE SHARES, YOU
AGREE THAT THE FUND SHALL NOT BE LIABLE FOR FOLLOWING TELEPHONE INSTRUCTIONS
REASONABLY BELIEVED TO BE GENUINE. Reasonable procedures will be employed to
confirm that such instructions are genuine and if not employed, the Fund may be
liable for unauthorized instructions. Such procedures will include a request
for personal identification (account or social security number) and tape
recording of the instructions. You should be aware that during unusual market
conditions we may have difficulty in accepting telephone requests in which case
you should contact us by mail. See "Exchange of Shares - By Telephone",
"Redemption of Shares".

EXCHANGE OF SHARES

GENERAL. You may exchange Class Y shares of the Fund for Class Y
shares of the other Davis Funds. The Davis Funds offer a variety of investment
objectives that includes common stock funds, tax-exempt, government and
corporate bond funds, and a money market fund. However, the Fund is intended as
a long-term investment and is not intended for short-term trades. The net asset
value of the initial shares being acquired must be at least $5,000,000 for
Institutions and Government Entities or minimums set by wrap program sponsors.
Class A shareholders who are eligible to purchase Class Y shares may exchange
their shares for Class Y shares of the Fund.

Before you decide to make an exchange, you must obtain the current
prospectus of the desired fund. Call the Distributor for information and a
prospectus for any of the other Davis Funds registered in your state. Read the
prospectus carefully. If you decide to exchange your shares, send State Street
a written unconditional request for the exchange and follow the instructions
regarding delivery of share certificates contained in the section on
"Redemption of Shares". A signature guarantee is not required for such an
exchange. However, if shares are also redeemed for cash in connection with the
exchange transaction, a signature guarantee may be required. See "Redemption of
Shares". Your dealer may charge an additional fee for handling an exercise of
the exchange privilege.

An exchange involves both a redemption and a purchase, and normally
both are done on the same day. However, in certain instances, such as where a
large redemption is involved, the investment of redemption proceeds into shares
of other Davis Funds may take up to seven days. For federal income tax
purposes, exchanges between funds are treated as a sale and purchase.
Therefore, there will usually be a recognizable capital gain or loss due to an
exchange.

The number of times you may exchange shares among the Davis Funds
within a specified period of time may be limited at the discretion of the
Adviser. Currently, more than four exchanges out of the Fund during a
twelve-month period are not permitted without the prior written approval of the
Adviser. The Fund reserves the right to terminate or amend the exchange
privilege at any time upon 60 days' notice.

REDEMPTION OF SHARES

GENERAL. You can redeem, or sell back to the Fund, all or part of your
shares at any time. You can do this by sending a written request to State
Street Bank and Trust Company, c/o The Davis Funds, P.O. Box 8406, Boston, MA
02266-8406, indicating how many of your shares or what dollar amount you want
to redeem. If more than one person owns the shares to be redeemed, all owners
must sign the request. The signatures on the request must correspond to the
account from which the shares are registered.

For the protection of all shareholders, the Company also requires that
signatures appearing on a stock power or redemption request where the proceeds
would be more than $50,000, must be guaranteed by a bank, credit union, savings

13
<PAGE>

association, securities exchange, broker, dealer or other guarantor
institution. A signature guarantee is also required in the event that any
modification to the Fund's application is made after the account is
established, including the selection of the Expedited Redemption Privilege. In
some situations such as where corporations, trusts or estates are involved,
additional documents may be necessary to effect the redemption. The transfer
agent may reject a request from any of the foregoing eligible guarantors, if
such guarantor does not satisfy the transfer agent's written standards or
procedures or if such guarantor is not a member or participant of a signature
guarantee program. This provision also applies to exchanges when there is also
a redemption for cash. A signature guarantee on redemption requests where the
proceeds would be $50,000 or less is not required, provided that such proceeds
are being sent to the address of record and, in order to ensure authenticity of
an address change, such address of record has not been changed within the last
30 days. All notifications of address changes must be in writing.

Redemption proceeds are normally paid to you within seven days after
State Street receives your proper redemption request. Payment for redemptions
can be suspended under certain emergency conditions determined by the
Securities and Exchange Commission or if the New York Stock Exchange is closed
for other than customary or holiday closings. If any of the shares redeemed
were just bought by you, payment to you may be delayed until your purchase
check has cleared (which usually takes up to 15 days from the purchase date).
You can avoid any redemption delay by paying for your shares by bank wire or
federal funds.

Redemptions are ordinarily paid to you in cash. However, the Fund's
Board of Directors is authorized to decide that conditions exist making cash
payments undesirable, although the Board has never reached such a decision. If
the Board should decide to make payment other than in cash, redemptions could
be paid in securities, valued at the value used in computing the Fund's net
asset value. There would be brokerage costs incurred by the shareholder in
selling such redemption proceeds. We must, however, redeem shares solely in
cash up to the lesser of $250,000 or 1% of the Fund's net asset value,
whichever is smaller, during any 90-day period for any one shareholder.

Your shares may also be redeemed through participating brokers or
dealers. The Distributor may repurchase shares from your dealer, if your dealer
is a member of the Distributor's selling group. Your dealer may, but is not
required to, use this method in selling back your shares and may place any
repurchase request by telephone or wire. Any dealer may charge you a service
fee or commission. No charge is payable if you redeem your own shares through
State Street rather than having a dealer arrange for a repurchase.

DETERMINING THE PRICE OF SHARES

NET ASSET VALUE. The net asset value per share of each class is
determined daily by dividing the total value of investments and other assets,
less any liabilities by the total outstanding shares. The net asset value of
the Fund is determined daily as of the earlier of the close of the New York
Stock Exchange (the "Exchange") or 4:00 p.m., Eastern Time, on each day that
the Exchange is open for trading.

The price per share for purchases or redemptions made directly through
State Street normally is such value next computed after State Street receives
the purchase order or redemption request. In order for your purchase order or
redemption request to be effective on the day you place your order with your
broker-dealer or other financial institution, such broker-dealer or financial
institution must (i) receive your order before 4:00 p.m. Eastern time and (ii)
promptly transmit the order to State Street. The broker-dealer or financial
institution is responsible for promptly transmitting purchase orders or
redemption requests to State Street so that you may receive the same day's net
asset value. Note that in the case of redemptions and repurchases of shares
owned by corporations, trusts or estates, or of shares represented by
outstanding certificates, State Street may require additional documents to
effect the redemption and the applicable price will be determined as of the
close of the next computation following the receipt of the required
documentation or outstanding certificates. See "Redemption of Shares".

VALUATION OF PORTFOLIO SECURITIES. Portfolio securities are normally
valued using current market valuations. Fixed-income securities may be valued
on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. (Pricing services
generally take into account institutional size trading in similar groups of
securities). Securities not priced in this manner will be priced at the last
published sales price if traded on that day and, if not traded, at the mean
between the most recent quoted bid and asked prices provided by investment
dealers. The pricing service and valuation procedures are reviewed and subject
to approval by the Board of Directors. Short-term securities maturing in 60
days or less will be valued at amortized cost (unless the Board of Directors
determines that amortized cost would not represent a fair value). If there is a
material difference in the market value and amortized cost value of short-term

14
<PAGE>

securities, market value will be used. Assets for which there are no quotations
available will be valued at a fair value as determined by or at the direction
of the Board of Directors.

DIVIDENDS AND DISTRIBUTIONS

The Fund currently declares monthly distributions based on the
Adviser's projections of estimated net investment income. The amount of each
distribution may differ from actual net investment income determined in
accordance with generally accepted accounting principles. The Fund at times may
continue to pay distributions based on expectation of future investment results
and to provide stable distributions for its shareholders even though, as a
result of temporary market conditions or other factors, the Fund may have
failed to achieve projected investment results for a given period. In such
cases, the Fund's distributions may include a return of capital to
shareholders. Shareholders who reinvest their distributions are largely
unaffected by such returns of capital. In the case of shareholders who do not
reinvest, a return of capital is equivalent to a partial redemption of the
shareholder's investment.

Shareholders have the option to receive all dividends and
distributions in cash, to have all dividends and distributions reinvested, or
to have income dividends paid in cash and capital gain distributions
reinvested. Reinvestment of all dividends and distributions is automatic for
accounts utilizing the Automatic Withdrawals Plan. The reinvestment of
dividends and distributions is made at net asset value (without any initial or
contingent deferred sales charge) on the payment date.

FEDERAL INCOME TAXES

The Fund intends to continue to qualify as a regulated investment
company under the Internal Revenue Code (the "Code") and, if so qualified, will
not be liable for federal income tax to the extent its earnings are
distributed. If for any calendar year the distributed earnings required under
the Code exceed the amount distributed, an excise tax equal to 4% of the excess
will be imposed on the Fund. The Fund intends to make distributions during each
calendar year sufficient to prevent imposition of the excise tax.

Interest on indebtedness incurred by non-corporate shareholders to
purchase or carry shares of the Fund will be deductible only up to the amount
of the shareholders' net investment income.

FUND SHARES

Shares issued by the Fund are currently divided into four classes,
Class A, Class B, Class C and Class Y shares. Due to differing expenses of the
Classes, dividends of Class B and Class C shares are likely to be lower than
for Class A shares, and are likely to be higher for Class Y shares than for any
other class of shares. For more information regarding the Class A, B, and C
shares, please call 1-800-279-0279 to request a prospectus for those shares.

