DAVIS TAX FREE HIGH INCOME FUND INC, 485BPOS, 1997-08-15

DAVIS TAX FREE HIGH INCOME FUND INC
485BPOS, 1997-08-15

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<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933

REGISTRATION NO. 2-74216

POST-EFFECTIVE AMENDMENT NO. 24

AND

REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940

REGISTRATION NO. 811-3270

AMENDMENT NO. 25

DAVIS TAX-FREE HIGH INCOME FUND, INC.

124 East Marcy Street
Santa Fe, New Mexico 87501
(1-505-820-3000)

Agent For Service: Samuel P. Ynzunza, Esq.
124 East Marcy Street
Santa Fe, New Mexico 87501

Copies To: Sheldon R. Stein
D'Ancona & Pflaum
30 North LaSalle Street
Suite 2900
Chicago, Illinois 60602
(1-312-580-2014)

It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
X on August 15, 1997, pursuant to paragraph (b)(ix)
- ---------------
60 days after filing pursuant to paragraph (a)
on , pursuant to paragraph (a)
---- ---------------
of Rule 485

In accordance with Section 24(f) of the Investment Company Act of 1940 and
Rule 24f-2 thereunder, Registrant has previously elected to register an
indefinite number of shares of its Common Stock. The 24f-2 Notice was filed
on or about November 26, 1996.

<PAGE> 2
FORM N-1A
DAVIS TAX-FREE HIGH INCOME FUND, INC.- CLASS A AND CLASS B SHARES

POST-EFFECTIVE AMENDMENT NO. 24 TO REGISTRATION STATEMENT
NO. 2-74216 UNDER THE SECURITIES ACT OF 1933 AND AMENDMENT
NO. 25 UNDER THE INVESTMENT COMPANY ACT OF 1940 TO
REGISTRATION STATEMENT NO. 811-3270.
<TABLE>
CROSS REFERENCE SHEET
---------------------
<CAPTION>
N-1A
ITEM NO. PROSPECTUS CAPTION OR PLACEMENT
-------- -------------------------------
<C> <S>
1 Front Cover
2 Summary (includes expense table)
3 Financial Highlights; Performance Data
4 Summary; Investment Objective and Policies
5 Adviser, Sub-Adviser and Distributor; Distribution
Plans; Purchase of Shares; Summary
5A Mangement's Discussion of Fund Performance
(contained in 1996 Annual Report)
6 Summary; Shareholder Inquiries; Dividends and
Distributions; Federal Income Taxes; Fund Shares
7 Purchase of Shares; Exchange of Shares; Determining
the Price of Shares
8 Redemption of Shares
9 (Not Applicable)

PART B CAPTION OR PLACEMENT
---------------------------

10 Cover Page
11 Table of Contents
12 (Not Applicable)
13 Fundamental Investment Restrictions; Municipal
Obligations; Temporary Investments; Portfolio
Transactions
14 Directors and Officers
15 Certain Shareholders of the Funds
16 Investment Advisory Services; Custodian; Auditors;
Determining the Price of Shares; Distribution of
Fund Shares
17 Portfolio Transactions
18 <F*>
19 Determining the Price of Shares; Reduction of Class
A Sales Charge
20 <F*>
21 <F*>
22 Performance Data
23 Financial Statements for the year ended
September 30, 1996 are incorporated by reference
from the 1996 Annual Report to Shareholders.

