DAVIS HIGH INCOME FUND INC, N-30B-2, 1998-06-09

DAVIS HIGH INCOME FUND INC
N-30B-2, 1998-06-09

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<PAGE>

DAVIS HIGH INCOME FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501

Dear Shareholder:

PERFORMANCE REVIEW
The Davis High Income Fund is managed to provide a high level of current income
and build long-term wealth for shareholders, with less volatility than other
high-yield funds. This approach has allowed your fund to provide good
risk-adjusted performance over the long term.

Your fund's Class A shares earned Morningstar's highest risk-adjusted rating,
***** (five stars), for the five-year period ended March 31, 1998, the longest
period that Portfolio Manager B. Clark Stamper has managed the fund. The Class
A shares hold a **** (four stars) Morningstar rating for the latest three-year
period. The fund's Class B shares, which were first offered in December 1994,
are rated **** (four stars) overall and for the latest three years. The Fund's
Class A shares earned 4, 5, and 1 stars rated against 1,403, 831 and 329 fixed
income funds for the three, five, and ten year periods ended March 31, 1998,
respectively. The Fund's Class B shares earned 4 stars rated against 1,403
fixed income funds for the three-year period ended March 31, 1998.(1)

In terms of absolute performance, the fund's Class A shares provided a total
return on net asset value of 10.40% for the one-year period ended March 31,
1998. (2) While the fund's absolute total return lagged the average return of
other high current yield funds tracked by Lipper Analytical Services, Inc., its
risk level is considerably lower than other high-yield funds.

The average credit quality rating of your fund's portfolio is currently BBB for
the securities that are rated plus cash. This rating is a considerably higher
quality rating than that of most other high-yield bond portfolios, which
typically average a B rating.

A DISCIPLINED RESEARCH PROCESS
In line with the Davis equity investment discipline, the Davis High Income Fund
employs a contrarian value-oriented investment philosophy. We seek to uncover
attractive yields in bonds that are overlooked, under-researched and mispriced,
yet make sound investment sense.

We are wary of investment fads and take a long-term view, concentrating
primarily on evaluating the risk and reward trade-offs of different investments
through a disciplined research process. Our objective is to provide the maximum
yield relative to credit quality--that is to get the most reward for
shareholders given the amount of risk taken.

We build the portfolio bond by bond, using a bottom-up investment approach. Our
primary tool is in-depth credit analysis of bond issuers in order to minimize
credit risk. We also analyze each individual investment's security
characteristics (i.e., coupon rate, maturity, stated call schedule, relative
trading levels of different investments, etc.) in terms of upside potential and
downside protection in relation to interest rate risk and call risk. In
addition, we employ top-down management techniques, monitoring the portfolio
overall to assure proper diversification among different sectors and
strategies.

<PAGE>

DAVIS HIGH INCOME FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501

HOW WE SEEK TO MAXIMIZE REWARD RELATIVE TO RISK
Consistent with our strategy of seeking to maximize upside potential and
downside protection, the Davis High Income Fund offers a hybrid approach
between the methods employed by traditional high-yield bond funds and those
used by higher quality, more interest-rate-sensitive BBB-rated funds. We take
more credit risk than BBB funds with the objective of achieving greater rewards
over the long term.

Normally, lower quality bonds offer investors higher interest rates to
compensate for the increased risk that interest and principal payments might
not be made on a timely basis. However, over the last year or two, credit
quality spreads--that is, the difference in yields between low-quality bonds
and high-quality bonds--have generally been at record tight levels because
investor demand for high-yielding lower quality bonds has been so strong.

Rather than overpaying for lower quality bonds just to obtain a slightly larger
yield, your fund has concentrated on higher quality issues, which currently
offer greater value. In seeking to maximize reward relative to risk, we have
relinquished some of the upside potential of lower rated bonds in order to gain
a more than proportionate amount of downside protection from higher rated
securities. This is why the fund has lagged the riskier, high-yield fund
category over the past year.

It seems unlikely that spreads can tighten much further from here. When spreads
begin to widen to more normal levels, as we believe they inevitably will, lower
quality bonds should underperform higher quality bonds. Accordingly, we have
continued to maintain our defensive posture, and we expect to benefit from the
posture when the market declines.

CAPITALIZING ON UNRECOGNIZED OPPORTUNITIES
Through careful research, we continue to be able to identify good values in
less followed areas of the bond market that offer better yields relative to
credit quality and more favorable risk/return ratios.

One strategy we have successfully implemented is investing in high-yield bonds
that are secured by real property. This provides these bonds with a higher
credit-quality profile than most high-yield bonds, which usually are
subordinated or junior to other bonds in the issuer's capital structure. One
example is your fund's purchase of Wright Medical Technology Inc.'s senior
secured 11 3/4% bonds due July 1, 2000. The bonds are secured by substantially
all of the company's assets. Wright Medical Technology designs and distributes
orthopedic implants.(3)

Your fund also continues to find good values in taxable municipal bonds.
Taxable municipals are generally ignored by both traditional municipal bond
investors and high-yield bond investors and, therefore, often offer superior
yields relative to their credit quality. Your fund's Portfolio Manager is
experienced in analyzing these securities because he is also Portfolio Manager
of the Davis Tax-Free High Income Fund.

As an example, your fund invested in taxable municipal bonds backed by the
University of Southern California with a 9.80% interest coupon, due October 1,
2006. Your fund purchased the bonds at a 9.30% yield to their October 1, 2003
par call date and a 9.43% yield to maturity. Those yields were higher than
yields then available on many B-rated bonds. But these taxable municipal bonds
carry a rating of AA- minus, providing your fund with significant additional
yield per credit quality. (3)

2
<PAGE>

DAVIS HIGH INCOME FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501

Even in an overvalued junk bond market, we have found good investment
opportunities on a selective basis in traditional high-yield bonds. In the
first quarter of 1998 when oil prices hit a 30-year low, we purchased several
bonds issued by oil and gas companies. One example is the 10 1/4% bonds due
October 1, 2006 of Costilla Energy Inc., an independent energy company. Your
fund invested in these bonds at a 9.74% yield to their 2004 call date and a
9.82% yield to maturity. (3)

In addition, your fund continues to own significant investments in higher
quality, high-yielding, private-label mortgage-backed securities and in
"busted" convertibles, which are convertibles trading below the price at which
the bonds can be converted into the issuing company's stock. Because there is
little demand for busted convertibles, their prices tend to be low and their
yields high.

Your fund's portfolio is broadly diversified, holding 177 issues at the end of
March 1998, which helps to lower its volatility. To further limit volatility,
we are avoiding bonds issued by cyclical companies, such as paper companies.

PRUDENTLY POSITIONED FOR UNCERTAIN MARKETS
With credit quality spreads extremely tight, consumer debt at record levels and
stock prices at historical highs, the high-yield bond market faces an uncertain
outlook. The possibility of an impending credit crunch, a sell-off in the stock
market, or a re-escalation of currency and financial problems in the Far East,
could cause spreads to widen and prices of lower quality, high yield bonds to
drop. This is the kind of environment in which your fund could outperform.

Our objective is to provide shareholders with strong relative and absolute
performance, consistent with our focus on minimizing volatility and maximizing
long-term, risk-adjusted returns. We think our prudent investment philosophy
and defensive strategies with respect to credit quality and interest rate
movements are the right ones to accomplish that aim.

Sincerely,

Shelby M.C. Davis B. Clark Stamper
Chief Investment Officer Portfolio Manager

May 7, 1998

3
<PAGE>

DAVIS HIGH INCOME FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501

(1) Morningstar proprietary ratings reflect historical risk-adjusted performance
as of March 31, 1998. Subject to change every month, Morningstar ratings are
calculated from a fund's three, five, and ten year average annual total returns
in excess of 90-day Treasury bill (T-bill) returns, with appropriate fee
adjustments and a risk factor that reflects fund performance below 90-day
T-bill returns. 10% of the funds in an investment category receive five stars.
The next 22.5% receive four stars. The next 35% receive three stars. The next
22.5% receive two stars, and 10% receive one star.

Star ratings for the Fund's other classes of shares may vary and are available
only for those classes with at least three years of performance history. Past
performance is no guarantee of future results.

(2) All performance figures cited in this letter are calculated without
considering sales commissions. The average annual total returns for the Fund's
Class A shares, including the maximum front-end sales charge of 4.75%, for the
one, five, and ten year periods ended March 31, 1998 were 5.26%, 7.60% and
6.55%, respectively.

(3) The Fund's portfolio securities as of March 31, 1998, including the
securities discussed in this letter, are listed in the Schedule of Investments.