The Board of Directors may offer additional classes in the future and
may at any time discontinue the offering of any class of shares. Each share,
when issued and paid for in accordance with the terms of the offering, is fully
paid and non-

15
<PAGE>

assessable. Shares have no preemptive or subscription rights and are freely
transferable. Each share of the Fund represents an interest in the assets of
the Fund and has identical voting, dividend, liquidation and other rights and
the same terms and conditions as any other shares except that (i) each dollar
of net asset value per share is entitled to one vote, (ii) the expenses related
to a particular class, such as those related to the distribution of shares of
each class and the transfer agency expenses of each class are borne solely by
each such class and (iii) each class of shares votes separately with respect to
provisions of the Rule 12b-1 Distribution Plan which pertains to a particular
class and other matters for which separate class voting is appropriate under
applicable law. Each fractional share has the same rights, in proportion, as a
full share. Shares do not have cumulative voting rights; therefore, the holders
of more than 50% of the voting power of the Fund can elect all of the directors
of the Fund.

16
<PAGE>

PERFORMANCE DATA

From time to time, the Fund may advertise information regarding its
performance. Such information may consist of its "yield," "distribution rate,"
"average annual total return" and "total return" and will be calculated
separately for each class. These performance figures are based upon historical
results and are not intended to indicate future performance.

"Yield" is computed by dividing the net investment income per share
(as defined in applicable regulations of the Securities and Exchange
Commission) during a specified 30-day period by the maximum offering price per
share on the last day of such period. Yield is an annualized figure, in that it
assumes that the same level of net investment income is generated over a one
year period. The yield formula annualizes net investment income by providing
for semi-annual compounding.

"Average annual total return" refers to the Fund's average annual
compounded rate of return over a stated period that would equate an initial
amount invested at the beginning of the period to the ending redeemable value
of the investment.

"Total return" refers to the Fund's compounded rate of return over a
stated period that would equate an initial amount invested at the beginning of
the period to the ending redeemable value of the investment. Total return is
not annualized. In the event the Fund advertises its total return or average
annual total return, the stated periods will be one, five and ten years, and
may also include longer or shorter periods, including the life of the Fund. The
computation of total and average annual total return assumes reinvestment of
all dividends and distributions, and deduction of all charges and expenses. In
addition, a table showing the performance of an assumed investment of $10,000
may be used from time to time.

The Fund may also quote average annual total return and total return
on net asset value. Such data will be calculated substantially as described
above except that sales charges will not be deducted.

The Fund's 1998 Annual Report contains additional performance
information and will be made available upon request and without charge.

SHAREHOLDER INQUIRIES

Shareholder inquiries should be directed to Davis Distributors, LLC,
by writing to State Street Bank and Trust Company, c/o The Davis Funds, P.O.
Box 8406, Boston, MA 02266-8406 or by calling 1-800-279-0279. Davis Direct
Access is the Davis Funds' automated telephone system that enables shareholders
to perform a number of account transactions automatically by using a touch-tone
phone. Shareholders may obtain Fund and account specific information and make
purchases, exchanges and redemptions.

17
<PAGE>

APPENDIX

QUALITY RATINGS OF DEBT SECURITIES

MOODY'S INVESTORS SERVICE, INC. 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 edged." Interest payments are protected by a large or an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are unlikely to impair
the fundamentally strong position of such issues.

Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat greater than 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 longer 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 to 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.

STANDARD & POOR'S CORPORATE BOND RATINGS

AAA - Debt rated AAA has the highest rating assigned by Standard and
Poor'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 an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate 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 in higher rated categories.

BB - Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments. The
BB rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.

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<PAGE>

B - Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.

CCC - Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The CCC rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied B or B- rating.

CC - The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.

C - The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.

CI - The rating CI is reserved for income bonds on which no interest
is being paid.

D - Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P 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.

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- -------------------------------------------------------------------------------
TABLE OF CONTENTS

PAGE

Summary.................................................................... 2
Financial Highlights....................................................... 3
Investment Objectives, Policies and Strategies............................. 5
Primary Investment Risks................................................... 5
Securities and Investment Practices........................................ 6
Adviser, Sub-Adviser and Distributor....................................... 9
Purchase of Shares......................................................... 10
Telephone Privilege........................................................ 11
Exchange of Shares......................................................... 11
Redemption of Shares....................................................... 11
Determining the Price of Shares............................................ 12
Dividends and Distributions................................................ 12
Federal Income Taxes....................................................... 13
Fund Shares................................................................ 13
Performance Data........................................................... 14
Shareholder Inquiries...................................................... 14
Appendix - Quality Ratings of Debt Securities.............................. 15
- -------------------------------------------------------------------------------

20
<PAGE>

STATEMENT OF ADDITIONAL INFORMATION
AUGUST 1, 998, AS AMENDED
OCTOBER 6, 1998

DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
124 EAST MARCY STREET
SANTA FE, NEW MEXICO 87501
1-800-279-0279

TABLE OF CONTENTS

TOPIC PAGE

Investment Restrictions.................................................... 2

Investment Securities, Strategies, and Techniques.......................... 3

Portfolio Transactions..................................................... 8

Federal Income Taxes....................................................... 9

Directors and Officers..................................................... 10

Directors' Compensation Schedule........................................... 12

Certain Shareholders of the Fund........................................... 12

Investment Advisory Services............................................... 14

Custodian.................................................................. 15

Auditors................................................................... 15

Determining the Price of Shares............................................ 15

Reduction of Class A Sales Charges......................................... 15

Special Distribution Arrangements.......................................... 17

Distribution of Fund Shares................................................ 17

Performance Data........................................................... 18

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE READ
IN CONJUNCTION WITH THE CLASS A, CLASS B, AND CLASS C PROSPECTUS DATED AUGUST
1, 1998, AS AMENDED OCTOBER 6, 1998, AND THE CLASS Y PROSPECTUS DATED AUGUST 1,
1998, AS AMENDED OCTOBER 6, 1998. THE PROSPECTUSES MAY BE OBTAINED FROM THE
FUND.

THE FUND'S MARCH 31, 1998, ANNUAL REPORT TO SHAREHOLDERS ACCOMPANIES THIS
STATEMENT OF ADDITIONAL INFORMATION AND THE FINANCIAL STATEMENTS APPEARING
THEREIN ARE INCORPORATED HEREIN BY REFERENCE.

<PAGE>

INVESTMENT RESTRICTIONS

The investment restrictions set forth below and the Fund's investment
objectives set forth in the Prospectus may not be changed without the approval
of the holders of the lesser of (i) 67% of the eligible votes, if the holders
of more than 50% of the eligible votes are represented or (ii) more than 50% of
the eligible votes. All percentage limitations set forth in these restrictions
apply as of the time of an investment without regard to later increases or
decreases in the value of securities in total or net assets.

1. Commodities. The Fund may not buy or sell commodities or commodity
contracts.

2. Real Estate. The Fund may not purchase real estate or real estate
mortgages as such, but the Fund may purchase the liquid securities of
companies, including real estate investment trusts, holding real
estate or interests (including mortgage interests) therein.

3. Voting Securities. The Fund may not buy the securities of any company
if the Fund would then own more than 10% of such company's voting
securities or any class of such company's securities. For this
purpose, all debt securities of an issuer are deemed to comprise a
single class.

4. Diversification. The Fund may not buy the securities of any company if
more than 5% of the value of its total assets would then be invested
in that company; the Fund may, however, without limitation, invest in
obligations issued or guaranteed by the U.S. Government, its agencies
and instrumentalities ("U.S. Government Securities") and repurchase
agreements with respect thereto.

5. Concentration. The Fund may not buy the securities of companies in any
one industry if more than 25% of the value of the Fund's total assets
would then be invested in companies in that industry.

6. Options. The Fund may not purchase or write put or call options,
except that it may write listed covered call options and make closing
transactions in respect thereof, provided that no more than 20% of the
value of the Fund's total assets would be subject to such calls.

7. Seasoned Issuers. The Fund may not buy the securities of companies in
continuous operation for less than three years (including
predecessors) if more than 5% of the value of the Fund's total assets
would then be invested in such securities.

8. Investment Companies. The Fund may not buy securities issued by other
investment companies except incident to an acquisition of assets or a
merger.

9. Selling Short, Margin, Arbitrage. The Fund may not sell short, buy on
margin or engage in arbitrage transactions.

10. Investing For Control. The Fund does not invest for the purpose of
exercising control or management of other companies.

11. Borrowing. The Fund may not borrow money except from banks for
extraordinary emergency purposes in amounts not exceeding 10% of the
value of the Fund's total assets (excluding the amount borrowed) at
the time of such borrowing. The Fund may not pledge or hypothecate any
of its assets, except in connection with permitted borrowing in
amounts not exceeding 15% of the value of its total assets (excluding
the amount borrowed) at the time of such borrowing.

12. Affiliated Securities. The Fund may not buy or continue to hold
securities if any officers or directors of the Fund, the Adviser, or
the Adviser's General Partner, own too many of the same securities.
This would happen if any of these individuals own 1/2 of 1% or more of
the securities and all such individuals who own that much or more own
5% of such securities.

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<PAGE>

13. Underwriting. The Fund does not engage in the underwriting of
securities; however, if the Fund sells "restricted" securities it may
technically be considered an "underwriter."

14. Lending. The Fund may lend its securities provided that not more than
20% of the value of the Fund's total assets are subject to such loans.
The Fund may not lend money except through the purchase of debt
obligations (including entering into repurchase agreements) in
accordance with the Fund's investment objectives.

NON-FUNDAMENTAL POLICIES. In addition to the foregoing restrictions, the Fund
is subject to certain non-fundamental policies which may be changed without
shareholder approval. Currently, these restrictions include:

1. Futures and Options Contracts. The Fund will not invest in futures or
options contracts. In addition, the Fund will not enter into swap
transactions or forward contracts. This restriction does not limit the
Fund's ability to purchase fixed income securities with embedded
options or to enter into repurchase agreements which are fully
collateralized with government securities.

2. Fixed Income Securities Denominated in U.S. Dollars. The Fund will
only purchase fixed income securities if they are denominated in U.S.
dollars.