<FN>
--------------------
<F*>INCLUDED IN PROSPECTUS
</TABLE>

<PAGE> 3

FORM N-1A
DAVIS TAX-FREE HIGH INCOME FUND, INC. - CLASS Y SHARES

POST-EFFECTIVE AMENDMENT NO. 24 TO REGISTRATION STATEMENT
NO. 2-74216 UNDER THE SECURITIES ACT OF 1933 AND AMENDMENT
NO. 25 UNDER THE INVESTMENT COMPANY ACT OF 1940 TO
REGISTRATION STATEMENT NO. 811-3270.
<TABLE>
CROSS REFERENCE SHEET
---------------------
<CAPTION>
N-1A
ITEM NO. PROSPECTUS CAPTION OR PLACEMENT
-------- -------------------------------
<C> <S>
1 Front Cover
2 Summary (includes expense table)
3 Financial Highlights; Performance Data
4 Summary; Investment Objective and Policies
5 Adviser, Sub-Adviser and Distributor;
Purchase of Shares; Summary
5A Mangement's Discussion of Fund Performance
(contained in 1996 Annual Report)
6 Summary; Shareholder Inquiries; Dividends and
Distributions; Federal Income Taxes; Fund Shares
7 Purchase of Shares; Exchange of Shares; Determining
the Price of Shares
8 Redemption of Shares
9 (Not Applicable)

PART B CAPTION OR PLACEMENT
---------------------------

<PAGE> 4

PROSPECTUS FEBRUARY 1, 1997 AS REVISED AUGUST 15, 1997
CLASS A, CLASS B AND CLASS C

DAVIS TAX-FREE HIGH INCOME FUND, INC.

124 EAST MARCY STREET
SANTA FE, NEW MEXICO 87501
1-800-279-0279

<TABLE>
<S> <C>
Minimum Investment Plans Available
Initial Purchase $1,000 Exchange Privilege
Subsequent Investment $25 Automatic Investment Plan
Automatic Withdrawals Plan
</TABLE>

Davis Tax-Free High Income Fund, Inc. (the "Fund") seeks to provide
current income free from federal income tax by investing in debt obligations
issued by state and local governments or their agencies or instrumentalities
("municipal obligations"). The Fund may invest up to 100% of its assets in
lower rated bonds, commonly known as "junk bonds," which entail greater
risks, including default risks, than those found in higher rated securities.
Investors should carefully consider these risks before investing. 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. Shares of a particular class may be
exchanged for shares of the same class offered by another Davis Fund. 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 for 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 February 1, 1997 as revised August
15, 1997, has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. A copy of this Statement 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> 5

<TABLE>
===============================================================================================================================

TABLE OF CONTENTS

<CAPTION>
PAGE
<S> <C>
Summary................................................................................................................ 2

Financial Highlights................................................................................................... 5

Investment Objectives and Policies..................................................................................... 7

Adviser, Sub-Advisers and Distributor.................................................................................. 13

Distribution Plans..................................................................................................... 14

Purchase of Shares..................................................................................................... 15

Telephone Privilege.................................................................................................... 21

Exchange of Shares..................................................................................................... 21

Redemption of Shares................................................................................................... 22

Determining the Price of Shares........................................................................................ 24

Dividends and Distributions............................................................................................ 25

Federal Income Taxes................................................................................................... 26

Fund Shares............................................................................................................ 27

Performance Data....................................................................................................... 27

Shareholder Inquiries.................................................................................................. 28

Appendix -- Quality Ratings of Debt Securities......................................................................... 29

===============================================================================================================================
</TABLE>

<PAGE> 6
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,
Class B and C shares of the Fund will bear directly or indirectly. The
information is based on the Fund's fiscal period ended March 31, 1997. You can
refer to "Adviser, Sub-Advisers 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%<F*> 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....................... 0.65% 0.65% 0.65%
12b-1 fees<F**>....................... 0.25% 0.99% 1.00%
Other expenses........................ 0.50% 0.49% 0.49%
------- ------- -------
Total Fund operating expenses......... 1.40% 2.13% 2.14%

<FN>
- -------------
<F*> On certain Class A shares purchased after December 1, 1996 without a
sales load and redeemed during the first year after purchase, there is a
0.75% deferred sales charge.

<F**> 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.
</TABLE>

Example:

You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return and (except as noted 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................................. $52 $87 $124 N/A

Class B (assuming no redemption at end
of period)............................ $22 $67 $114 N/A

Class C................................. $22 $67 $115 $247

Class C (assuming no redemption at end
of period)............................ $22 $67 $115 $247
</TABLE>

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.

2
<PAGE> 7

THE FUND. Davis Tax-Free High Income Fund, Inc. is an open-end,
diversified management investment company incorporated in Maryland in 1981 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 after December 1, 1996 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 of
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 such class. The
purpose and function of the deferred sales charge and distribution services 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 Purchases
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 Board
of Directors 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".