4
<PAGE>

DAVIS HIGH INCOME FUND, INC.
COMPARISON OF CLASS A SHARES OF DAVIS HIGH INCOME FUND, INC. AND SALOMON
BROTHERS LONG-TERM HIGH-YIELD INDEX

Average Annual Total Return for the Periods ended March 31, 1998.

- ----------------------------------------------------------
CLASS A SHARES (This calculation includes an initial
sales charge of 4 3/4%.)

One Year.................................. 5.26%
Five Years................................ 7.60%
Ten Years................................. 6.55%
- ----------------------------------------------------------

$10,000 invested over ten years. Let's say you invested $10,000 in Davis High
Income Fund, Inc., Class A ("DHIF-A") shares on March 31, 1988 and paid a
4 3/4% sales charge. As the chart shows, by March 31, 1998 the value of your
investment would have grown to $18,860 - a 88.60% increase on your initial
investment. For comparison, the Salomon Brothers Long-Term High Yield Index
("Salomon") is also presented on the chart below.

Salomon DHIF-A
3/31/88 $10,000 $9,525
3/31/89 $11,096 $10,212
3/31/90 $10,153 $9,018
3/31/91 $11,962 $8,538
3/31/92 $15,119 $10,461
3/31/93 $17,830 $12,428
3/31/94 $19,361 $13,831
3/31/95 $20,830 $14,480
3/31/96 $24,774 $15,918
3/31/97 $26,935 $17,046
3/31/98 $32,925 $18,860

Salomon Brothers Long-Term High-Yield Index is an unmanaged index and has no
specific investment objective. The index used includes interest reinvested, but
does not take into account any sales charge.

The performance data for Davis High Income Fund, Inc. contained in this report
represents past performance and assumes that all distributions were reinvested,
and should not be considered as an indication of future performance from an
investment in the Fund today. The investment return and principal value will
fluctuate so that shares may be worth more or less than their original cost
when redeemed.

5
<PAGE>

DAVIS HIGH INCOME FUND, INC.
COMPARISON OF CLASS B SHARES OF DAVIS HIGH INCOME FUND, INC. AND SALOMON
BROTHERS LONG-TERM HIGH-YIELD INDEX

Average Annual Total Return for the Periods ended March 31, 1998.

- ---------------------------------------------------
CLASS B SHARES (This calculation includes any
applicable contingent deferred sales charge.)

One Year .................................... 6.53%
Life of Class (December 5, 1994 through
March 31, 1998)......................... 7.92%
- ---------------------------------------------------

- ---------------------------------------------------
CLASS C SHARES (This calculation includes any
applicable contingent deferred sales charge.)

Life of Class (August 12, 1997 through
March 31, 1998)......................... 4.61%
- ---------------------------------------------------

$10,000 invested at inception. Let's say you invested $10,000 in Davis High
Income Fund, Inc., Class B (DHIF-B) shares on December 5, 1994 (inception of
Class). As the chart shows, by March 31, 1998 the value of your investment
(less applicable contingent deferred sales charges) would have grown to
$12,882 - a 28.82% increase on your initial investment. For comparison, the
Salomon Brothers Long-Term High Yield Index ("Salomon") is also presented
on the chart below.

Salomon DHIF-B
12/5/94 $10,000 $10,000
3/31/95 $10,945 $10,339
3/31/96 $13,018 $11,237
3/31/97 $14,153 $11,940
3/31/98 $17,301 $12,882

6
<PAGE>

DAVIS HIGH INCOME FUND, INC.
COMPARISON OF CLASS Y SHARES OF DAVIS HIGH INCOME FUND, INC. AND SALOMON
BROTHERS LONG-TERM HIGH-YIELD INDEX

Average Annual Total Return for the Periods ended March 31, 1998.

- ----------------------------------------------------------
CLASS Y SHARES

One Year.................................. 10.64%
Life of Class (March 20, 1997 through
March 31, 1998)...................... 9.86%
- ----------------------------------------------------------

$10,000 invested at inception. Let's say you invested $10,000 in Davis High
Income Fund, Inc., Class Y ("DHIF-Y") shares on March 20, 1997. As the chart
shows, by March 31, 1998 the value of your investment would have grown to
$11,017 - a 10.17% increase on your initial investment. For comparison, the
Salomon Brothers Long-Term High Yield Index ("Salomon") is also presented on
the chart below.

Salomon DHIF-Y
3/20/97 $10,000 $10,000
3/31/97 $10,000 $9,937
3/31/98 $12,224 $11,017

7
<PAGE>

DAVIS HIGH INCOME FUND, INC.
PORTFOLIO HOLDINGS AS OF MARCH 31, 1998

PORTFOLIO MAKEUP (% OF FUND NET ASSET)

Common and Preferred Stocks 2.0%
Cash and Cash Equivalents 13.6%
Bonds & Notes 84.4%

SECTOR WEIGHTINGS (% OF BOND/NOTES)

Hotels 4.3%
Metals 4.6%
Mortgage Backed 4.4%
Taxable Munis 14.5%
Food Service 3.8%
Entertainment 4.0%
Grocery 5.3%
Other 11.5%
Financial Services 4.4%
Communications 9.6%
Broadcasting 6.7%
Technology 3.7%
Pharmaceuticals 4.0%
Energy 19.2%

<TABLE>
<CAPTION>
Top 10 Holdings % of Fund Net Assets
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Courtyard By Marriott II, L.P., Sr. Secured Notes, 10.75%, 02/01/08 1.85%
Gerrity Oil & Gas Corp., Sr. Sub. Notes, 11.75%, 07/15/04 1.57%
Sunshine Mining & Refining Co. 1.48%
University of Southern CA, 9.80%, 10/01/06 1.42%
Crown Resources Corp., Conv. Sub. Deb., 5.75%, 08/27/01 1.39%
Alps 96-1 D Asset Backed Lease, Aircraft Lease CL D, 12.75%, 06/15/06 1.31%
California Hsg. Fin. Agy. Rev. Bds., Taxable Home Mtg., Series D, 9.30%, 02/01/26 1.29%
Marcus Cable Holding Co., L.P., Sr. Secured Notes, Zero Cpn., 12/15/05 1.27%
Underwater World Mall of America, Sr. Rev. Bds., 13.75%, 03/01/02 1.19%
Transamerica Energy Corp., Sr. Secured Disc. Notes, 10.251%, 06/15/02 1.18%
</TABLE>

8
<PAGE>
<TABLE>

DAVIS HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS
At March 31, 1998

<CAPTION>
PRINCIPAL VALUE
CORPORATE BONDS AND NOTES - (68.48%) (NOTE 1)
<S> <C> <C>
AEROSPACE/AVIATION - (0.72%)
$ 500,000 Simula Inc., Sr. Conv. Sub. Notes, Series C, 10.00%, 09/15/99 (c) $ 515,000
-------------
AUTOMOTIVE - (0.27%)
200,000 Glasstech Inc., Sr. Notes, 12.75%, 07/01/04.................................. 195,000
-------------
BROADCASTING - (2.46%)
500,000 Pegasus Media & Communications, Sr. Sub. Notes, Series B,
12.50%, 07/01/05............................................................ 575,000
500,000 SFX Broadcasting Inc., Sr. Sub. Notes, Series B, 10.75%, 05/15/06............ 555,000
500,000 Sinclair Broadcast Group, Sr. Sub. Notes, 9.00%, 07/15/07.................... 524,375
100,000 Spanish Broadcasting Systems Inc., Sr. Notes, 7.50%, 06/15/02................ 115,000
-------------
1,769,375
-------------
CABLE - (2.86%)
150,000 Fundy Cable Ltd., Sr. Secured 2nd Priority Notes, 11.00%, 11/15/05........... 166,875
1,000,000 Marcus Cable Holding Co., L.P., Sr. Secured Notes, Zero Cpn., 12/15/05....... 911,250
650,000 Rifkin Acquisition Partners, L.P., Sr. Sub. Notes, 11.125%, 01/15/06......... 723,125
250,000 TCA Cable TV, Inc., 6.53%, 02/01/28.......................................... 249,971
-------------
2,051,221
-------------
CHEMICALS - (0.66%)
500,000 Trikem S.A., Notes, 10.625%, 07/24/07 (b).................................... 471,250
-------------
COMPUTER PRODUCTS AND SERVICES - (1.70%)
250,000 Coinmach Corporation, Sr. Notes, Series C, 11.75%, 11/15/05................. 280,000
1,950,000 JTS Corporation, Conv. Sub. Deb., 5.25%, 04/29/02............................ 526,500
279,200 San Jacinto Holdings Inc., Sr. Notes, 10.75%, 12/31/02 (c)................... 209,400
250,000 Sapiens International N.V., Euro Conv. Notes, 5.00%, 09/20/03................ 205,000
-------------
1,220,900
-------------
CONSUMER PRODUCTS & MERCHANDISE - (1.03%)
250,000 Galey & Lord, Inc., Sr. Sub. Notes, 9.125%, 03/01/08 (b)..................... 254,375
1,000,000 International Semi-Tech Microelectronics Inc., Sr. Notes, 11.50%,
08/15/03................................................................... 345,000
141,000 MacAndrews & Forbes Holdings, Inc., Sub. Deb., 13.00%, 03/01/99 142,234
-------------
741,609
-------------
DATA PROCESSING - (0.71%)
500,000 Axiohm Transaction Solutions Inc., Sr. Sub. Notes, 9.750%, 10/01/07.......... 508,750
-------------
DIVERSIFIED SERVICES - (1.64%)
624,004 Emcor Group Inc., Sr. Notes, Series C, 11.00%, 12/15/01...................... 655,204
500,000 Jordan Industry Inc., Sr. Notes, Series B, 10.375%, 08/01/07................. 521,250
-------------
1,176,454
-------------