3. High Yield, High Risk Securities. The Fund will not invest more than
35% of its total assets in fixed income securities which are rated
less than investment grade or, if unrated, judged by the Adviser to be
of comparable quality to such high yield, high risk securities. High
yield, high risk securities include securities rated BB, B, CCC, CC, C
and D by Standard & Poor's or Ba, B, Caa, Ca and C by Moody's.

4. Illiquid Securities. The Fund will not purchase or hold illiquid
securities if more than 15% of the Fund's net assets would then be
illiquid.

INVESTMENT SECURITIES, STRATEGIES, AND TECHNIQUES

SECURITIES OF FOREIGN GOVERNMENTS AND COMPANIES. The Fund may invest
in debt obligations (which must be dominated in U.S. dollars) issued or
guaranteed by foreign corporations, certain supranational entities (described
below) and foreign governments or their agencies or instrumentalities.

The percentage of the Fund's assets that will be allocated to foreign
securities will vary from time to time depending on, among other things, the
relative yields of foreign and U.S. securities, the economies of foreign
countries, the condition of such countries' financial markets, the interest
rate climate of such countries and the relationship of such countries' currency
to the U.S. dollar. The Adviser will consider an issuer's affiliation, if any,
with a foreign government as one of the factors in determining whether to
purchase any particular foreign security. These factors are judged on the basis
of fundamental economic criteria (e.g., relative inflation levels and trends,
growth rate forecasts, balance of payments status, and economic policies) as
well as technical and political data. The Fund's portfolio of foreign
securities may include those of a number of foreign countries or, depending
upon market conditions, those of a single country.

Investments in foreign securities offer potential benefits not
available from investments solely in securities of domestic issuers, by
offering the opportunity to invest in foreign issuers that appear to offer
growth potential, or in foreign countries with economic policies or business
cycles different from those of the U.S., or to reduce fluctuations in portfolio
value by taking advantage of foreign bond or other markets that do not move in
a manner parallel to U.S. markets. From time to time, U.S. government policies
have discouraged certain investments abroad by U.S. investors, through taxation
or other restrictions, and it is possible that such restrictions could be
reimposed. The Fund's policy of investing in foreign debt securities if they
are denominated in U.S. dollars may limit the number of foreign debt securities
which the Fund may invest in and prevent the Fund from investing in foreign
issuers which would otherwise meet the Fund's investment criteria.

The obligations of foreign governmental entities may or may not be
supported by the full faith and credit of a foreign government. Obligations of
"supranational entities" include those of international organizations

3
<PAGE>

designated or supported by governmental entities to promote economic
reconstruction or development and of international banking institutions and
related government agencies. Examples include the International Bank for
Reconstruction and Development (the "World Bank"), the European Coal and Steel
Community, the Asian Development Bank and the Inter- American Development Bank.
The governmental members, or "stockholders," of these entities usually make
initial capital contributions to the supranational entity and in many cases are
committed to make additional capital contributions if the supranational entity
is unable to repay its borrowings. Each supranational entity's lending
activities are limited to a percentage of its total capital (including
"callable capital" contributed by members at the entity's call), reserves and
net income. There is no assurance that foreign governments will be able or
willing to honor their commitments.

Investing in foreign securities involves considerations and possible
risks not typically associated with investing in securities in the U.S. Even
though the Fund invests only in debt securities denominated in U.S. dollars,
the values of foreign securities may be affected by changes in currency rates
or exchange control regulations or currency blockage, application of foreign
tax laws, including withholding taxes, changes in governmental administration
or economic or monetary policy (in the U.S. or abroad) or changed circumstances
in dealings between nations. There may be a lack of public information about
foreign issuers. Foreign countries may not have financial reporting, accounting
and auditing standards comparable to those that apply to U.S. issuers. Foreign
brokerage commissions are generally higher than commissions in the U.S., and
foreign securities markets may be less liquid, more volatile and less subject
to governmental regulation than in the U.S. They may have increased delays in
settling portfolio transactions. Investments in foreign countries could be
affected by other factors not generally thought to be present in the U.S.,
including expropriation or nationalization, confiscatory taxation and potential
difficulties in enforcing contractual obligations, and could be subject to
extended settlement periods.

MORTGAGE-BACKED SECURITIES. These securities represent participation
interests in pools of residential mortgage loans which are guaranteed by
agencies or instrumentalities of the U.S. Government. Such securities differ
from conventional debt securities which generally provide for periodic payment
of interest in fixed or determinable amounts (usually semi-annually) with
principal payments at maturity or specified call dates. Some mortgage-backed
securities in which the Fund may invest may be backed by the full faith and
credit of the U.S. Treasury (e.g., direct pass-through certificates of
Government National Mortgage Association); some are supported by the right of
the issuer to borrow from the U.S. government (e.g., obligations of Federal
Home Loan Mortgage Corporation); and some are backed by only the credit of the
issuer itself, which may be a private rather than a government entity. Those
guarantees do not extend to the value of or yield of the mortgage-backed
securities themselves or to the net asset value of the Fund's shares. Any of
these government agencies may also issue collateralized mortgage-backed
obligations ("CMOs"), discussed below.

The yield on mortgage-backed securities is based on the average
expected life of the underlying pool of mortgage loans. The actual life of any
particular pool will be shortened by any unscheduled or early payments of
principal and interest. Principal prepayments generally result from the sale of
the underlying property or the refinancing or foreclosure of underlying
mortgages. The occurrence of prepayments is affected by a wide range of
economic, demographic and social factors, and accordingly, it is not possible
to predict accurately the average life of a particular pool. Yield on such
pools is usually computed by using the historical record of prepayments for
that pool, or in the case of newly issued mortgages, the prepayment history of
similar pools. The actual prepayment experience of a pool of mortgage loans may
cause the yield realized by the Fund to differ from the yield calculated on the
basis of the expected average life of the pool.

Prepayments tend to increase during periods of falling interest rates,
while during periods of rising interest rates prepayments will most likely
decline. When prevailing interest rates rise, the value of a pass-through
security may decrease as do the values of other debt securities, but when
prevailing interest rates decline, the value of a pass-through security is not
likely to rise to the extent that the value of other debt securities rise,
because of the prepayment feature of pass-through securities. The Fund's
reinvestment of scheduled principal payments and unscheduled prepayments it
receives may occur at times when available investments offer higher or lower
rates than the original investment; thus, affecting the yield of the Fund.
Monthly interest payments received by the Fund have a compounding effect which
may increase the yield to the Fund more than debt obligations that pay interest
semi-annually. Because of those factors, mortgage-backed securities may be less
effective than Treasury bonds of similar maturity at maintaining yields during
periods of declining interest rates. The Fund may purchase mortgage-backed
securities at par, at a premium, or at a discount. Accelerated prepayments
adversely affect yields for pass-through

4
<PAGE>

securities purchased at a premium (i.e., at a price in excess of their
principal amount) and may involve additional risk of loss of principal because
the premium may not have been fully amortized at the time the obligation is
repaid. The opposite is true for pass-through securities purchased at a
discount.

The Fund may invest in "stripped" mortgage backed securities, in which
the principal and interest portions of the security are separated and sold.
Stripped mortgage-backed securities usually have at least two classes each of
which receives different proportions of interest and principal distributions on
the underlying pool of mortgage assets. One common variety of stripped
mortgage-backed security, has one class that receives some of the interest and
most of the principal, while the other class receives most of the interest and
remainder of the principal. In some cases, one class will receive all of the
interest (the "interest-only" or "IO" class), while the other class will
receive all of the principal (the "principal-only" or "PO" class). Interest
only securities are extremely sensitive to interest rate changes, and
prepayments of principal on the underlying mortgage assets. An increase in
principal payments or prepayments will reduce the income available to the IO
security. In other types of CMOs, the underlying principal payments may apply
to various classes in a particular order, and therefore the value of certain
classes or "tranches" of such securities may be more volatile than the value of
the pool as a whole, and losses may be more severe than on other classes.

Mortgage-backed securities may be less effective than debt obligations
of similar maturity at maintaining yields during periods of declining interest
rates. As new types of mortgage-related securities are developed and offered to
investors, the Adviser will, subject to the direction of the Board of Directors
and consistent with the Fund's investment objective and policies, consider
making investments in such new types of mortgage-related securities.

GNMA CERTIFICATES. Certificates of Government National Mortgage
Association ("GNMA") are mortgage-backed securities of GNMA that evidence an
undivided interest in a pool or pools of mortgages ("GNMA Certificates"). The
GNMA Certificates that the Fund may purchase are of the "modified pass-through"
type, which entitle the holder to receive timely payment of all interest and
principal payments due on the mortgage pool, net of fees paid to the
"issuer"and GNMA, regardless of whether the mortgagor actually makes the
payments when due.

The National Housing Act authorizes GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or guaranteed by the
Veterans Administration ("VA"). The GNMA guarantee is backed by the full faith
and credit of the U.S. Government. GNMA is also empowered to borrow without
limitation from the U.S. Treasury, if necessary, to make any payments required
under its guarantee.

The average life of a GNMA Certificate is likely to be substantially
shorter than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of principal investment long before
the maturity of the mortgages in the pool. Foreclosures impose no risk to
principal investment because of the GNMA guarantee, except to the extent that
the Fund has purchased the certificates at a premium in the secondary market.

FNMA SECURITIES. The Federal National Mortgage Association ("FNMA")
was established to create a secondary market in mortgages insured by the FHA.
FNMA issues guaranteed mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of
interest and principal on FNMA Certificates. The FNMA guarantee is not backed
by the full faith and credit of the U.S. Government.

FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation ("FHLMC")
was created to promote development of a nationwide secondary market for
conventional residential mortgages. FHLMC issues two types of mortgage
pass-through certificates ("FHLMC Certificates"): mortgage participation
certificates ("PCs"); and, guaranteed mortgage certificates ("GMCs"). PCs
resemble GNMA Certificates in that each PC represents a pro rata share of all
interest and principal payments made and owed on the underlying pool. FHLMC
guarantees timely monthly payment of interest on PCs and the ultimate payment
of principal. The FHLMC guarantee is not backed by the full faith and credit of
the U.S. Government.