INVESTMENT OBJECTIVE. The Fund's investment objective is to provide
current income free from federal income tax by investing in municipal
obligations. The Fund may invest in bonds below investment grade ("junk
bonds"). Such securities are speculative and subject to greater market
fluctuations and risk of loss of income and principal than higher rated bonds.
There is no assurance that the investment objective of the Fund will be
achieved. See "Investment Objectives and Policies".

INVESTMENT ADVISER, SUB-ADVISERS AND DISTRIBUTOR. Davis Selected Advisers,
L.P., (the "Adviser") is the investment adviser for the Fund. Davis
Distributors, LLC (the "Distributor") serves as the principal underwriter for
the Fund. Stamper Capital & Investments, Inc. (the "Sub-Adviser") is employed
by the Adviser to provide day to day management of the Fund's portfolio. For
more information, see "Adviser, Sub-Advisers and Distributor". The Adviser
has also entered into a Sub Advisory Agreement with its wholly owned
subsidiary,

3
<PAGE> 8
Davis Selected Advisers-NY, Inc. ("DSA-NY"). DSA-NY performs research and
other services for the Fund on behalf of the Adviser. For more information see
"Adviser, Sub-Advisers 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. 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. There is no charge for this service. See
"Purchase of Shares--Alternative Purchase Arrangements" for Class Y
eligibility requirements".

SHAREHOLDER SERVICES. Questions regarding the Fund or your account may be
directed to Davis Selected Advisers, L.P. at 1-800-279-0279 or to your sales
representative. Written inquiries may be directed to State Street Bank & Trust
Co., c/o The Davis Funds, P.O. Box 8406, Boston, MA, 02266-8406. During drastic
market conditions, the Distributor may experience difficulty 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 8:00 a.m. and 4:00 p.m. Mountain Time.

4
<PAGE> 9

FINANCIAL HIGHLIGHTS

The following table provides you with information about the financial
history of the Fund's Class A and B shares. The table expresses the information
in terms of a single Class A or B share for the respective periods presented
and is supplementary information to the Fund's financial statements which are
included in the September 30, 1996 Annual Report to Shareholders. Such reports
may be obtained by writing or calling the Fund. The Fund's financial statements
and financial highlights for the five years ended September 30, 1996, have been
audited by the Fund's independent certified public accountants, whose opinion
thereon is contained in the Annual Report. No information is presented for the
Class C shares because no shares were outstanding as of September 30, 1996.

<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 1997 YEAR ENDED TEN MONTHS ENDED
(UNAUDITED) SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
---------------- ------------------ -------------------

<S> <C> <C> <C>
Net Asset Value, Beginning of Period........................ $ 9.15 $ 9.19 $ 8.90
------- ------- -------

Income (Loss) From Investment Operations
- ----------------------------------------
Net Investment Income..................................... .30 .61 .40
Net Gains (Losses) on Securities (both realized and
unrealized)............................................. .02 (.05) .30
------- ------- -------
Total From Investment Operations...................... .32 .56 .70
------- ------- -------

Less Distributions
- ------------------
Dividends (from net investment income).................... (.29) (.54) (.40)
Distributions from realized gains from investment
transactions............................................ (.02) (.06) (.01)
------- ------- -------
Total Distributions................................... (.31) (.60) (.41)
------- ------- -------
Net Asset Value, End of Period.............................. $ 9.16 $ 9.15 $ 9.19
======= ======= =======
Total Return<F1>............................................ 3.47% 6.33% 7.93%
- ----------------

Ratios/Supplemental Data
- ------------------------
Net Assets, End of Period (000 omitted)................... $50,492 $44,828 $45,461
Ratio of Expenses to Average Net Assets................... 1.40%<F*> 1.36% 1.43%<F*>
Ratio of Net Income to Average Net Assets................. 6.74%<F*> 6.64% 5.95%<F*>
Portfolio Turnover Rate................................... 55.40% 106.55% 127.80%

<FN>
- -------------
<F1> Sales charges are not reflected in calculation.