9
<PAGE>

DAVIS HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At March 31, 1998

VALUE
PRINCIPAL (NOTE 1)
CORPORATE BONDS AND NOTES - CONTINUED

ECOLOGICAL/ENVIRONMENTAL - (1.26%)
$ 319,000 Envirotest System Corp., Sr. Notes, 9.125%, 03/15/01......................... $ 323,785
500,000 Norcal Waste Systems Inc., Sr. Notes, Series B, 12.50% Incr. rate,
11/15/05................................................................... 582,500
-------------
906,285
-------------
EDUCATION - (0.36%)
250,000 La Petite Holdings Corp., Sr. Secured Notes, 9.625%, 08/01/01................ 258,750
-------------
ELECTRONICS - (0.80%)
43,000 Andersen Group, Inc., Conv. Sub. Deb., 10.50%, 10/15/02...................... 41,119
760,000 Broadband Technologies Inc., Conv. Sub. Notes, 5.00%, 05/15/01............... 504,450
558,273 Comptronix Corp., Conv. Sub. Deb., 6.75%, 03/01/02++ (c)..................... 23,447
-------------
569,016
-------------
EQUIPMENT LEASING - (1.36%)
942,810 Alps 96-1 D Asset Backed Lease, Aircraft Lease CL D, 12.75%, 06/15/06........ 942,810
670,700 Technical Equipment Leasing Corp., Jr. Sub. Deb., Series A, 18.375%,
04/01/96++ (c)............................................................. 33,535
-------------
976,345
-------------
FARMING & AGRICULTURE - (0.68%)
500,000 Iowa Select Farms, L.P., Sr. Sub. Notes, 10.75%, 12/01/05 (b)................ 491,250
-------------
FINANCIAL SERVICES AND INSURANCE - (3.71%)
50,000 CII Financial, Inc., Conv. Sub. Deb., 7.50%, 09/15/01........................ 49,313
500,000 Dollar Financial Group Inc., Sr. Notes, Series A, 10.875%, 11/15/06.......... 547,500
500,000 GPA Delaware Inc., Gtd. Notes, 8.75%, 12/15/98............................... 508,750
500,000 Imperial Credit Capital Trust, Remarketed Par Securities, Series A,
0%/13.00%, 06/14/02 (d)............................................. 495,167
250,000 Nationwide Credit, Inc., Sr. Notes, 10.25%, 01/15/08 (b)..................... 258,750
250,000 Ocwen Capital Trust, Capital Securities, 10.875%, 08/01/27................... 278,750
500,000 PennCorp Financial Group, Inc., Sr. Sub. Notes, 9.25%, 12/15/03.............. 527,500
-------------
2,665,730
-------------
FOOD SERVICE - (2.25%)
750,000 Envirodyne Industries, Inc., 1st Priority Sr. Secured Notes, 12.00%,
06/15/00................................................................... 802,500
284,000 Fresh Del Monte Produce N.V., Sr. Notes, Series B, 10.00%, 05/01/03.......... 299,620
500,000 Imperial Holly Corp., Sr. Sub Notes, 9.75%, 12/15/07......................... 516,875
-------------
1,618,995
-------------
GROCERY - (4.51%)
500,000 B & G Foods, Inc., Sr. Sub. Notes, 9.625%, 02/01/08.......................... 511,875
500,000 Homeland Stores, Inc., Sr. Notes, 10.00%, 08/01/03........................... 462,500
690,000 Kroger Co., Lease Cert., 6.00%, 04/01/03..................................... 677,587
675,000 Kroger Co., Lease Cert., 12.95%, 02/01/09.................................... 730,858
793,000 New Almacs Inc., Sr. Sub. Notes, 11.50%, 11/18/04++ (c)...................... 43,615

10
<PAGE>

DAVIS HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At March 31, 1998

VALUE
PRINCIPAL (NOTE 1)
CORPORATE BONDS AND NOTES - CONTINUED

GROCERY - CONTINUED
$ 1,000,000 Southland Corporation, Deb., 4.00%, 06/15/04................................ $ 805,000
-------------
3,231,435
-------------
HEALTHCARE AND PHARMACEUTICAL - (2.71%)
250,000 Alliance Imaging, Inc., Sr. Sub. Notes, 9.625%, 12/15/05.................... 259,375
863,000 Glycomed Inc., Conv. Sub. Deb., 7.50%, 01/01/03............................. 828,480
346,000 National Patent Development Corp., Conv. Bds., 5.00%, 08/31/99.............. 257,770
300,000 UroMed Corp., Conv. Sub. Notes, 6.00%, 10/15/03 (b)......................... 146,625
925,000 UroMed Corp., Conv. Sub. Notes, 6.00%, 10/15/03............................. 452,094
-------------
1,944,344
-------------
HOTELS, LODGING & GAMING - (3.64%)
250,000 Claridge Hotel & Casino Co., 1st Mtg. Notes, 11.75%, 02/01/02............... 246,250
1,200,000 Courtyard By Marriott II, L.P., Sr. Secured Notes, 10.75%, 02/01/08......... 1,326,000
250,000 Isle Capri Black Hawk, LLC, 1st Mtg. Notes, 13.00%, 08/31/04................ 255,000
250,000 Penn National Gaming, Inc., Sr. Notes, 10.625%, 12/15/04.................... 265,000
500,000 Venetian Casino, 1st Mtg. Notes, 12.25%, 11/15/04 (b)....................... 521,250
-------------
2,613,500
-------------
LEISURE, ENTERTAINMENT & FITNESS - (3.40%)
250,000 Discovery Zone Inc., Sr. Secured Notes, 13.50%, 08/01/02.................... 243,750
250,000 Premier Parks, Inc., Sr. Notes, 9.25%, 04/01/06............................. 256,875
500,000 SFX Entertainment, Inc., Sr. Sub. Notes, 9.125%, 02/01/08................... 497,500
250,000 Six Flags Entertainment, Sr. Notes, 8.875%, 04/01/06........................ 255,938
500,000 Spectrum Holobyte Inc., Conv. Sub. Notes, 6.50%, 09/15/02................... 328,125
984,599 Underwater World Mall of America, Sr. Rev. Bds., 13.75%, 03/01/02++ (c)..... 856,601
-------------
2,438,789
-------------
MEDICAL EQUIPMENT - (0.69%)
500,000 Wright Medical Technology, Inc., Sr. Secured Notes, Series D,
11.75%, 07/01/00.......................................................... 492,500
-------------

METALS & MINING - (1.56%)
100,000 EES Coke Battery Inc., Sr. Secured Notes, Series B, 9.328%, 04/15/07 (b).... 105,872
500,000 Florida Steel Corp., Deb., 11.50%, 12/15/00................................. 512,500
500,000 Metals USA, Inc., Sr. Sub. Notes, 8.625%, 02/15/08.......................... 498,750
-------------
1,117,122
-------------
MOBILE & WIRELESS TELECOMMUNICATIONS - (0.55%)
500,000 Millicom International Cellular S.A., Sr. Sub. Disc. Notes, 0%/13.50%,
06/01/06 (d)............................................................. 395,000
-------------
NATURAL GAS & OIL DISTRIBUTORS - (2.40%)
100,000 Amerigas Partners L.P., Sr. Notes, Series B, 10.125%, 04/15/07............. 107,500
630,000 Empire Gas Corp., Sr. Secured Notes, 7.00%/12.875%, 07/15/04................ 563,850
500,000 Statia Terminals International CDA Inc., 1st Mtg. Notes, 11.75%, 11/15/03... 532,500