5
<PAGE>

GMCs also represent a pro rata interest in a pool of mortgages.
However, these instruments pay interest semi-annually and return principal once
a year in guaranteed minimum payments. The expected average life of these
securities is approximately ten years. The FHLMC guarantee is not backed by the
full faith and credit of the U.S. Government.

COLLATERALIZED MORTGAGE-BACKED OBLIGATIONS ("CMOS"). CMOs are fully
collateralized bonds that are the general obligations of the issuer by either
the U.S. Government, a U.S. government instrumentality, or a private issuer
which may be a domestic or foreign corporation. Such bonds generally are
secured by an assignment to a trustee (under the indenture pursuant to which
the bonds are issued) of collateral consisting of a pool of mortgages. Payments
with respect to the underlying mortgages generally are made to the trustee
under the indenture. Payments of principal and interest on the underlying
mortgages are not passed through to the holders of the CMOs as such (i.e., the
character of payments of principal and interest is not passed through, and
therefore payments to holders of CMOs attributable to interest paid and
principal repaid on the underlying mortgages do not necessarily constitute
income and return of capital, respectively, to such holders), but such payments
are dedicated to payment of interest on and repayment of principal of the CMOs.
CMOs often are issued in two or more classes with different characteristics
such as varying maturities and stated rates of interest. Because interest and
principal payments on the underlying mortgages are not passed through to
holders of CMOs, CMOs of varying maturities may be secured by the same pool of
mortgages, the payments on which are used to pay interest on each class and to
retire successive maturities in sequence. Unlike other mortgage-backed
securities (discussed above), CMOs are designed to be retired as the underlying
mortgages are repaid. In the event of prepayment on such mortgages, the class
of CMO first to mature generally will be paid down. Therefore, although in most
cases the issuer of CMOs will not supply additional collateral in the event of
such prepayment, there will be sufficient collateral to secure CMOs that remain
outstanding.

ASSET-BACKED SECURITIES. The value of an asset-backed security is
affected by changes in the market's perception of the asset backing the
security, the creditworthiness of the servicing agent for the loan pool, the
originator of the loans, or the financial institution providing any credit
enhancement, and is also affected if any credit enhancement has been exhausted.
The risks of investing in asset-backed securities are ultimately dependent upon
payment of consumer loans by the individual borrowers. As a purchaser of an
asset-backed security, the Fund would generally have no recourse to the entity
that originated the loans in the event of default by a borrower. The underlying
loans are subject to prepayments, which shorten the weighted average life of
asset-backed securities and may lower their return, in the same manner as
described above for the prepayments of a pool of mortgage loans underlying
mortgage-backed securities.

REPURCHASE AGREEMENTS. The Fund may acquire securities that are
subject to repurchase agreements. In a repurchase transaction, the Fund
acquires a security from, and simultaneously resells it to, an approved vendor
(a U.S. commercial bank, the U.S. branch of a foreign bank, or a broker-dealer
which has been designated a primary dealer in government securities, which must
meet the credit requirements set by the Board of Directors from time to time),
for delivery on an agreed upon future date. The resale price exceeds the
purchase price by an amount that reflects an agreed-upon interest rate
effective for the period during which the repurchase agreement is in effect.
The majority of these transactions run from day to day and delivery pursuant to
resale typically will occur within one to five days of the purchase. Repurchase
agreements are considered "loans" under the Investment Company Act,
collateralized by the underlying security. The Fund's repurchase agreements
require that at all times while the repurchase agreement is in effect, the
collateral's value must equal or exceed the repurchase price to fully
collateralized the repayment obligation. Additionally, the Adviser will impose
creditworthiness requirements to confirm that the vendor is financially sound
and will continuously monitor the collateral's value.

The Fund may enter into "tri-party repurchase agreements" either
separately or on a joint basis. A tri-party repurchase agreement is an
agreement between the Fund, the seller, and a third-party bank. Both the Fund
and the seller have accounts with the third-party bank which facilitates the
exchange of cash and securities. Tri-party repurchase agreements are subject to
the same risks and the Fund follows the same procedures as apply to regular
repurchase agreements.

ILLIQUID AND RESTRICTED SECURITIES. The Fund may invest in restricted
securities which are subject to contractual restrictions on resale. The Fund's
policy is to not purchase or hold illiquid securities (which may include
restricted securities) if more than 15% of the Fund's net assets would then be
illiquid. To enable the Fund to sell

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<PAGE>

restricted securities not registered under the Securities Act of 1933, the Fund
may have to cause those securities to be registered. The expenses of
registration of restricted securities may be negotiated by the Fund with the
issuer at the time such securities are purchased by the Fund, if such
registration is required before such securities may be sold publicly. When
registration must be arranged because the Fund wishes to sell the securities, a
considerable period may elapse between the time the decision is made to sell
the securities and the time the Fund would be permitted to sell them. The Fund
would bear the risks of any downward price fluctuation during that period. The
Fund may also acquire, through private placements, securities having
contractual restrictions on their resale, which might limit the Fund's ability
to dispose of such securities and might lower the amount realizable upon the
sale of such securities.

The Fund's policy not to purchase or hold illiquid securities if more
than 15% of the Fund's net assets would then be illiquid does not limit
purchases of restricted securities that are eligible for sale to qualified
institutional purchasers pursuant to Rule 144A under the Securities Act of
1933, provided that those securities have been determined to be liquid by the
Board of Directors of the Fund or by the Adviser under Board-approved
guidelines. Those guidelines take into account the trading activity for such
securities and the availability of reliable pricing information, among other
factors. If there is a lack of trading interest in a particular Rule 144A
security, the Fund's holding of that security may be deemed to be illiquid.

AVERAGE MATURITY AND MIX OF SECURITIES. The average maturity and the
mix of investments of the Fund will vary as the Adviser seeks to provide a high
level of income considering the available alternatives in the market. To limit
interest rate risk, the Adviser seeks to maintain the Fund's average maturity
from five to ten years. Since interest rates vary with changes in economic,
market, political, and other conditions, there can be no assurance that
historic interest rates are indicative of rates which may prevail in the
future. Since the values of securities in the Fund fluctuate depending upon
market factors, the credit of the issuer and inversely with current interest
rate levels, the net asset value of its shares will fluctuate. The Adviser
attempts to adjust investments as considered advisable in view of prevailing or
anticipated market and credit conditions as perceived by the Adviser. Portfolio
securities may be purchased or sold in anticipation of a rise or a decline in
interest rates or a change in credit quality.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase
securities on a "when-issued" basis, and may purchase or sell such securities
on a "delayed delivery" basis. Although the Fund will enter into such
transactions for the purpose of acquiring securities for its portfolio, the
Fund may dispose of a commitment prior to settlement. "When-issued" or "delayed
delivery" refers to securities whose terms and indenture are available and for
which a market exists, but which are not available for immediate delivery. When
such transactions are negotiated, the price (which is generally expressed in
yield terms) is fixed at the time the commitment is made, but delivery and
payment for the securities take place at a later date. The Fund does not intend
to make such purchases for speculative purposes. The commitment to purchase a
security for which payment will be made on a future date may be deemed a
separate security and involve a risk of loss if the value of the security
declines prior to the settlement date. During the period between commitment by
the Fund and settlement (generally within two months but not to exceed 120
days), no payment is made for the securities purchased by the purchaser, and no
interest accrues to the purchaser from the transaction. Such securities are
subject to market fluctuation; and the value at delivery may be less than the
purchase price. The Fund will identify liquid assets on its records as
segregated, of any type, including equity and debt securities of any grade at
least equal to the value of purchase commitments until payment is made.

The Fund may engage in when-issued transactions in order to secure
what is considered to be an advantageous price and yield at the time of
entering into the obligation. When the Fund engages in when-issued or delayed
delivery transactions, it relies on the buyer or seller, as the case may be, to
consummate the transaction. Failure of the buyer or seller to do so may result
in the Fund losing the opportunity to obtain a price and yield considered to be
advantageous. At the time the Fund makes a commitment to purchase or sell a
security on a when-issued or forward commitment basis, it records the
transaction and reflects the value of the security purchased, or if a sale, the
proceeds to be received, in determining its net asset value. If the Fund
chooses to (i) dispose of the right to acquire a when-issued security prior to
its acquisition or (ii) dispose of its right to deliver or receive against a
forward commitment, it may incur a gain or loss.

To the extent the Fund engages in when-issued and delayed delivery
transactions, it will do so for the purpose of acquiring or selling securities
consistent with its investment objective and policies and not for the purposes
of investment leverage. The Fund enters into such transactions only with the
intention of actually

7
<PAGE>

receiving or delivering the securities, although (as noted above), when-issued
securities and forward commitments may be sold prior to settlement date. In
addition, changes in interest rates before settlement in a direction other than
that expected by the Adviser will affect the value of such securities and may
cause a loss to the Fund.

When-issued transactions and forward commitments allow the Fund a
technique to use against anticipated changes in interest rates and prices. For
instance, in periods of rising interest rates and falling prices, the Fund
might sell securities in its portfolio on a forward commitment basis to attempt
to limit its exposure to anticipated falling prices. In periods of falling
interest rates and rising prices, the Fund might sell portfolio securities and
purchase the same or similar securities on a when-issued or forward commitment
basis, thereby obtaining the benefit of currently higher cash yields.