<F*> Annualized
</TABLE>

5
<PAGE> 10

<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED
MARCH 31, YEAR ENDED SEPTEMBER 30,
1997 ------------------------------------------------------------------------------------------------------
(UNAUDITED) 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value,
Beginning
of
Period..... $ 9.12 $ 9.17 $ 9.09 $ 9.65 $ 9.49 $ 9.41 $ 9.30 $ 9.58 $ 9.57 $ 9.30 $ 10.09
-------- -------- -------- -------- -------- -------- ------- ------- ------- ------- -------

Income (Loss)
- -------------
From
----
Investment
----------
Operations
-----------

Net
Investment
Income.... .27 .54 .48 .44 .54 .54 .67 .59 .55 .61 .66

Net Gains or
Losses on
Securities
(both
realized
and
unrealized) .01 (.05) .10 (.18) .29 .27 .22 (.09) .24 .51 (.59)
-------- -------- -------- -------- -------- -------- ------- ------- ------- ------- -------

Total
From
Invest-
ment
Opera-
tions.. .28 .49 .58 .26 .83 .81 .89 .50 .79 1.12 .07
-------- -------- -------- -------- -------- -------- ------- ------- ------- ------- -------

Less
- ----
Distributions
- -------------

Dividends
(from net
investment
income)... (.25) (.48) (.48) (.44) (.54) (.54) (.67) (.59) (.55) (.61) (.64)

Distribution
from
realized
gains from
investment
trans-
actions (.02) (.06) (.01) (.28) -- -- -- -- -- (.04) --

Distribution
in excess
of net
investment
income.... -- -- (.01) (.07) (.10) (.12) (.11) (.12) (.12) (.12) (.12)

Tax Return
of capital
distribu-
tions..... -- -- -- (.03) (.03) (.07) -- (.07) (.11) (.08) (.07)
-------- -------- -------- -------- -------- -------- ------- ------- ------- ------- -------

Total
Distri-
butions (.27) (.54) (.50) (.82) (.67) (.73) (.78) (.78) (.78) (.85) (.86)
-------- -------- -------- -------- -------- -------- ------- ------- ------- ------- -------

Net Asset
Value, End
of
Period..... $ 9.13 $ 9.12 $ 9.17 $ 9.09 $ 9.65 $ 9.49 $ 9.41 $ 9.30 $ 9.58 $ 9.57 $ 9.30
======== ======== ======== ======== ======== ======== ======= ======= ======= ======= =======

Total
- -----
Return<F1>.. 3.10% 5.51% 6.64% 2.81% 9.10% 8.89% 10.09% 5.37% 8.63% 12.54% 0.66%
----------

Ratios/
- -------
Supplemental
------------
Data
----

Net Assets,
End of
Period
(000
omitted).. $107,797 $109,488 $126,727 $188,874 $164,018 $124,227 $91,718 $80,283 $71,339 $58,871 $51,450

Ratio of
Expenses to
Average Net
Assets.... 2.13%<F*> 2.10% 2.14% 2.07% 2.26% 2.41% 2.41% 2.44% 2.39% 2.46% 2.42%

Ratio of
Net Income
to Average
Net Assets 5.97%<F*> 5.89% 5.37% 4.59% 5.50% 5.53% 7.13% 6.08% 5.63% 6.36% 6.56%

Portfolio
Turnover
Rate...... 55.40% 106.55% 127.80% 113.46% 107.80% 47.31% 55.07% 28.77% 22.85% 33.72% 64.39%

<FN>
- --------------------
<F1> Contingent deferred sales charges are not reflected in calculation.