11
<PAGE>

DAVIS HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At March 31, 1998

VALUE
PRINCIPAL (NOTE 1)
CORPORATE BONDS AND NOTES - CONTINUED

NATURAL GAS & OIL DISTRIBUTORS - CONTINUED
$ 500,000 Trident NGL Holdings, Inc., Sub. Notes, 10.25%, 04/15/03.................... $ 522,780
-------------
1,726,630
-------------
OIL & GASOLINE - (10.78%)
500,000 Abraxas Petroleum Corp., 11.50%, 11/01/04 (b)............................... 516,250
250,000 Clark R & M Inc., Sr. Notes, 8.375%, 11/15/07............................... 253,125
250,000 Clark R & M Inc., Sr. Sub. Notes, 8.875%, 11/15/07.......................... 254,375
250,000 Costilla Energy, Inc., Sr. Notes, 10.25%, 10/01/06 (b)...................... 256,250
500,000 Dailey Petroleum Services Corp., Sr. Notes, 9.50%, 02/15/08 (b)............. 506,250
500,000 Deeptech International, Inc., Sr. Secured Notes, 12.00%, 12/15/00........... 533,750
800,000 Forman Petroleum Corp., Sr. Secured Notes, Series B, 13.50%, 06/01/04....... 812,000
500,000 Furon Co., Sr. Sub. Notes, 8.125%, 03/01/08 (b)............................. 505,000
1,000,000 Gerrity Oil & Gas Corp., Sr. Sub. Notes, 11.75%, 07/15/04................... 1,130,000
500,000 HS Resources Inc., Sr. Sub. Notes, 9.875%, 12/01/03......................... 520,000
100,000 Moran Energy Inc., Conv. Sub. Deb., 8.75%, 01/15/08......................... 98,500
500,000 National Energy Group, Sr. Notes, 10.75%, 11/01/06.......................... 480,000
500,000 Parker Drilling Co., Sr. Notes, Series C, 9.75%, 11/15/06 (b)............... 533,750
500,000 Ram Energy Inc., Sr. Notes, 11.50%, 02/15/08................................ 491,250
1,000,000 Transamerica Energy Corp., Sr. Secured Disc. Notes, 10.251%, 06/15/02....... 850,000
-------------
7,740,500
-------------
PAPER PRODUCTS - (0.92%)
2,000,000 Crown Packaging Enterprises, Ltd., Sr. Secured Disc. Notes, 0%/14.00%,
08/01/06 (c) (d)........................................................... 110,000
500,000 Grupo Industrial Durango S.A. DE C.V., Notes, 12.00%, 07/15/01............... 548,750
-------------
658,750
-------------
PRECIOUS METALS - (2.29%)
1,170,000 Crown Resources Corp., Conv. Sub. Deb., 5.75%, 08/27/01...................... 994,500
500,000 Echo Bay Mines Ltd., Capital Securities, 11.00%, 04/01/27.................... 452,500
1,000,000 Pegasus Gold Inc., Conv. Sub. Notes, 6.25%, 04/30/02......................... 200,000
-------------
1,647,000
-------------
PROTECTION SERVICES - (0.21%)
150,000 Loomis Fargo and Company, Sr. Sub. Notes, 10.00%, 01/15/04................... 153,750
-------------
RESTAURANT - (1.00%)
500,000 American Restaurant Group, Inc., Sr. Notes, 11.50%, 02/15/03 (b)............. 507,500
250,000 TPI Enterprises Inc., Conv. Sub. Deb., 8.25%, 07/15/02....................... 208,750
-------------
716,250
-------------
RETAIL - (0.33%)
414,000 Emerson Radio Corp., Sr. Conv. Sub. Deb., 8.50%, 08/15/02.................... 238,568
-------------

12
<PAGE>

DAVIS HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At March 31, 1998

VALUE
PRINCIPAL (NOTE 1)
CORPORATE BONDS AND NOTES - CONTINUED

TELECOMMUNICATIONS - (7.57%)
$ 1,000,000 Crown Castle International Corp., Sr. Disc. Notes, 0%/10.625%,
11/15/07 (b) (d).......................................................... $ 678,750
500,000 EchoStar Communications Corp., Sr. Secured Disc. Notes, Zero Cpn.,
06/01/04.................................................................. 483,750
275,000 Esprit Telecom Group PLC, Sr. Notes, 11.50%, 12/15/07....................... 303,875
250,000 Facilicom International, Inc., Sr. Notes, 10.50%, 01/15/08 (b) ............. 261,250
600,000 Globalstar, L.P., Sr. Notes, 11.25%, 06/15/04 .............................. 631,500
1,000,000 ICG Holdings (USA), Inc., Sr. Disc. Notes, 0%/ 12.50%, 05/01/06 (d)......... 815,000
250,000 L 3 Communications Co., Sr. Sub. Notes, 10.375%, 05/01/07................... 278,125
250,000 Nextlink Communications LLC, Sr. Notes, 12.50%, 04/15/06.................... 288,750
500,000 Primus Telecommunications, Sr. Notes, 11.75%, 08/01/04...................... 558,750
250,000 Telegroup, Inc., Sr. Disc. Notes, 0%/10.50%, 11/01/04 (d)................... 206,250
500,000 Hyperion Telecommunications, Sr. Disc. Notes, Series B, 0%/13.00%,
04/15/03 (d)............................................................. 385,000
650,000 Winstar Communications, Inc., Sr. Disc. Notes, 0%/14.00%, 10/15/05 (d)...... 544,375
-------------
5,435,375
-------------
TRANSPORTATION/SHIPPING - (1.80%)
375,000 Golden Ocean Group Ltd., Sr. Notes, 10.00%, 08/31/01 (b).................... 298,125
250,000 Moran Transportation Co., 1st Preferred Shipping Mtg. Notes, Series B,
11.75%, 07/15/04.......................................................... 280,625
100,000 Piedmont Aviation Inc., Equip. Trust Certificates, Series '88 I, 9.55%,
05/08/98.................................................................. 101,000
444,000 Preston Corp., Conv. Sub. Deb., 7.00%, 05/01/11............................. 366,300
250,000 Sea Containers, Sr. Notes, 7.875%, 02/15/08 (b)............................. 248,750
-------------
1,294,800
-------------
UTILITIES - (1.65%)
32,000 Michigan General Corp. (New), Sr. Notes, 11.00%, 06/30/98................... 480
500,000 Midland Funding Corporation II, Sub. Secured Lease, 13.25%, 07/23/06........ 634,232
498,978 Panda Funding, Series A-1, 11.625%, 08/20/12................................ 551,370
-------------
1,186,082
-------------
TOTAL CORPORATE BONDS AND NOTES
- (identified cost $50,241,222).................................... 49,166,325
-------------

MORTGAGE BACKED BONDS - (3.67%)
380,000 Arkansas St. Dev. Fin. Sngl. Fam. Mtg. Rev. Refunding Bds., Mtg. Bkd.
Secs. Prg., Ser-C, GNMA/FNMA, 7.75%, 01/01/00............................. 385,833
256,418 Capstead Securities Corp., IV, CMO, Series '92-7, CL Z-1, 8.75%, 05/25/23... 260,264
310,045 Chase Mortgage Finance Corp., Series '93-G-A1, REMIC, 7.00%, 04/25/01....... 311,653
210,187 Citicorp Mtg. Securities, Inc., Series '89-16, CL A-1, 0%/6.55%,
04/01/19 (d).............................................................. 205,195

13
<PAGE>

DAVIS HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At March 31, 1998

VALUE
PRINCIPAL (NOTE 1)

MORTGAGE BACKED BONDS - CONTINUED

$ 36,460 CTS Home Equity Loan Trust, Asset Backed Certificates, Series '91-1-A,
8.80%, 01/15/06............................................................ $ 36,405
85,443 Fannie Mae, REMIC, Series '91-38, CL SA, Inverse Support Tranche,
10.1862%, 04/25/21......................................................... 91,186
223,835 First Nationwide Trust, Series '89-AR4-1, 9.50%, 09/25/19.................... 223,154
293,852 Freddie Mac, REMIC, CL 1668 F, 7.65%, 02/15/14............................... 307,571
100,000 Freddie Mac, REMIC, CL 1630 E, 6.00%, 09/15/23............................... 94,295
221,794 Freddie Mac, CL 1567 A, 6.15%, 08/15/23...................................... 210,810
153,632 Manufacturers Hanover Mortgage Corporation, Series A, 11.50%, 04/20/15....... 160,162
179,000 The Prudential Mortgage Securities Company, Mtg. Pass-Through
Certificates, Series '92-038, CL A-8, Fixed Rate, 6.95%, 11/25/22.......... 176,262
79,358 Resolution Trust Corporation, American Res. Mtg. Corp., Service Mtg.
Pass-Through Certificates, Series '92 M4 CL A-1, 8.00%, 09/25/21........... 80,350
91,977 Resolution Trust Corporation, American Res. Mtg. Corp., Service Mtg.
Pass-Through Certificates, Series '92-7, CL A-1, 6.592%, 03/25/22.......... 88,528
-------------
TOTAL MORTGAGE BACKED BONDS - (identified cost $2,513,577)............. 2,631,668
-------------