LENDING PORTFOLIO SECURITIES. The Fund may lend securities to
broker/dealers or institutional investors for their use in connection with
short sales, arbitrages, and other securities transactions. The Fund may earn
interest on cash collateral or receive a fee from broker/dealers for lending
its portfolio securities. The Fund will not lend portfolio securities unless
the loan is secured by collateral (consisting of any combination of cash, U.S.
Government securities or irrevocable letters of credit) in an amount at least
equal (on a daily market-to-market basis) to the current market value of the
securities loaned. In the event of a bankruptcy or breach of agreement by the
borrower of the securities, the Fund could experience delays and costs in
recovering the securities loaned. The Fund will not lend securities if such a
loan would cause more than 20% of the total value of its assets to then be
subject to such loans.

PORTFOLIO TRANSACTIONS

Davis Selected Advisers, L.P. (the "Adviser") makes investment
decisions and arranges for the placement of buy and sell orders and the
execution of portfolio transactions for the Fund, subject to review by the
Board of Directors. In this regard, the Adviser will seek to obtain the most
favorable price and execution for the transaction given the size and risk
involved. In placing executions and paying any brokerage commissions, the
Adviser considers the financial responsibility and reputation of the broker or
dealer, the range and quality of the services made available to the Fund, and
the professional services rendered, including execution, clearance procedures,
wire service quotations, and ability to provide supplemental performance,
statistical and other research information for consideration, analysis and
evaluation by the Adviser. In accordance with this policy, brokerage
transactions, if any, are not executed solely on the basis of the lowest
commission rate available for a particular transaction. Research services
provided to the Adviser by or through brokers who effect portfolio transactions
for the Fund may be used in servicing other accounts managed by the Adviser
and, likewise, research services provided by brokers used for transactions of
other accounts may be utilized by the Adviser in performing services for the
Fund. Subject to the requirements of best execution, the placement of orders by
securities firms for shares of the Fund may be taken into account as a factor
in the placement of portfolio transactions.

On occasions when the Adviser deems the purchase or sale of a security
to be in the best interest of the Fund as well as other fiduciary accounts, the
Adviser may aggregate the securities to be sold or purchased for the Fund with
those to be sold or purchased for other accounts in order to obtain the best
net price and most favorable execution. In such event, the allocation will be
made by the Adviser in the manner considered to be most equitable and
consistent with its fiduciary obligations to all such accounts, including the
Fund. In some instances, this procedure could adversely affect the Fund but the
Fund deems that any disadvantage in the procedure is outweighed by the
increased selection available and the increased opportunity to engage in volume
transactions.

The Adviser believes that research from brokers and dealers is
desirable, although not essential, in carrying out its functions, in that such
outside research supplements the efforts of the Adviser by corroborating data
and enabling the Adviser to consider the views, information and analyses of
other research staffs. Such views, information and analyses include such
matters as communicating with persons having special expertise on certain
companies, industries, areas of the economy and/or securities prices, obtaining
written materials on these or other areas which might affect the economy and/or
securities prices, obtaining quotations on securities prices, and obtaining
information on the activities of other institutional investors. The Adviser
researches, at its own expense, each security included in, or being considered
for inclusion in, the Fund's portfolio. As any particular research obtained by
the Adviser may be useful to the Fund, the Board of Directors or its Committee
on brokerage, in

8
<PAGE>

considering the reasonableness of the commissions paid by the Fund, will not
attempt to allocate, or require the Adviser to allocate, the relative costs or
benefits of research.

During the last three fiscal years ended March 31, 1998, 1997, and
1996, the Fund paid brokerage commissions of $4,045, $1,580, and $854,
respectively. Most of the Fund's transactions are made on a principal basis.
The price of such transactions may include profit for the dealer.

FEDERAL INCOME TAXES

This section is not intended to be a full discussion of all the
aspects of the federal income tax law and its effects on the Fund and its
shareholders. Shareholders may be subject to state, and local taxes on
distributions. Each investor should consult his or her own tax adviser
regarding the effect of foreign, federal, state and local taxes on an
investment in the Fund.

The Fund intends to continue to qualify as a regulated investment
company under the Internal Revenue Code (the "Code"). As a regulated investment
company, the Fund is not subject to federal income tax on the portion of its
net investment income and realized capital gain net income that it distributes
to its shareholders provided, among other qualification requirements, the Fund
distributes at least 90% of its net investment income for the taxable year. In
addition to any federal income tax, the Fund is subject to a 4% non-deductible
excise tax if the Fund fails to distribute at least 98% of ordinary taxable
income for the calendar year and 98% of capital gain net income for the
twelve-month period ended October 31. The Fund intends to make distributions
sufficient to prevent the imposition of any federal income tax or excise tax.

If for any taxable year the Fund does not qualify as a regulated
investment company, all of its taxable income, including realized capital gains
and without a deduction for the dividends paid, will be subject to federal
income taxes at the regular corporate rates. Distributions from the Fund to the
fund's shareholders will be taxable as ordinary dividends to the extent of the
Fund's earnings and profits.

Distributions of net investment income and net realized short-term
capital gains will be taxable to shareholders as ordinary income. Distributions
of net long-term capital gains will be taxable to shareholders as long-term
capital gain regardless of how long the shares have been held. Distributions by
the Fund that do not constitute ordinary income or capital gain dividends will
be treated as a return of capital distribution and will reduce the
shareholder's tax basis in his or her shares. Any return of capital
distribution in excess of the shareholder's tax basis will be treated as a gain
from the sale of his or her Fund shares. Distributions will be treated the same
for tax purposes whether received in cash or in additional shares. Dividends
declared in the last calendar month to shareholders of record in such month and
paid by the end of the following January are treated as received by the
shareholder in the year in which they are declared. A gain or loss for tax
purposes may be realized on the redemption of shares. If the shareholder
realizes a loss on the sale or exchange of any shares held for six months or
less and if the shareholder received a capital gain distribution during that
period, then the loss is treated as a long-term capital loss to the extent of
such distribution. No gain or loss will be recognized by shareholders on the
automatic conversion of Class B shares into Class A shares of the Fund

The Fund is required in certain cases to withhold and remit to the U.S
Treasury 31% of ordinary income dividends, capital gain distributions, and the
proceeds from the redemption of shares, paid to any shareholder who, i) has
failed to provide a tax identification number, ii) has provided an incorrect
tax identification number, iii) is subject to backup withholding for failure to
report interest or dividend income properly, or iv) has failed to certify to
the Fund that it is not subject to backup withholding or that it is an exempt
recipient (i.e. a corporation).

If a shareholder: (1) incurs a sales load in purchasing shares of the
Fund; (2) by reason of such purchase acquires a reinvestment right; (3)disposes
such shares less than 91 days after they are acquired; and, (4) subsequently
purchases shares of the same or another fund at a reduced sales load pursuant
to the reinvestment right; then the sales load on the shares disposed of (to
the extent of the reduction in sales load pursuant to the reinvestment right)
shall not be taken into account in determining the gain or loss on shares
disposed of but shall be treated as incurred in the acquisition of the shares
subsequently acquired.

9
<PAGE>

Interest on indebtedness incurred by non-corporate shareholders to
purchase or carry shares of the Fund will be deductible only up to the amount
of the shareholders' net investment income.

DIRECTORS AND OFFICERS

The names and addresses of the directors and officers of the Fund are
set forth below, together with their principal business affiliations and
occupations for the last five years. The asterisk following the names of Andrew
A. Davis, Christopher C. Davis, and Jeremy H. Biggs, indicates that they are
considered to be "interested persons" of the Fund, as defined in the Investment
Company Act, by reason of their affiliation with the Fund's adviser. As
indicated below, certain directors and officers of the Fund hold similar
positions with the following funds that are also managed by the Adviser: Davis
New York Venture Fund, Inc., Davis Tax-Free High Income Fund, Inc. Bond Fund,
Inc. High Income Fund, Inc., Davis Series, Inc. and Davis International Series,
Inc. (collectively the "Davis Funds").

WESLEY E. BASS, JR. (8/21/31), 710 Walden Road, Winnetka, IL 60093. Director of
the Company and each of the Davis Funds except Davis International Series,
Inc.; President of Bass & Associates (a financial consulting firm); formerly
First Deputy City Treasurer City of Chicago, and an Executive Vice President
for Chicago Title and Trust Company.

JEREMY H. BIGGS (8/16/35),* Two World Trade Center, 94th Floor, New York, NY
10048. Director and Chairman of the Company and each of the Davis Funds;
Director of the Van Eck Funds; Consultant to the Adviser. Vice Chairman, Head
of Equity Research Department, Chairman of the U.S. Investment Policy
Committee, and member of the International Investment Committee of Fiduciary
Trust Company International.

MARC P. BLUM (9/9/42), 233 East Redwood Street, Baltimore, MD 21202. Director
of the Company and each of the Davis Funds except Davis International Series,
Inc.; Chief Executive Officer for World Total Return Fund, L.P.; Member,
Gordon, Feinblatt, Rothman, Hoffberger and Hollander, LLC (attorneys); Director
of Mid-Atlantic Realty Trust.

JERRY D. GEIST (5/23/34), 931 San Pedro Dr. S.E., Albuquerque, NM 87108.
Director of the Company and each of the Davis Funds except Davis International
Series, Inc.; Chairman for Santa Fe Center Enterprises; President and Chief
Executive Officer for Howard Energy International Utilities; Director of
CH2M-Hill, Inc.; Retired Chairman and President for Public Service Company of
New Mexico.

D. JAMES GUZY (3/7/36), 508 Tasman Drive, Sunnyvale, CA 94089. Director of the
Company and each of the Davis Funds except Davis International Series, Inc.;
Chairman of PLX Technology, Inc. (a manufacturer of semi-conductor circuits);
Director of Intel Corp. (a manufacturer of semi-conductor circuits), Cirrus
Logic Corp. (a manufacturer of semi-conductor circuits) and Alliance Technology
Fund (a mutual fund).

G. BERNARD HAMILTON (3/18/37), Avanti Partners, P.O. Box 1119, Richmond, VA
23218. Director of the Company and each of the Davis Funds, and Managing
General Partner of Avanti Partners, L.P.