<F*> Annualized
</TABLE>

6
<PAGE> 11

INVESTMENT OBJECTIVE AND POLICIES

GENERAL. The Fund's investment objective is to provide current income free
from federal income tax by investing in municipal obligations. In seeking to
achieve this investment objective, the Fund will normally have at least 80% of
its net assets invested in municipal obligations without limitation as to
quality ratings, maturity ranges or types of issuers. The Sub-Adviser will
select particular municipal obligations for the Fund if, in its view after
analysis, the increased yield offered, regardless of published ratings, is
sufficient to compensate for the level of assumed risk. The Fund may invest up
to 100% of its assets in high yield, high risk obligations. See "High Yield,
High Risk Debt Securities" and "Portfolio Composition," below. The average
maturity of the Fund's portfolio will vary; however, it is anticipated that a
significant portion of the portfolio will be invested in long-term obligations
of 20 years or more since such securities generally produce higher yields than
shorter-term obligations. A more complete description of bond ratings is
contained in the Appendix. The Fund may invest in shares of investment
companies primarily investing in short-term municipal obligations, but will not
do so if it would cause more than 10% of its total assets to be invested in
such shares. Such other investment companies usually have their own management
costs or fees and the Fund's Adviser earns its regular fee on such assets.

If you are subject to the Federal alternative minimum tax, you should note
that the Fund may invest up to 20% of its total assets in municipal obligations
issued to finance private activities. The interest from these investments is a
tax preference item for purposes of the alternative minimum tax.

MUNICIPAL OBLIGATIONS. Municipal obligations are bonds or notes issued by
a state or local governmental entity to obtain funds for various public
purposes or facilities such as airports, bridges, highways, housing, hospitals,
schools, streets, water and sewer systems, mass transit and utility and power
facilities. They are also used to refund outstanding obligations or for general
operating expenses. In addition, they may be used for the construction or
purchase of privately operated facilities deemed to be of public purpose and
benefit.

The two general classifications of municipal bonds are "general
obligation" bonds and "revenue" bonds. General obligation bonds are secured
by the issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. They are usually paid from general revenues of the
issuing governmental entity. Revenue bonds are usually payable only out of a
specific revenue source rather than from general revenues and ordinarily are
not backed by the faith, credit or general taxing power of the issuing
governmental entity.

The Fund may invest in municipal bonds and certificates of participation
that constitute involvement in lease obligations or installment purchase
contract obligations (hereafter collectively called "lease obligations") of
municipal authorities or entities. Although lease obligations do not constitute
general obligations of the municipality for which the municipality's taxing
power is pledged, a lease obligation is ordinarily backed by the municipality's
covenant to budget for, appropriate and make the payments due under the lease
obligation. However, certain lease obligations contain "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Although "non-appropriation" lease
obligations are secured by the leased property, the disposition of the property
in the event of foreclosure might prove difficult. The Fund will seek to
minimize these risks by not investing more than 10% of its investment assets in
lease obligations that contain "non-appropriation" clauses.

7
<PAGE> 12
of their issuers (or other revenue source) to meet the interest and principal
payments, which can also result in rating changes. Such values will also change
in response to changes in the interest rates payable on new issues. As
discussed below, portfolio values will also change in response to changes in
the level of interest rates.

Municipal obligations, like other marketable obligations, fluctuate in
price. Payments of interest and principal are dependent upon the ability of the
issuers (or other revenue source) to meet their obligations. Payments on
general obligation bonds are dependent on the tax base of the issuing
governmental entity. Payments on revenue bonds, unless guaranteed by a taxing
authority, are dependent upon the revenues from a specific project or facility
or payments from a private company which operates the facility.

The principal and interest on revenue bonds for private facilities are
typically paid out of rents or other specified payments made to the issuing
governmental entity by the company using or operating the facilities. The most
common type of these obligations are industrial revenue bonds and pollution
control revenue bonds. Industrial revenue bonds are issued by governmental
entities to provide financing aid to communities to locate privately operated
industrial plants or community facilities such as hospitals, hotels, business
or residential complexes, convention halls or sport complexes. Pollution
control revenue bonds are issued to provide funding for air, water and solids
pollution control systems for privately operated industrial or commercial
facilities. Sometimes, the funds for payment of such obligations come solely
from revenue generated by operation of the facility. Absent a guarantee by the
issuing governmental entity, revenue bonds for private facilities do not
represent a pledge of credit, general revenues or taxing powers of the issuing
governmental entity and the private company operating the facility is the sole
source of payment of the obligation. This type of revenue bond frequently
provides a higher rate of return than other municipal obligations but may
entail greater risk than an obligation which is guaranteed by a governmental
unit with taxing power. Federal income tax laws place substantial limitations
on industrial revenue bonds, and particularly those "specified private
activity bonds" issued after August 7, 1986. See "Federal Income Taxes."
However, the Fund's management does not believe that these limitations will
impair the Fund's ability to purchase or sell bonds in accordance with the
Fund's objectives and policies.