TAXABLE MUNICIPAL BONDS - (12.35%)

670,000 Adams Cnty., CO, IDR Series A Pool Gtd. - Executive Life, 9.00%,
11/01/96+.................................................................. 20,100
2,025,000 Austin, TX, Hsg. Fin. Corp. Sngl. Fam. Mtg. Rev. Bds., Compounded
Interest, Series '84, Zero Cpn., 02/01/16.................................. 255,130
855,000 California Hsg. Fin. Agy. Rev. Bds., Taxable Home Mtg., Series D,
9.30%, 02/01/26............................................................ 927,188
220,000 Commerce Refuse to Energy Auth., Taxable Ref. Rev. Bds., '90 Series,
10.50%, 07/01/00........................................................... 229,260
700,000 Connecticut St. Health & Edl. Facs. (Sheriden Woods Ctr.), Taxable Rev.
Bds., 8.73%, 11/01/17...................................................... 790,510
700,000 Connecticut St. Hsg. Fin. Auth., Taxable Hsg. Mtg. Program, Series G,
7.625%, 05/15/21.......................................................... 741,650
80,000 Connecticut St. Hsg. Fin. Auth., Taxable Hsg. Mtg. Program, Series H,
7.875%, 11/15/26.......................................................... 85,062
195,000 El Paso Hsg. Fin. Corp., Multi-Fam. Res. Loan Program, Securitized Mult-
Fam. Hsg. Rev. Bds., Series '86A, 8.88%, 10/15/96.......................... 5,850
100,000 Galveston Cnty., TX, Wtr. Auth., Canal Sys. Contract Wtr. Rev. Bds.,
AMBAC Insured, 9.60%, 07/01/99............................................. 100,991
170,000 Galveston Cnty., TX, Wtr. Auth., Canal Sys. Contract Wtr. Rev. Bds.,
AMBAC Insured, 9.80%, 07/01/01............................................. 171,768
620,000 Harrisburg, PA, G.O. Capital Appreciation Bds., Zero Cpn., 04/01/13.......... 230,020
219,000 Illinois HFA Rev. Bds., Series C, MBIA Insured, 10.30%, 08/15/03............. 221,786

14
<PAGE>

DAVIS HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At March 31, 1998

VALUE
PRINCIPAL/SHARES (NOTE 1)
TAXABLE MUNICIPAL BONDS - CONTINUED

$ 200,000 Lancaster, TX, Combined Tax & Golf Course Park Rev. Bds., Series B,
Certificates of Obligation, MBIA Insured, 9.375%, 08/01/02................. $202,446
640,000 Los Angeles County, CA, Pension Obligation, Capital Appreciation Bds.,
Series C, MBIA Insured, Zero Cpn., 06/30/07................................ 349,440
100,000 Louisiana Hsg. Fin. Agy., Taxable Home Mtg., Series '86A, 8.61%,
08/01/49+.................................................................. 3,000
100,000 Louisiana St. Agriculture Fin. Auth., Series '86A, 8.80%, 10/01/96........... 3,000
230,000 Mayor and City Council of Baltimore, Econ. Dev. Taxable Lease Rev. Bds.
(Arcade Ltd. Partnership Prj.) Series '92, 8.50%, 08/01/02................. 244,872
50,000 Mayor and City Council of Baltimore, Econ. Dev. Taxable Lease Rev. Bds.
(Arcade Ltd. Partnership Prj.) Series '92, 9.50%, 08/01/14................. 54,216
675,480 Memphis, TN Hlth. Educ. & Hsg. Fac. Brd., Multi Fam. Hsg. Rev.
Securitized, Series '86A, 8.68%, 09/15/96+................................. 20,264
115,000 Missouri St., Hsg. Dev. Cmnty., Multi Fam. Hsg. Rev. Bds., FHA Insured
Mtg. Loans, 9.25%, 12/01/30................................................ 122,089
20,000 Nebraska Invst. Fin. Auth., Agriculture Rev. Bds., Series A, Gtd. Executive
Life, 8.34%, 11/01/93+..................................................... 600
2,500,000 New Jersey Econ. Dev. Auth., Taxable Rev. Bds., Zero Cpn., 02/15/19.......... 516,500
440,000 New York St. HFA Rev. Multi Fam. Mtg. Series B, Sonyma Prg.
Insurance, 8.875%, 08/15/14................................................ 478,333
1,930,000 Orange County, CA, Pension Obligation, Capital Appreciation Bds.,
Series A, Zero Cpn., 09/15/01.............................................. 673,184
598,842 Polk Cnty., FL, HFA REMIC Collateralized Mtg. Bds., Series 1, CL 2-A,
9.55%, 01/15/11............................................................ 618,544
130,000 San Bernadino CA Assd. Cmntys. Fing. Auth. Health Care Ref. &
Improvement Bds. (Granada) Series B, 8.80%, 05/01/17....................... 138,321
807,000 The Southeast TX Hsg. Fin. Corp. Securitized Multi Fam. Hsg. Rev. Bds.
Series '86A, 8.60%, 09/01/96............................................... 24,210
1,000,000 University of Southern CA, 9.80%, 10/01/06................................... 1,018,400
5,000 Utah St. Hsg. Fin. Agy. Sngl. Fam. Mtg., Series A, 9.40%, 07/01/99........... 5,037
315,000 Utah St. Hsg. Fin. Rev., Taxable RHA Cmnty. Services, Series B, 9.00%,
07/01/02................................................................... 318,213
2,460,000 Wagner College, NY, G.O. Capital Appreciation Bds., Zero Cpn., 10/01/22...... 212,544
315,000 York, PA, G.O. Capital Appreciation Bds., Series A, Zero Cpn., 02/01/17...... 90,216
---------
TOTAL TAXABLE MUNICIPAL BONDS
- (identified cost $8,882,466)..................................... 8,872,744
---------

PREFERRED STOCKS - (0.12%)
6,200 Westmoreland Coal Co., Dep. Shares Conv. Pfd., Series A, 8.50%.............. 86,800
---------
TOTAL PREFERRED STOCKS - (identified cost $80,910)...................... 86,800
---------

15
<PAGE>

DAVIS HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At March 31, 1998

VALUE
(NOTE 1)
Shares/Units/Principal
COMMON STOCKS - (1.70%)
135,951 Canyon Resources Corporation*................................................ $ 110,460
260,000 Crown Packaging Enterprises Ltd.*............................................ 2,600
1,161 Nextel Communications Inc., Class A*......................................... 39,147
222 San Jacinto Hldgs. Inc.,..................................................... 889
852,880 Sunshine Mining & Refining Co.*.............................................. 1,066,100
-------------
TOTAL COMMON STOCKS - (identified cost $1,681,091).................... 1,219,196
-------------
WARRANTS - (0.15%)
500 Chattem Inc., expire 08/17/99 (c)............................................ 2,800
869 Empire Gas Corp., expire 07/15/04 (c)........................................ 2,607
800 Forman Petroleum Corp., expire 06/01/04 (b).................................. 8,000
100 Spanish Broadcasting Systems Inc., expire 06/30/99 (c)....................... 35,000
21,825 Sunshine Mining & Refining Co., expire 03/09/99.............................. 6,820
500 Hyperion Telecommunications, expire 04/01/01 (c)............................. 35,000
205 Wright Medical Technology, Inc., expire 06/30/03 (b)......................... 20,500
-------------
TOTAL WARRANTS - (identified cost $18,299)............................ 110,727
-------------
SHORT TERM - (13.57%)
$ 9,740,000 State Street Bank and Trust Company Repurchase Agreement, 5.75%,
04/01/98, dated 03/31/98, repurchase value of $9,741,556 (collateralized
by $9,900,000 par value U.S. Treasury Notes, 5.50%, 02/28/99, market
value $9,937,125) - (identified cost $9,740,000)............................. 9,740,000
-------------

TOTAL INVESTMENTS (identified cost $73,157,565) - (100.04%)(a)............... $ 71,827,460
LIABILITES LESS OTHER ASSETS - (0.04%)....................................... (30,766)
-------------
NET ASSETS - 100%............................................................ $ 71,796,694
=============
</TABLE>

.These securities are in default but have made partial payments.

..These securities are in default and are not currently paying interest or
dividends.

*Non-income producing security.

(a) Aggregate cost for Federal income tax purposes is $73,157,565.