LEROY E. HOFFBERGER (6/8/25), The Exchange - Suite 215, 1112 Kenilworth Drive,
Towson, MD 21204. Director of the Company and each of the Davis Funds except
Davis International Series, Inc.; of-Counsel to Gordon, Feinblatt, Rothman,
Hoffberger and Hollander, LLC (attorneys); Chairman of Mid-Atlantic Realty
Trust; Director and President of CPC, Inc. (a real estate company); Director
and Vice President of Merchant Terminal Corporation; formerly, Director of
Equitable Bancorporation, Equitable Bank and Maryland National Bank, and
formerly, Director and President of O-W Fund, Inc. (a private investment fund).

LAURENCE W. LEVINE (4/9/31), c/o Bigham Englar Jones & Houston, 14 Wall Street,
21st, Floor, New York, NY 10005-2140. Director of the Company and each of the
Davis Funds except Davis International Series, Inc.; Partner of Bigham, Englar,
Jones and Houston (attorneys); United States Counsel to Aerolineas Argentina;
and Director for various private companies.

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<PAGE>

CHRISTIAN R. SONNE (5/6/30), P.O. Box 777, Tuxedo Park, NY 10987. Director of
the Company and each of the Davis Funds except Davis International Series,
Inc.; General Partner of Tuxedo Park Associates (a land holding and development
firm); President and Chief Executive Officer of Mulford Securities Corporation
(a private investment fund) until 1990; formerly, Vice President of Goldman
Sachs & Company (investment banker).

SHELBY M.C. DAVIS (3/20/37), 4135 North Steers Head Road, Jackson Hole, WY
83001. President of the Fund and each of the Davis Funds; President of Selected
American Shares, Inc., Selected Special Shares, Inc. and Selected Capital
Preservation Trust; Director, Chairman and Chief Executive Officer of Venture
Advisers, Inc.; Director of Davis Selected Advisers-NY, Inc.; Employee of
Capital Ideas, Inc. (financial consulting firm); Consultant to Fiduciary Trust
Company International; Director, Shelby Cullom Davis Financial Consultants,
Inc.

ANDREW A. DAVIS (6/25/63),* 124 East Marcy Street, Santa Fe, NM 87501. Director
and Vice President of the Company and each of the Davis Funds (except Davis
International Series, Inc.), Selected American Shares, Inc., Selected Special
Shares, Inc. and Selected Capital Preservation Trust; Director and President of
Venture Advisers, Inc.; Director and Vice President of Davis Selected
Advisers-NY, Inc.; Consultant to Capital Ideas, a private financial consultant;
formerly Vice President and head of convertible security research for
PaineWebber, Incorporated.

CHRISTOPHER C. DAVIS (7/13/65),* 609 Fifth Ave, New York, NY 10017. Director
and Vice President of the Company and each of the Davis Funds; Selected
American Shares, Inc., Selected Special Shares, Inc. and Selected Capital
Preservation Trust; Director and Vice Chairman of Venture Advisers, Inc.;
Director, Chairman and Chief Executive Officer of Davis Selected Advisers-NY,
Inc.; Chairman and Director of Shelby Cullom Davis Financial Consultants, Inc.;
employee of Shelby Cullom Davis & Co., a registered broker/dealer; Director of
Rosenwald, Roditi and Company, Ltd., an offshore investment management company.

KENNETH C. EICH (8/14/53), 124 East Marcy Street, Santa Fe, NM 87501. Vice
President of the Fund and each of the Davis Funds, Selected American Shares,
Inc., Selected Special Shares, Inc. and Selected Capital Preservation Trust;
Chief Operating Officer, Venture Advisers, Inc.; Vice President of Davis
Selected Advisers-NY, Inc.; President of Davis Distributors, LLC; formerly
President and Chief Executive Officer of First of Michigan Corporation;
formerly Executive Vice President and Chief Financial Officer of Oppenheimer
Management Corporation.

CAROLYN H. SPOLIDORO (11/19/52), 124 East Marcy Street, Santa Fe, NM 87501.
Vice President of the Company and each of the Davis Funds; Vice President of
Venture Advisers, Inc.

SHARRA L. REED (9/25/66), 124 East Marcy Street, Santa Fe NM 87501. Vice
President, Treasurer and Assistant Secretary of the Company and each of the
Davis Funds, Selected American Shares, Inc., Selected Special Shares, Inc. and
Selected Capital Preservation Trust; Vice President of Venture Advisers, Inc.;
formerly a Unit Manager with Investors Fiduciary Trust Company.

THOMAS D. TAYS (3/7/57), 124 East Marcy Street, Santa Fe NM 87501. Vice
President and Secretary of the Company and each of the Davis Funds, Selected
American Shares, Inc. Selected Special Shares, Inc. and Selected Capital
Preservation Trust; Vice President and Secretary of Venture Advisers, Inc.,
Davis Selected Advisers-NY, Inc., and Davis Distributors, LLC; formerly as Vice
President and Special Counsel of U.S. Global Investors, Inc.

SHELDON R. STEIN (11/29/28), 30 North LaSalle Street, Suite 2900, Chicago, IL
60602. Assistant Secretary of the Company and each of the Davis Funds, Selected
American Shares, Inc., Selected Special Shares, Inc. and Selected Capital
Preservation Trust; and a Partner of D'Ancona & Pflaum, the Company's legal
counsel.

ARTHUR DON (9/24/53), 30 North LaSalle Street, Suite 2900, Chicago, IL 60602.
Assistant Secretary of the Company and each of the Davis Funds, Selected
American Shares, Inc., Selected Special Shares, Inc. and Selected Capital
Preservation Trust; and a Partner of D'Ancona & Pflaum, the Company's legal
counsel.

The Fund does not pay salaries to any of its officers.

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<PAGE>

DIRECTORS' COMPENSATION SCHEDULE

During the fiscal year ended March 31, 1998, the compensation paid to
the directors who are not considered to be interested persons of the Fund was
as follows:

AGGREGATE FUND TOTAL
NAME COMPENSATION COMPLEX COMPENSATION*
---- ------------ ---------------------

Wesley E. Bass $2,725 $38,575
Marc P. Blum 2,500 35,700
Jerry D. Geist 2,450 35,550
D. James Guzy 2,500 35,700
G. Bernard Hamilton 2,450 40,550
LeRoy E. Hoffberger 2,500 35,650
Laurence W. Levine 2,500 35,650
Christian R. Sonne 2,500 35,700
Edwin R. Werner 2,050 29,425

*Complex compensation is the aggregate compensation paid for services as a
Director by all mutual funds with the same investment adviser.

CERTAIN SHAREHOLDERS OF THE FUND

The following table sets forth, as of June 30, 1998, the name and
holdings of each person known by the Fund to be a record owner of more than 5%
of its outstanding Class A, B, C, or Y shares. As of such date, there were
9,275,253.638 Class A shares outstanding and the directors and officers of the
Fund, as a group, owned 101,603.089 Class A shares, or approximately 1.10% of
the Fund's outstanding Class A shares. As of such date, there were
6,029,762.956 Class B shares, 890,438.216 Class C shares, and 897,094.439 Class
Y shares outstanding. The directors and officers of the Fund do not presently
own or intend to own any Class B shares, Class C shares, or Class Y shares of
the Fund. CLASS A SHARES

12
<PAGE>

Number of Percent of
Name and Address Shares Owned Class Outstanding
---------------- ------------ -----------------

National City Bank TTEE 1,013,973.208 10.93%
FBO McKeesport Hospital TR
P.O. Box 94984
Cleveland, OH 44101-4984

CLASS B SHARES

Number of Percent of
Name and Address Shares Owned Class Outstanding
---------------- ------------ -----------------

MLPF&S for the sole benefit of 1,531,658.308 25.40%
its customers

Attn: Fund Administrator
4800 Deerlake Drive East
2nd Floor
Jacksonville, FL 32246-6484

CLASS C SHARES

Number of Percent of
Name and Address Shares Owned Class Outstanding
---------------- ------------ -----------------

MLPF&S for the sole benefit of 366,396.001 41.15%
its customers

Attn: Fund Administrator
4800 Deerlake Drive East
2nd Floor
Jacksonville, FL 32246-6484

CLASS Y SHARES

Number of Percent of
Name and Address Shares Owned Class Outstanding
---------------- ------------ -----------------

Naidot & Co. 885,444.688 98.70%
c/o Bessemer Trust Company
100 Woodbridge Center Drive
Woodbridge, NJ 07095

13
<PAGE>

INVESTMENT ADVISORY SERVICES

Davis Selected Advisers, L.P. serves as investment adviser for the
Fund pursuant to an investment advisory agreement (the "Advisory Agreement")
adopted in accordance with the requirements of the Investment Company Act of
1940. Pursuant to the Advisory Agreement the Adviser, subject to the general
supervision of the Fund's Board of Directors, provides management and
investment advice, and furnishes statistical, executive and clerical personnel,
bookkeeping, office space, and equipment necessary to carry out its investment
advisory functions and such corporate managerial duties as requested by the
Board of Directors of the Fund. The Fund bears all expenses other than those
specifically assumed by the Adviser under the Advisory Agreement, including
preparation of its tax returns, financial reports to regulatory authorities,
dividend determinations, transaction and accounting matters related to its
custodian bank, transfer agency, custodial and shareholder services, and
qualification of its shares under federal and state laws.

For the Adviser's services, the Fund pays the Adviser a monthly fee at
the annual rate of 0.55% of average net assets. Prior to October 6, 1998, the
Fund paid the Adviser a monthly fee at the annual rate of 0.70% of average net
assets to manage an investment portfolio of high yield, high risk securities.

Prior to October 6, 1998, the Fund invested primarily in high yield,
high risk securities. At that time the Fund and the Adviser retained Stamper
Capital & Investments, Inc. to serve as sub-adviser to the Fund.