Subject to the restrictions described below, the Fund's portfolio may be
invested in new issue bonds and in bonds whose interest payments are from
revenues of similar projects (such as utilities or hospitals) or whose issuers
share the same geographic location. As a result, the Fund's portfolio may be
more susceptible to similar economic, political or regulatory developments than
would a portfolio of bonds with a greater variety of issuers. This may result
in greater market fluctuations in the Fund's share price. The Fund may purchase
up to 50% of the outstanding debt obligations of an issuer. Some of the
securities which the Fund may hold may not have an established market and such
lack of liquidity could cause the Fund difficulty at times in selling these
securities at favorable prices.

The market value of fixed income securities will generally be affected by
changes in the level of rates. Increases in interest rates tend to reduce the
market value of fixed income investments and declines in interest rates tend to
increase their value. Moreover, debt issues with longer maturities, which tend
to produce higher yields, are subject to potentially greater capital
appreciation or depreciation than securities with shorter maturities.
Fluctuations in the market value of the Fund's portfolio securities subsequent
to their acquisition will not affect cash income from such securities but will
be reflected in the Fund's net asset value. In addition, the future earning
power of an obligor and its ability to service debt may affect the market price
of higher yielding debt.

8
<PAGE> 13

The average maturity and the mix of investments of the Fund will vary as
the Sub-Adviser seeks to provide a high level of income considering the
available alternatives in the market. 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 obligor and inversely with current interest
rate levels, the net asset value of its shares will fluctuate. Consequently,
there can be no assurance that the Fund's objectives can be achieved or that
its shareholders will be protected from the risk of loss inherent in security
ownership. The Sub-Adviser attempts to adjust investments as considered
advisable in view of prevailing or anticipated market conditions as perceived
by the Sub-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.

There are market and investment risks with any security and the value of an
investment in the Fund will fluctuate over time. In seeking to achieve its
investment objective, the Fund will invest in fixed income securities based on
the Sub-Adviser's analysis without relying on any published ratings. The Fund
will invest in a particular security if, in the Sub-Adviser's view, the
increased yield offered, regardless of published ratings, is sufficient to
compensate for the assumed risk. Since investments will be based upon the
Sub-Adviser's analysis rather than on the basis of published ratings,
achievement of the Fund's goals may depend more upon the abilities of the
Sub-Adviser than would otherwise be the case. Investments in lower rated or
non-rated securities, while generally providing greater income and opportunity
for gain than investments in higher rated securities, entail greater risk of
loss of income and principal. See "High Yield, High Risk Debt Securities"
below for a discussion of various risk factors related to high yield, high risk
fixed income securities.

HIGH YIELD, HIGH RISK DEBT SECURITIES. As discussed above, the Fund may
invest in low rated securities offering high current income. Such securities
will ordinarily be in the lower rating categories of recognized rating
agencies, including securities rated BBB or lower by Standard & Poor's
Corporation ("S&P") or Baa or lower by Moody's Investors Service, Inc.
("Moody's") or, if unrated, deemed by the Sub-Adviser to be of an equivalent
rating. These lower-rated securities are considered speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of
the obligation and generally will involve more credit risk than securities in
the higher rating categories. Securities rated BB or lower by S&P or Ba or
lower by Moody's are below investment grade and are referred to in the
financial community as "junk bonds". A brief description of the bond ratings
of these two services is contained herein under "Portfolio Composition." A
more complete description is contained in the Appendix.