(b) These securities are subject to Rule 144A. The Board of Directors of the
Fund has determined that there is sufficient liquidity in these securities to
realize current valuations. These securities amounted to $6,589,747 and 9.18%
of the Fund's total net assets as of March 31, 1998.

(d)Represents a step bond: a zero coupon bond that converts to a fixed or
variable interest rate at a designated future date.

At March 31, 1998, unrealized appreciation (depreciation) of securities for
Federal income tax purposes was as follows:

<TABLE>

<S> <C>
Unrealized appreciation ....................................................................... $ 3,641,552
Unrealized depreciation........................................................................ (4,971,657)
-----------
Net unrealized depreciation.................................................................. $(1,330,105)
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS

16
<PAGE>

<TABLE>

DAVIS HIGH INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
At March 31, 1998

<S> <C>
ASSETS:
Investments in securities, at value (including repurchase agreements of $9,740,000)
(identified cost $73,157,565) (See accompanying Schedule of Investments)............ $71,827,460
Cash ................................................................................... 45,289
Receivables:
Interest............................................................................ 1,341,901
Capital stock sold.................................................................. 537,045
Investments sold.................................................................... 8,851
--------------
Total assets................................................................... 73,760,546
--------------

LIABILITIES:
Payables:
Capital stock reacquired............................................................ 1,350,955
Investments purchased............................................................... 500,000
Accrued expenses.................................................................... 112,897
--------------
Total liabilities.............................................................. 1,963,852
--------------

NET ASSETS (NOTE 7).......................................................................... $ 71,796,694
==============

CLASS A SHARES
Net assets.............................................................................. $ 44,057,860
Shares outstanding...................................................................... 9,247,463
Net asset value and redemption price per share (net assets/shares outstanding).......... $ 4.76
==============
Maximum offering price per share (100/95.25 of $4.76)* $ 5.00
==============

CLASS B SHARES
Net assets.............................................................................. $ 21,623,725
Shares outstanding...................................................................... 4,573,035
Net asset value, offering and redemption price per share (net assets/shares outstanding) $ 4.73
==============

CLASS C SHARES
Net assets.............................................................................. $ 1,927,876
Shares outstanding...................................................................... 405,131
Net asset value, offering and redemption price per share (net assets/shares outstanding) $ 4.76
==============

CLASS Y SHARES
Net assets.............................................................................. $ 4,187,233
Shares outstanding...................................................................... 873,955
Net asset value, offering and redemption price per share (net assets/shares outstanding) $ 4.79
==============

NET ASSETS CONSIST OF:

Net unrealized depreciation of investments.............................................. $ (1,330,105)
Accumulated net realized loss on investments............................................ (17,435,169)
Paid-in capital......................................................................... 90,561,968
--------------
Net assets.......................................................................... $ 71,796,694
==============
</TABLE>

* On purchases of $100,000 or more, the offering price is reduced.

SEE NOTES TO FINANCIAL STATEMENTS

17
<PAGE>

<TABLE>

DAVIS HIGH INCOME FUND, INC.
STATEMENT OF OPERATIONS
For the year ended March 31, 1998

INVESTMENT INCOME:

Income:

Interest............................................................................ $ 5,441,917
---------------

Expenses:

Management fees (Note 3)............................................ $ 446,682
Custodian fees...................................................... 52,580
Transfer agent fees
Class A........................................................ 56,978
Class B........................................................ 15,852
Class C........................................................ 498
Class Y........................................................ 169
Audit fees.......................................................... 28,541
Legal fees.......................................................... 15,104
Accounting fees (Note 3)............................................ 13,001
Reports to shareholders............................................. 24,139
Directors' fees and expenses........................................ 23,231
Registration and filing fees (Note 3)............................... 54,467
Miscellaneous....................................................... 16,640
Payments under distribution plan (Note 4):
Class A........................................................ 101,590
Class B........................................................ 145,416
Class C........................................................ 10,355
-------------

Total expenses............................................................. 1,005,243
Fee reduction (Note 5) .................................................... (6,151)
---------------
Net expenses............................................................... 999,092
---------------
Net Investment Income.................................................. 4,442,825
===============

REALIZED AND UNREALIZED GAIN ON INVESTMENTS:

Net realized gain from investment transactions.......................................... 1,600,540
Net increase in unrealized appreciation of investments during the period................ 66,318
---------------
Net realized and unrealized gain on investments................................ 1,666,858
---------------
Net increase in net assets resulting from operations........................... $ 6,109,683
===============

</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

18
<PAGE>

<TABLE>

DAVIS HIGH INCOME FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS

FOR THE YEARS
OPERATIONS: ENDED MARCH 31,

1998 1997
---- ----
<S> <C> <C>

Net investment income............................................... $ 4,442,825 $ 4,771,887
Net realized gain (loss) from investment transactions......... 1,600,540 (452,398)
Net increase in unrealized appreciation (depreciation) of
investments................................................. 66,318 (260,076)
--------------- ---------------
Net increase in net assets resulting from operations..... 6,109,683 4,059,413

DISTRIBUTIONS TO SHAREHOLDERS FROM:

Net investment income
Class A....................................................... (3,217,912) (4,139,503)
Class B....................................................... (913,850) (632,384)
Class C....................................................... (60,594) -
Class Y....................................................... (250,469) -

Paid-in capital
Class A....................................................... (760,545) (752,105)
Class B....................................................... (214,746) (114,589)
Class C....................................................... (19,800) -
Class Y....................................................... (60,064) -

CAPITAL SHARE TRANSACTIONS (Note 7)................................... 13,070,923 (721,597)
--------------- ---------------

Total increase (decrease) in net assets 13,682,626 (2,300,765)

NET ASSETS:

Beginning of year................................................... 58,114,068 60,414,833
--------------- ---------------
End of year......................................................... $ 71,796,694 $ 58,114,068
=============== ===============

</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

19
<PAGE>

DAVIS HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
Year Ended March 31, 1998

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

The Fund is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company. Its 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 invests primarily in high yield, high risk, low rated and
unrated bonds commonly referred to as "junk bonds." Such securities are
speculative and subject to greater market fluctuations and risk of loss of
income and principal than higher rated bonds. The Fund offers shares in four
classes, Class A, Class B, Class C and Class Y. The Class A shares are sold
with a front-end sales charge, the Class B shares are sold at net asset value
and may be subject to a contingent deferred sales charge upon redemption and
the Class C shares are sold at net asset value and may be subject to a
contingent deferred sales charge upon redemption. Class Y shares are sold at
net asset value and are not subject to any contingent deferred sales charge.
Class Y shares are only available to certain qualified investors. Income,
expenses (other than those attributable to a specific class) and gains and
losses are allocated daily to each class of shares based upon the relative
proportion of net assets represented by each class. Operating expenses directly
attributable to a specific class are charged against the operations of that
class. All classes have identical rights with respect to voting (exclusive of
each Class' distribution arrangement), liquidation and distributions. The
following is a summary of significant accounting policies followed by the Fund
in the preparation of its financial statements.

SECURITY VALUATION.

Portfolio securities may be valued on the basis of prices provided by an
independent pricing service or broker when such prices are believed to reflect
the fair market value of such securities. (Pricing agents 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. If no quotations are available, securities will be valued at fair
value as determined in good faith by the Board of Directors. Short-term
obligations are valued at amortized cost, which approximates value.

FEDERAL INCOME TAXES.

It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
substantially all of its taxable income to shareholders. Therefore, no
provision for federal income or excise tax is required. At March 31, 1998, the
Fund had approximately $17,435,000 of capital loss carryovers available to
offset future capital gains, if any, of which $7,606,000, $4,382,000,
$1,409,000, $3,505,000, $81,000 and $452,000 expire in 1999, 2000, 2001, 2003,
2004 and 2005, respectively.

SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME.

Securities transactions are accounted for on the trade date (date the
order to buy or sell is executed) with realized gain or loss on the sale of
securities being determined based upon identified cost. Dividend income is
recorded on the ex-dividend date and interest income is recorded on the accrual
basis. Discounts and premiums on debt securities are amortized over the lives
of the respective securities in accordance with the requirements of the
Internal Revenue Code.

20
<PAGE>

DAVIS HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended March 31, 1998

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS.

Dividends and distributions to shareholders are recorded on the
ex-dividend date. The character of the distributions made during the year from
net investment income may differ from its ultimate characterization for federal
income tax purposes. Also, due to the timing of distributions, the fiscal year
in which amounts are distributed may differ from the fiscal year in which
income or gain was recorded by the Fund. The Fund adjusts the classification of
distributions to shareholders to reflect the differences between financial
statement amounts and distributions determined in accordance with income tax
regulations. During the year ended March 31, 1998, amounts have been
reclassified to reflect a decrease in accumulated net realized loss on
securities sold of $3,317,120 and a decrease in paid-in capital of $3,317,120.