The Adviser has also entered into a Sub-Advisory Agreement with its
wholly owned subsidiary, Davis Selected Advisers - NY, Inc. ("DSA-NY") under
which DSA-NY performs research and other services for the Fund on behalf of the
Adviser. Under the Agreement, the Adviser pays all of DSA-NY's direct and
indirect costs of operation.

The reimbursable costs for certain accounting and administrative
services for the fiscal years ended March 31, 1998, 1997 and 1996 were $13,001,
$14,663, and $15,996 respectively. The reimbursable costs for qualifying the
Fund's shares for sale with state agencies for such periods were $12,000 in all
three years, and the reimbursable costs for providing shareholder services for
such periods were $11,493, $6,713, and $6,987 respectively.

The Advisory Agreement also makes provisions for portfolio
transactions and brokerage policies of the Fund which are discussed above under
"Portfolio Transactions."

In accordance with the provisions of the Investment Company Act, the
Advisory Agreement will terminate automatically upon assignment and is subject
to cancellation upon 60 days' written notice by the Fund's Board of Directors,
the vote of the holders of a majority of the Fund's outstanding shares, or the
Adviser. The continuance of the Agreement must be approved at least annually by
the Fund's Board of Directors or by the vote of holders of a majority of the
outstanding shares of the Fund. In addition, any new agreement or the
continuation of the existing agreement must be approved by a majority of
directors who are not parties to the agreement or interested persons of any
such party.

The Adviser, DSA-NY, and the Sub-Adviser have each adopted a Code of
Ethics which regulates the personal securities transactions of their investment
personnel and other employees and affiliates with access to information
regarding securities transactions of the Fund. The Codes require investment
personnel to disclose personal securities holdings upon commencement of
employment and all subsequent trading activity to the Adviser's, DSA-NY's, or
Sub-Adviser's Compliance Officer. Investment personnel are prohibited from
engaging in any securities transactions, including the purchase of securities
in a private offering, without the prior consent of the Compliance Officer.
Additionally, such personnel are prohibited from purchasing securities in an
initial public offering and are prohibited from trading in any securities (i)
for which the Fund has a pending buy or sell order, (ii) which the Fund is
considering buying or selling, or (iii) which the Fund purchased or sold within
seven calendar days.

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<PAGE>

CUSTODIAN

The Custodian of the Fund's assets is State Street Bank and Trust
Company ("State Street'), 66 Brooks Drive, Braintree, Massachusetts 02184. The
Custodian maintains all of the instruments representing the investments of the
Fund and all cash. The Custodian collects income on portfolio securities,
delivers securities against payment upon sale and pays for securities against
delivery upon purchase. The Custodian also remits Fund assets in payment of
Fund expenses, pursuant to instructions of officers, or resolutions of the
Board of Directors.

AUDITORS

The independent auditors of the Fund are KPMG Peat Marwick LLP, 707
17th St. Suite 2300, Denver, Colorado 80202. They also perform other related
audit services and act as auditors for certain other funds advised by the
Adviser.

DETERMINING THE PRICE OF SHARES

The Fund does not price its shares or accept orders for purchases or
redemptions on days when the New York Stock Exchange is closed. Such days
currently include New Year's Day, Martin Luther King, Jr. Day, President's Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.

Certain brokers and certain designated intermediaries on their behalf
may accept purchase and redemption orders. The Fund will be deemed to have
received such an order when the broker or the designee has accepted the order.
Customer orders are priced at the net asset value next computed after such
acceptance. Such order may be transmitted to the Fund or its agents several
hours after the time of the acceptance and pricing.

REDUCTION OF CLASS A SALES CHARGE

There are a number of ways to reduce the sales charge imposed on the
purchase of the Fund's Class A shares, as described below. These reductions are
based upon the fact that there is less sales effort and expense involved in
respect to purchases by affiliated persons and purchases made in large
quantities.

FAMILY OR GROUP PURCHASES. Certain purchases made by or for more than
one person may be considered to constitute a single purchase, including (i)
purchases for family members, including spouses, and children under 21, (ii)
purchases by trust or other fiduciary accounts and purchases by Individual
Retirement Accounts for employees of a single employer and (iii) purchases made
by an organized group of persons, whether incorporated or not, if the group has
a purpose other than buying shares of mutual funds. For further information on
group purchase reductions, contact the Adviser or your dealer.

STATEMENTS OF INTENTION. Another way to reduce the sales charge is by
signing a Statement of Intention. A Statement is included in the Application
Form included in the Prospectus. Please read it carefully before completing it.

If you enter into a Statement of Intention you (or any "single
purchaser") may state that you intend to invest at least $100,000 in the Fund's
Class A shares over a 13-month period. The amount you say you intend to invest
may include Class A shares which you already own, valued at the offering price,
at the end of the period covered by the Statement. A Statement may be backdated
up to 90 days to include purchases made during that period, but the total
period covered by the Statement may not exceed 13 months.

Shares having a value of 5% of the amount you state you intend to
invest will be held "in escrow" to make sure that any additional sales charges
are paid. If any of the Fund's shares are in escrow pursuant to a Statement and
such shares are exchanged for shares of another Davis Fund, the escrow will
continue with respect to the acquired shares.

15
<PAGE>

No additional sales charge will be payable if you invest the amount
you have indicated. Each purchase under a Statement will be made as if you were
buying the total amount indicated at one time. For example, if you indicate
that you intend to invest $100,000, you will pay a sales charge of 3-1/2% on
each purchase.

If you buy additional amounts during the period to qualify for an even
lower sales charge, you will be charged such lower charge. For example, if you
indicate that you intend to invest $100,000 and actually invest $250,000, you
will, by retroactive adjustment, pay a sales charge of 2-1/2%.

If during the 13-month period you invest less than the amount you have
indicated, you will pay an additional sales charge. For example, if you state
that you intend to invest $250,000 and actually invest only $100,000, you will,
by retroactive adjustment, pay a sales charge of 3-1/2%. The sales charge you
actually pay will be the same as if you had purchased the shares in a single
purchase.

A Statement does not bind you to buy, nor does it bind the Adviser to
sell, the shares covered by the Statement.

RIGHTS OF ACCUMULATION. Another way to reduce the sales charge is
under a right of accumulation. This means that the larger purchase entitled to
a lower sales charge need not be in dollars invested at one time. The larger
purchases that you (or any "single purchaser") make at any one time can be
determined by adding to the amount of a current purchase the value of Fund
shares (at offering price) already owned by you.

For example, if you owned $100,000 worth (at offering price) of Fund
shares (including Class A, B and C shares of all Davis Funds, except Davis
Government Money Market Fund) and invest $5,000 in additional shares, the sales
charge on that $5,000 investment would be 3-1/2, not 4-3/4%.

If you claim this right of accumulation, you or your dealer must so
notify the Distributor (or State Street, if the investment is mailed to State
Street) when the purchase is made. Enough information must be given to verify
that you are entitled to such right.

COMBINED PURCHASES WITH OTHER DAVIS FUNDS. Your ownership or purchase
of Class A shares of Davis New York Venture Fund, Inc., Davis Tax-Free High
Income Fund, Inc. Bond Fund, Inc., Davis Series, Inc. and Davis International
Series, Inc. (collectively with the Fund, the `Davis Funds") may also reduce
your sales charges in connection with the purchase of the Fund's Class A
shares. This applies to all three situations for reduction of sales charges
discussed above.

If a "single purchaser" decides to buy the Fund's Class A shares as
well as Class A shares of any of the other Davis Funds (other than shares of
Davis Government Money Market Fund) at the same time, these purchases will be
considered a single purchase for the purpose of calculating the sales charge.
For example, a single purchaser can invest at the same time $100,000 in the
Fund's Class A shares and $150,000 in the Class A shares of Davis High Income
Fund, Inc. and pay a sales charge of 2-1/2%, not 3-1/2%.

Similarly, a Statement of Intention for the Fund's Class A shares and
for the Class A shares of the other Davis Funds (other than Davis Government
Money Market Fund) may be aggregated. In this connection, the Fund's Class A
shares and the Class A shares of the other Davis Funds which you already own,
valued at the current offering price at the end of the period covered by your
Statement of Intention, may be included in the amount you have stated you
intend to invest pursuant to your Statement.

Lastly, the right of accumulation applies also to the Class A, Class B
and Class C shares of the other Davis Funds (other than Davis Government Money
Market Fund) which you own. Thus, the amount of current purchases of the Fund's
Class A shares which you make may be added to the value of the Class A shares
of the other Davis Funds (valued at their current offering price) already owned
by you in determining the applicable sales charge. For example, if you owned
$100,000 worth of shares of Davis New York Venture Fund, Inc. and Davis
Financial Fund and Davis Convertible Securities Fund, (valued at the applicable
current offering price) and invest $5,000 in the Fund's shares, the sales
charge on your investment would be 3-1/2%, not 4-3/4%.

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In all the above instances where you wish to claim this right of
combining the shares you own of the other Davis Funds, you or your dealer must
notify the Distributor (or State Street, if the investment is mailed to State
Street) of the pertinent facts. Enough information must be given to permit
verification as to whether you are entitled to a reduction in sales charges.

ISSUANCE OF SHARES AT NET ASSET VALUE. There are many situations where
the sales charge will not apply to the purchase of Class A shares, as discussed
in the Prospectus. In addition, the Fund may occasionally be provided with an
opportunity to purchase substantially all the assets of a public or private
investment company or to merge another such company into the Fund. This offers
the Fund the opportunity to obtain significant assets. No dealer concession is
involved. It is industry practice to effect such transactions at net asset
value as it would adversely affect the Fund's ability to do such transactions
if the Fund had to impose a sales charge.