The investment philosophy of the Fund with respect to high yield, high risk
bonds is based on the premise that over the long term a diversified portfolio
of high yield fixed income securities should, even taking into account possible
losses, provide a higher net return than that achievable on a portfolio of
higher rated securities. The Fund seeks to achieve a high yield while reducing
relative risk through (a) diversification, (b) credit analysis of the obligors
by the Sub-Adviser, and (c) monitoring and seeking to anticipate changes and
trends in the economy and financial markets that might affect the prices of
portfolio securities. Ratings assigned by credit agencies do not evaluate
market risks. The Sub-Adviser's judgment as to the "reasonableness" of the
risk involved in any particular investment will be a function of its experience
in managing fixed income investments and its evaluation of general economic and
financial conditions. This includes analysis and evaluations of a specific
guaranteeing entity's business and management, cash flow, earnings coverage of
interest and dividends, ability to operate under adverse economic conditions,
fair market value of the obligor's assets; and of such other considerations as
the Sub-Adviser may deem appropriate. The Sub-Adviser, while seeking to
maximize current yield, will monitor current developments with respect to
portfolio securities, potential investments and broad

9
<PAGE> 14
trends in the economy. Achievement of the Fund's investment objective will be
more dependent upon the Sub-Adviser's credit analysis than would be the case
for funds predominantly investing in higher rated bonds. In some circumstances,
defensive strategies may be implemented to preserve or enhance capital even at
the sacrifice of current yield. There is, however, no assurance that the Fund's
objectives will be achieved or that the Fund's approach to risk management will
protect the shareholders against loss.

The market values of such high yield, high risk municipal securities tend
to reflect individual developments of the guaranteeing entity underlying the
issue to a greater extent than do higher rated securities, which react to a
greater extent to fluctuations in the general level of interest rates. Such
securities also tend to be more sensitive to economic and industry conditions
than are higher rated securities. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis regarding individual lower rated
bonds or the high yield market, may depress the prices for such securities.
Factors such as the aforementioned which may adversely impact the market value
of high yield, high risk securities and could adversely impact the Fund's net
asset value.

An economic downturn or significant increase in interest rates is likely to
have a negative affect on the high yield, high risk bond market and
consequently on the value of these bonds. In an economic downturn, issuers may
not have sufficient revenues to meet their principal and interest payment
obligations.

The risk of loss due to default is significantly greater for the holders of
high yield, high risk bonds. The costs associated with recovering principal and
interest once a security has defaulted may impact the return to holders of the
security. If the Fund experiences unexpectedly large net redemptions, it may be
forced to sell such bonds without regard to the investment merits of such
sales. This could decrease the Fund's rate of return. The Fund has not
experienced this problem to date.

The Fund may have difficulty disposing of certain high yield, high risk
bonds because there may be a thin trading market for such bonds. Because not
all dealers maintain markets in all high yield, high risk bonds, the Fund
anticipates that such bonds could be sold only to a limited number of dealers
or institutional investors. The lack of a liquid secondary market may have an
adverse impact on market price and the Fund's ability to dispose of particular
issues and may also make it more difficult for the Fund to obtain accurate
market quotations or valuations for purposes of valuing the Fund's assets. The
Fund has a policy of utilizing a professional pricing service which has
experience in pricing such securities which are difficult to price so as to
obtain prices reflecting the market as accurately as possible. To the extent
that the Fund purchases illiquid or restricted bonds, it may incur special
securities registration responsibilities, liabilities and costs, and liquidity
and valuation difficulties relating to such bonds.

Bonds may be subject to redemption or call provisions. If an issuer
exercises these provisions when investment rates are declining, the Fund would
be likely to replace the bond with a lower yielding bond, resulting in a
decreased return. Zero coupon and pay-in-kind bonds involve special
considerations. The market prices of these securities are generally more
volatile than the market prices of securities that pay interest periodically
and are likely to respond to changes in interest rates to a greater degree than
do securities paying interest currently that have similar maturities and credit
quality. There is the 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. If the
issuer defaults, the Fund may obtain no return at all on its investment. Zero
coupon bonds generate interest income before receipt of actual cash payments.
In order to distribute such income, the Fund may have to sell portfolio
securities under disadvantageous circumstances.

10
<PAGE> 15

PORTFOLIO COMPOSITION. The table below reflects the Fund's portfolio
composition by quality rating calculated on the basis of the average weighted
ratings of all bonds held at September 30, 1996. 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. 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.