USE OF ESTIMATES IN FINANCIAL STATEMENTS.

In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of income and expenses during the reporting period. Actual
results may differ from these estimates.

NOTE 2 - PURCHASES AND SALES OF SECURITIES.

Purchases and sales of investment securities (excluding short term
securities) during the year ended March 31, 1998, were $46,964,328 and
$41,005,026, respectively.

NOTE 3 - INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES.

The Fund pays advisory fees for investment management and advisory
services under a management agreement with Davis Selected Advisers, L.P. (the
"Adviser"). The management agreement provides for a fee at the annual rate of
0.70% of the first $250 million of average net assets of the Fund, 0.60% of the
next $250 million of average net assets of the Fund and 0.55% of average net
assets over $500 million.

The Adviser is paid for registering Fund shares for sale in various
states. The fee for the year ended March 31, 1998 amounted to $12,000. Boston
Financial Data Services is the Fund's primary transfer agent. The Adviser is
also paid for certain transfer agent services. The fee for these services for
the year ended March 31, 1998 amounted to $11,493. State Street Bank & Trust
Co. is the Fund's primary accounting provider. The Adviser is also paid for
certain accounting services. The fee for the year ended March 31, 1998 amounted
to $13,001. Certain directors and officers of the Fund are also directors and
officers of the general partner of Davis Selected Advisers, L.P.

Davis Selected Advisers-NY, Inc. ("DSA-NY"), a wholly-owned subsidiary
of the Adviser, acts as sub-adviser to the Fund. The Fund pays no fees directly
to DSA-NY.

Stamper Capital & Investments, Inc. ("Stamper") also acts as sub-adviser
of the Fund. Stamper manages the day-to-day investment operations for the Fund.
The Fund pays no fees directly to Stamper. Stamper receives from the Adviser a
percentage of the total annual investment advisory fees paid by the Fund to the
Adviser.

21
<PAGE>

DAVIS HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended March 31, 1998

NOTE 4 - DISTRIBUTION AND UNDERWRITING FEES

CLASS A SHARES

Class A shares of the Fund are sold at net asset value plus a sales
charge and are redeemed at net asset value (without a contingent deferred sales
charge).

During the year ended March 31, 1998, Davis Distributors, LLC (or its
predecessor, Davis Selected Advisers, L.P.), the Fund's Underwriter (the
"Underwriter" or "Distributor") received $207,166 from commissions earned on
sales of Class A shares of the Fund of which $32,473 was retained by the
Underwriter and the remaining $174,693 was reallowed to investment dealers. The
Underwriter paid the costs of prospectuses in excess of those required to be
filed as part of the Fund's registration statement, sales literature and other
expenses assumed or incurred by it in connection with such sales.

The Underwriter is reimbursed for amounts paid to dealers as a service
fee with respect to Class A shares sold by dealers which remain outstanding
during the period. The service fee is paid at the annual rate of 1/4 of 1% of
the average net assets maintained by the responsible dealers. The Underwriter
is not reimbursed for accounts for which the Underwriter pays no service fees
to other firms. The service fee for Class A shares of the Fund for the year
ended March 31, 1998 was $101,590.

CLASS B SHARES

Class B shares of the Fund are sold at net asset value and are redeemed
at net asset value less a contingent deferred sales charge if redeemed within
six years of purchase.

The Fund pays a distribution fee to reimburse the Distributor for
commission advances on the sale of the Fund's Class B shares. The National
Association of Securities Dealers, Inc., ("NASD") limits the percentage of the
Fund's average annual net assets attributable to Class B shares which may be
used to reimburse the Distributor. The limit is 1%, of which 0.75% may be used
to pay distribution expenses and 0.25% may be used to pay shareholder service
fees. The NASD rule also limits the aggregate amount the Fund may pay for
distribution-related services to 6.25% of gross sales since inception of the
Rule 12b-1 plan plus interest at 1% over the prime rate on unpaid amounts. The
Distributor intends to seek full payment (plus interest at prime plus 1%) of
distribution charges that exceed the 1% annual limit in some future period or
periods when the plan limits have not been reached.

For the year ended March 31, 1998, Class B shares of the Fund made
distribution plan payments which included distribution fees of $108,624 and
service fees of $36,792.

Commission advances by the Distributor for the year ended March 31, 1998
on the sale of Class B shares of the Fund amounted to $443,234, of which
$442,096 was reallowed to qualified selling dealers.

The Distributor intends to seek payment from Class B shares of the Fund
in the amount of $582,180, representing the cumulative commission advances by
the Distributor on the sale of the Fund's Class B shares, plus interest,
reduced by cumulative distribution fees paid by the Fund and cumulative
contingent deferred sales charge paid by redeeming shareholders. The Fund has
no contractual obligation to pay any such distribution charges and the amount,
if any, timing and condition of such payment are solely within the discretion
of the Directors who are not interested persons of the Fund or the Distributor.

22
<PAGE>

DAVIS HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended March 31, 1998

NOTE 4 - DISTRIBUTION AND UNDERWRITING FEES - (CONTINUED)

CLASS B SHARES - CONTINUED

A contingent deferred sales charge is imposed upon redemption of certain
Class B shares of the Fund within six years of the original purchase. The
charge is a declining percentage starting at 4% of the lesser of net asset
value of the shares redeemed or the total cost of such shares. For the year
ended March 31, 1998 the Distributor received contingent deferred sales charges
of $17,700 from redemptions of Class B shares of the Fund.

CLASS C SHARES

Class C shares of the Fund are sold at net asset value and are redeemed
at net asset value less a contingent deferred sales charge of 1% if redeemed
within one year of purchase. The Fund pays the Distributor 1% of the Fund's
average annual net assets attributable to Class C shares, of which 0.75% may be
used to pay distribution expenses and 0.25% may be used to pay shareholder
service fees. During the year ended March 31, 1998, Class C shares of the Fund
made distribution payments of $10,355.

NOTE 5 - CUSTODY FEES

Under an agreement with the custodian bank, custody fees are reduced by
credits for cash balances. Such reductions amounted to $6,151 during the year
ended March 31, 1998.

NOTE 6 - RESTRICTED AND ILLIQUID SECURITIES

Restricted securities are not registered under the Securities Act of
1933 and may have contractual restrictions on resale. They are valued under
methods approved by the Board of Directors as reflecting fair value. Securities
may be considered illiquid if they lack a readily available market or if
valuation has not changed for a certain period of time. The aggregate value of
restricted or illiquid securities is $1,867,005, or 2.60% of the Fund's total
net assets as of March 31, 1998. Information concerning restricted securities
is as follows:

<TABLE>
<CAPTION>
ACQUISITION COST VALUATION PER UNIT
SECURITY DATE PER UNIT AS OF MARCH 31, 1998
<S> <C> <C> <C>
New Almacs Inc., Sr. Sub. Notes,
11.50%, 11/18/04 06/14/95 $ 27.00 $ 5.50
San Jacinto Holdings Inc., Sr. Notes,
10.75%, 12/31/02 03/27/96 81.97 75.00
Simula Inc., Sr. Conv. Sub. Notes,
Series C, 10.00%, 09/15/99 09/17/96 100.00 103.00
Technical Equipment Leasing Corp.,
Jr. Sub. Deb., Series A,
18.375%, 04/01/96 06/15/84 100.00 5.00
</TABLE>

23
<PAGE>

DAVIS HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended March 31, 1998

NOTE 7 - CAPITAL STOCK

At March 31, 1998, there were 1,000,000,000 shares of capital stock ($0.05 par
value per share) authorized. Transactions in capital stock were as follows:

<TABLE>
<CAPTION>
CLASS A FOR THE YEAR ENDED
MARCH 31, 1998
---------------------------
SHARES AMOUNT
<S> <C> <C>
Shares subscribed............................................................. 2,266,192 $ 10,770,163
Shares issued to shareholders in connection with reinvestment of distributions 509,944 2,413,253
------------- ------------
2,776,136 13,183,416
Shares reacquired............................................................. (3,686,564) (17,452,719)
------------- ------------
Net decrease.......................................................... (910,428) $ (4,269,303)
============== ============

FOR THE YEAR ENDED
MARCH 31, 1997
---------------------------
SHARES AMOUNT
Shares subscribed............................................................. 1,237,463 $ 5,873,114
Shares issued to shareholders in connection with reinvestment of distributions 647,205 3,066,164
------------- ------------
1,884,668 8,939,278
Shares reacquired............................................................. (2,841,857) (13,495,219)
------------- ------------
Net decrease.......................................................... (957,189) $ (4,555,941)
============= ============