SPECIAL DISTRIBUTION ARRANGEMENTS

Class B shares of the Davis High Income Fund, Inc. are made available
to Retirement Plan Participants such as 401(k) or 403(b) Plans at NAV with the
waiver of contingent deferred sales charge (CDSC) if:

(i) the Plan is recordkept on a daily valuation basis by Merrill Lynch
and, on the date the Plan sponsor signs the Merrill Lynch
Recordkeeping Service Agreement, the Plan has less than $3 million in
assets invested in broker/dealer funds not advised or managed by
Merrill Lynch Asset Management, L.P. ("MLAM") that are made available
pursuant to a Services Agreement between Merrill Lynch and the Fund's
principal underwriter or distributor and in funds advised or managed
by MLAM (collectively, the "Applicable Investments"); or

(ii) the Plan is recordkept on a daily valuation basis by an independent
recordkeeper whose services are provided through a contract or
alliance arrangement with Merrill Lynch, and on the date the Plan
Sponsor signs the Merrill Lynch Recordkeeping Service Agreement, the
Plan has less than $3 million in assets, excluding money market funds,
invested in Applicable Investments; or

(iii) the Plan has less than 500 eligible employees, as determined by the
Merrill Lynch plan conversion manager, on the date the Plan Sponsor
signs the Merrill Lynch Recordkeeping Service Agreement.

Plans recordkept on a daily basis by Merrill Lynch or an independent
recordkeeper under a contract with Merrill Lynch that are currently investing
in Class B shares of the Davis Funds convert to Class A shares once the Plan
has reached $5 million invested in Applicable Investments. The Plan will
receive a Plan level share conversion. The Fund may make similar exceptions for
other financial institutions sponsoring or administering similar benefit plans.

Under a program with Prudential Bache Securities, Inc. ("PruArray"),
the Distributor will not advance a 1% commission at the time of purchase, no
CDSC is assessed and the 12b-1 fee is paid directly to PruArray. Class C shares
of the Davis High Income Fund, Inc. are made available to PruArray Retirement
Plan Participants, such as 401(k) Plans, at NAV with the waiver of contingent
deferred sales charge (CDSC).

DISTRIBUTION OF FUND SHARES

Davis Distributors, LLC, ("the Distributor"), acts as principal
underwriter of the Fund's shares on a continuing basis pursuant to a
Distributing Agreement. Pursuant to the Distributing Agreement, the Distributor
pays for all expenses in connection with the preparation, printing, and
distribution of advertising and sales literature for use in offering the Fund's
shares to the public, including reports to shareholders to the extent they are
used as sales literature. The Distributor also pays for the preparation and
printing of prospectuses other than those forwarded to existing shareholders.
The continuance and assignment provisions of the Distributing Agreement are the
same as those of the Advisory Agreement.

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<PAGE>

During the Fund's fiscal year ended March 31, 1998, the Distributor
received total sales charges of Class A shares (which the Fund does not pay) on
the sale of Fund shares of $207,166. Of this amount, the Distributor paid
concessions to dealers of $174,693. For the two prior fiscal years ended March
31, 1997 and 1996, the Distributor received total sales charges on the sale of
the Fund shares of $123,695 and $163,366 respectively, and of those amounts
paid concessions to dealers of $104,712 and $140,825, respectively.

In addition, the Fund has adopted distribution plans with respect to
each class of its shares, except Class Y shares, pursuant to Rule 12b-1 under
the Investment Company Act (the "Distribution Plans"). Payments under the Class
A Distribution Plan are limited to an annual rate of 0.25% of the average daily
net asset value of the Class A shares. Payments under the Class B and Class C
Distribution Plans are limited to an annual rate of 1.00% of the average daily
net asset value of each such class of shares.

To the extent that any investment advisory fees paid by the Fund may
be deemed to be indirectly financing any activity which is primarily intended
to result in the sale of shares of the Fund within the meaning of Rule 12b-1,
the payments of such fees are authorized under the Plans.

The Distribution Plans continue annually so long as they are approved
in the manner provided by Rule 12b-1 or unless earlier terminated by vote of
the majority of the Fund's Independent Directors or a majority of the Fund's
outstanding shares. The Distributor is required to furnish quarterly written
reports to the Board of Directors detailing the amounts expended under the
Distribution Plans. The Distribution Plans may be amended provided that all
such amendments comply with the applicable requirements then in effect under
Rule 12b-1. Presently, Rule 12b-1 requires, among other procedures, that it be
continued only if a majority of the Independent Directors approve continuation
at least annually and that amendments materially increasing the amount to be
spent for distribution be approved by the Independent Directors and the
shareholders. As long as the Distribution Plans are in effect, the Fund must
commit the selection and nomination of candidates for new Independent Directors
to the sole discretion of the existing Independent Directors.

During the fiscal years ended March 31, 1998, 1997 and 1996, the
Distributor or the Adviser, in its capacity as distributor, received $101,590,
$98,840 and $100,703 under the Class A Distribution Plan, $145,416, $86,015 and
$46,899, under the Class B Distribution Plan. During the fiscal year ended
March 31, 1998, the Distributor or Adviser, in its capacity as distributor,
received $10,355 under the Class C Distribution Plan.

PERFORMANCE DATA

CHANGE IN INVESTMENT STRATEGY. Prior to October 6, 1998 the Fund
invested primarily in high yield, high risk securities. The Fund now invests
primarily in investment grade securities while maintaining an average maturity
of five to ten years. High yield, high risk securities often perform very
differently than intermediate term investment grade debt securities. In
addition, on October 6, 1998 the Fund and the Adviser agreed to a reduced
management fee, which will tend to lower the Fund's expense ratio. All of these
factors should be carefully considered when reviewing the Fund's past
performance.

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<PAGE>

YIELD. Yield is computed in accordance with a standardized method
prescribed by the rules of the Securities and Exchange Commission and is
calculated separately for each class. Yield is a measure of the net investment
income per share (as defined) earned over a specified 30-day period expressed
as a percentage of the maximum offering price of the Fund's shares at the end
of the period. For the 30-day period ended March 31, 1998, the yields for the
Fund's Class A, Class B, Class C, and Class Y shares were 7.98%, 7.65%, 7.60%
and 8.66%, respectively. The yield figure was determined by dividing the net
investment income per share on the last day of the period, according to the
following formula:

Yield = 2 [(a-b+1)6-1]
cd

Where: a = dividends and interest earned during the period

b = expenses accrued for the period

c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends

d = the maximum offering price per share on the last
day of the period

TOTAL RETURN. Average annual total return measures both the net
investment income generated by, and the effect, if any, realized or unrealized
appreciation or depreciation of, the underlying investments in the Fund's
portfolio. Average annual total return is calculated separately for each class
in accordance with the standardized method prescribed by the Securities and
Exchange Commission by determining the average annual compounded rates of
return over the periods indicated that would equate the initial amount invested
to the ending redeemable value, according to the following formula:

P(1+T)n = ERV

Where: P = hypothetical initial payment of $1,000

T = average annual total return

n = number of years

ERV = ending redeemable value at the end of the period
of a hypothetical $1,000 payment made at the
beginning of such period

This calculation (i) assumes all dividends and distributions are
reinvested at net asset value on the appropriate reinvestment dates and (ii)
deducts (a) the maximum front-end or applicable contingent deferred sales
charge from the hypothetical initial $1,000 investment, and (b) all recurring
fees, such as advisory fees, charged as expenses to all shareholder accounts.

The average annual total return figures for the Fund's Class A shares
during the one, five and ten year periods ended March 31, 1998, were 5.26%,
7.60% and 6.55%, respectively.

The average annual total return figures for the Fund's Class B shares
during the year ended March 31, 1998, and the period from December 5, 1994
through March 31, 1998 (life of the Class) was 6.53% and 7.92%, respectively.

The average annual total return figures for the Fund's Class C shares
for the period from August 12, 1997 through March 31, 1998 (life of the Class)
was 4.61%.

The average annual total return figures for the Fund's Class Y shares
during the year ended March 31, 1998, and the period from March 20, 1997
through March 31, 1998 (life of the Class) was 10.64% and 9.86%, respectively.

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<PAGE>

DISTRIBUTION RATES. Distribution rates are computed by dividing the
income dividends for a stated period by the maximum offering price on the last
day of such period. For the year ended March 31, 1998, the historical
distribution rate with respect to the Fund's Class A, Class B, Class C and
Class Y shares was 8.40%, 8.02%, 8.01%, and 9.18%, respectively.

ANNUALIZED CURRENT DISTRIBUTION RATES. Annualized current distribution
rates are computed by multiplying income dividends for a specified month by
twelve and dividing the resulting figure by the maximum offering price on the
last day of the specified period. The annualized current distribution rate with
respect to the Fund's Class A, Class B, Class C and Class Y shares for the
month ended March 31, 1998, was 8.40%, 8.02%, 8.00% and 9.13%, respectively.

ADVERTISING. In advertising and sales literature, the Fund's
performance may be compared with those of market indices and other mutual
funds. Advertisements quoting performance rankings or ratings of the Fund as
measured by financial publications or by independent organizations such as
Lipper Analytical Services, Inc., and Morningstar, Inc. and advertisements
presenting the historical performance of the Fund may also, from time to time,
be sent to investors or placed in newspapers and magazines such as the New York
Times, the Wall Street Journal, Barrons, Investor's Daily, Money Magazine,
Changing Times, Business Week and Forbes or other media on behalf of the Fund.

In advertising and sales literature the Fund may publish various
statistics describing its investment portfolio such as the Fund's average
maturity, duration, average credit quality distribution yield, beta, standard
deviation, etc.

In reports or other communications to shareholders, and in advertising
material, the Fund may also include evaluations of the Fund published by
nationally recognized ranking services and by financial publications that are
nationally recognized, such as Business Week, Forbes, Kiplinger's,
Institutional Investor and Money Magazine. Any given performance comparison
should not be considered representative of the Fund's performance for any
future period.