CLASS B FOR THE YEAR ENDED
MARCH 31, 1998
---------------------------
SHARES AMOUNT
Shares subscribed............................................................. 3,357,235 $ 15,840,614
Shares issued to shareholders in connection with reinvestment of distributions 114,872 540,264
------------- ------------
3,472,107 16,380,878
Shares reacquired............................................................. (1,082,952) (5,110,090)
------------- ------------
Net increase.......................................................... 2,389,155 $ 11,270,788
============= ============

FOR THE YEAR ENDED
MARCH 31, 1997
---------------------------
SHARES AMOUNT
Shares subscribed............................................................. 1,230,183 $ 5,801,708
Shares issued to shareholders in connection with reinvestment of distributions 76,289 358,617
------------- ------------
1,306,472 6,160,325
Shares reacquired............................................................. (495,300) (2,332,982)
------------- ------------
Net increase.......................................................... 811,172 $ 3,827,343
============= ============
</TABLE>

24
<PAGE>

DAVIS HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended March 31, 1998

NOTE 7 - CAPITAL STOCK - (CONTINUED)

<TABLE>
<CAPTION>
CLASS C FOR THE YEAR ENDED
MARCH 31, 1998
--------------------------
SHARES AMOUNT
<S> <C> <C>
Shares subscribed ............................................................ 823,575 $ 3,941,412
Shares issued to shareholders in connection with reinvestment of distributions 6,474 30,758
----------- -----------
830,049 3,972,170
Shares reacquired ............................................................ (424,918) (2,023,211)
----------- -----------
Net increase ......................................................... 405,131 $ 1,948,959
=========== ===========
</TABLE>

<TABLE>
<CAPTION>
CLASS Y FOR THE YEAR ENDED
MARCH 31, 1998
--------------------------
SHARES AMOUNT
<S> <C> <C>
Shares subscribed ............................................................ 809,065 $ 3,818,471
Shares issued to shareholders in connection with reinvestment of distributions 64,889 309,128
----------- -----------
873,954 4,127,599
Shares reacquired ............................................................ (1,476) (7,120)
----------- -----------
Net increase ......................................................... 872,478 $ 4,120,479
=========== ===========
</TABLE>

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
MARCH 31, 1997
---------------------
SHARES AMOUNT
<S> <C> <C>
Shares subscribed ............................................................ 1,477 $7,001
Shares issued to shareholders in connection with reinvestment of distributions -- --
------ ------
1,477 7,001
Shares reacquired ............................................................ -- --
------ ------
Net increase ......................................................... 1,477 $7,001
====== ======
</TABLE>

25
<PAGE>

DAVIS HIGH INCOME FUND, INC.
FINANCIAL HIGHLIGHTS

The following represents selected data for a share of capital stock outstanding
throughout each period.

CLASS A
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ............................. $ 4.71 $ 4.84 $ 4.86 $ 5.14 $ 5.18
---------- ---------- ---------- ---------- ----------

Income From Investment Operations
Net Investment Income .......................... 0.34 0.39 0.43 0.46 0.50
Net Gains or Losses on
Securities (both realized
and unrealized) ............................... 0.13 (0.06) 0.03 (0.24) 0.06
---------- ---------- ---------- ---------- ----------
Total From Investment
Operations ............................... 0.47 0.33 0.46 0.22 0.56

Less Distributions
Dividends (from net
investment income) ............................ (0.34) (0.39) (0.43) (0.46) (0.50)
Returns of Capital .............................. (0.08) (0.07) (0.05) (0.04) .
Distribution in Excess of
Realized Gains ................................ . . . . (0.10)
---------- ---------- ---------- ---------- ----------
Total Distributions ......................... (0.42) (0.46) (0.48) (0.50) (0.60)
---------- ---------- ---------- ---------- ----------
Net Asset Value,
End of Period ................................... $ 4.76 $ 4.71 $ 4.84 $ 4.86 $ 5.14
========== ========== ========== ========== ==========

Total Return (1) ................................... 10.40% 7.08% 9.93% 4.69% 11.29%

Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) ........ $ 44,058 $ 47,890 $ 53,816 $ 56,405 $ 64,663

Ratio of Expenses to
Average Net Assets ............................ 1.40%(2) 1.48%(2) 1.51% 1.53% 1.48%
Ratio of Net Income to
Average Net Assets ............................ 7.11% 8.13% 8.92% 9.49% 9.31%

Portfolio Turnover Rate (3) ..................... 71.54% 66.10% 118.34% 98.94% 98.31%
</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 in the total
returns.

(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.

26
<PAGE>

DAVIS HIGH INCOME FUND, INC.
FINANCIAL HIGHLIGHTS

The following represents selected data for a share of capital stock outstanding
throughout each period.

CLASS B

<TABLE>
<CAPTION>
DECEMBER 5, 1994
(COMMENCEMENT
OF OPERATIONS)
YEAR ENDED THROUGH
MARCH 31, 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 ................................ 0.10 (0.07) 0.00 0.05
---------- ---------- --------- ---------
Securities (both realized and unrealized)
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) 0.00
---------- ---------- --------- ---------
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 $ 1,900 $ 6,599

Ratio of Expenses to Average Net Assets ............. 2.16%(2) 2.16%(2) 2.30%(2) 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

27
<PAGE>

DAVIS HIGH INCOME FUND, INC.
FINANCIAL HIGHLIGHTS

The following represents selected data for a share of capital stock outstanding
throughout each period.

CLASS C

<TABLE>
<CAPTION>
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

28
<PAGE>

DAVIS HIGH INCOME FUND, INC.
FINANCIAL HIGHLIGHTS

The following represents selected data for a share of capital stock outstanding
throughout each period.

CLASS Y
<TABLE>
<CAPTION>
MARCH 20, 1997
(COMMENCEMENT OF OPERATIONS)
YEAR
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

29
<PAGE>

DAVIS HIGH INCOME FUND, INC.
INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors
of Davis High Income Fund, Inc.

We have audited the accompanying statement of assets and liabilities of
Davis High Income Fund, Inc., including the schedule of investments, as of
March 31, 1998, and the related statement of operations, the statement of
changes in net assets, and the financial highlights for the year then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit. The statement
of changes in net assets for the year ended March 31, 1997 and the financial
highlights for the four years ended March 31, 1997 were audited by other
auditors whose report, dated May 2, 1997, expressed an unqualified opinion on
this information.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
March 31, 1998, by correspondence with the custodian and brokers; and where
confirmations were not received from brokers, we performed other auditing
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Davis High Income Fund, Inc. as of March 31, 1998, the results of
its operations, the changes in its net assets, and the financial highlights for
the year then ended, in conformity with generally accepted accounting
principles.

KPMG PEAT MARWICK LLP

Denver, Colorado
May 1, 1998

30
<PAGE>

DAVIS HIGH INCOME FUND, INC.
124 East Marcy Street, Santa Fe, New Mexico 87501

DIRECTORS Officers

Wesley E. Bass, Jr. Jeremy H. Biggs
Jeremy H. Biggs Chairman
Marc P. Blum Shelby M.C. Davis
Andrew A. Davis President
Christopher C. Davis Kenneth C. Eich
Eugene M. Feinblatt Vice President
Jerry D. Geist Eileen R. Street
D. James Guzy Vice President, Treasurer
G. Bernard Hamilton & Assistant Secretary
LeRoy E. Hoffberger Thomas D. Tays
Laurence W. Levine Vice President & Secretary
Christian R. Sonne Andrew A. Davis
Vice President
Christopher C. Davis
Vice President
Carolyn H. Spolidoro
Vice President
Sharra L. Reed
Assistant
Treasurer
&
Assistant
Secretary

INVESTMENT ADVISER
Davis Selected Advisers, L.P.
124 East Marcy Street
Santa Fe, New Mexico 87501

DISTRIBUTOR
Davis Distributors, LLC
124 East Marcy Street
Santa Fe, New Mexico 87501

TRANSFER AGENT & CUSTODIAN
State Street Bank & Trust Company
c/o The Davis Funds
P. O. Box 8406
Boston, MA 02266-8406

AUDITORS
KPMG Peat Marwick LLP
707 Seventeenth Street, Suite 2300
Denver, CO 80202

COUNSEL
D'Ancona & Pflaum
30 North LaSalle Street
Chicago, Illinois 60602

31
<PAGE>

FOR MORE INFORMATION ABOUT DAVIS HIGH INCOME FUND, INCLUDING MANAGEMENT FEE,
CHARGES AND EXPENSES, SEE THE CURRENT PROSPECTUS WHICH MUST PRECEDE OR
ACCOMPANY THIS REPORT.