<TABLE>
COMPOSITION OF THE FUND'S PORTFOLIO BY QUALITY RATING AS
A PERCENTAGE OF TOTAL NET ASSETS AT SEPTEMBER 30, 1996

<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................................. 23.70% 0.29% Highest quality
Aa/AA................................... 11.91% 0.19% High quality
A/A..................................... 14.39% 0.76% Upper medium grade
Baa/BBB................................. 10.37% 4.76% Medium grade
Ba/BB................................... 10.28% 12.04% Some speculative elements
B/B..................................... 2.97% 4.31% Speculative
Caa/CCC................................. 0.00% 0.00% More speculative
Ca, C/CC, C, D.......................... 0.00% 0.00% Very speculative, may be in default
Not Rated............................... 22.35% 0.00% Not rated by Moody's or S&P
Short-term Investments.................. 4.03% 0.00%
------ -----
100.00% 22.35%
</TABLE>

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.

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.

11
<PAGE> 16
net assets to be invested in illiquid securities. In making this determination,
the 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 Sub-Adviser and, if as a result of changed conditions, it is
determined that a Rule 144A Security is 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 the Fund's investments in illiquid securities if qualified
institutional buyers are unwilling to purchase such securities.

PORTFOLIO TRANSACTIONS. The Adviser and Sub-Advisers 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-Advisers believe such security will no longer continue to provide a
relatively high current yield or involves undue risk, or when the Adviser or
Sub-Advisers 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-Advisers 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.
The Fund's portfolio turnover rate is set forth in "Financial Highlights".

"WHEN ISSUED" SECURITIES. Municipal obligations may at times be
purchased or sold on a delayed delivery basis or on a when-issued basis. These
transactions arise when securities are purchased or sold by the Fund with
payment and delivery taking place in the future. No payment is made until
delivery is made which may be up to 60 days after purchase. If delivery of the
obligation does not take place, no purchase will result and the transaction
will be terminated. Such transactions are considered to involve more risk than
immediate cash transactions. As a matter of non-fundamental policy, any
investment on a when issued or delayed delivery basis will not be made if such
investment would cause more than 5% of the value of the Fund's total assets to
be invested in this type of investment.

BORROWING. The Fund may borrow money from banks for temporary or emergency
purposes in an amount not exceeding 10% of the value of its total assets
(excluding the amount borrowed) and may pledge an amount not exceeding 15% of
its total assets (excluding the amount borrowed) to secure such borrowing.

FUNDAMENTAL AND NON-FUNDAMENTAL POLICIES. The Fund has adopted certain
investment restrictions which are described in the Statement of Additional
Information. These restrictions and the Fund's investment objectives may not be
changed unless authorized by a vote of the shareholders. All other investment
policies are non-fundamental and may be changed without shareholder approval.

12
<PAGE> 17

ADVISER, SUB-ADVISERS AND DISTRIBUTOR

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. As discussed below,
the Adviser has hired Stamper Capital & Investments, Inc. (the "Sub-Adviser")
as sub-adviser for the Fund. Davis Selected Advisers-NY, Inc., ("DSA-NY") a
wholly owned subsidiary of the Adviser, performs research and other services
for the Fund on behalf of the Adviser under a Sub-Advisory Agreement with the
Adviser. This Agreement does not affect the services provided by Stamper
Capital & Investments. The Adviser also acts as investment adviser for Davis
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 0.65% on the first
$250 million of average net assets, 0.60% on the next $250 million of average
net assets and 0.55% on average net assets over $500 million. This fee is
higher than that of most municipal bond funds. 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.

Stamper Capital & Investments, Inc. (the "Sub-Adviser"), is Sub-Adviser
for the Fund and manages the Fund's day to day investment operations. The Fund
pays no fees directly to the Sub-Adviser. The Sub-Adviser receives from the
Adviser a fee equal to 30% of the fees received by the Adviser from the Fund.
All the fees paid to Stamper Capital are paid by the Adviser and not the Fund.
The Sub-Adviser also provides investment advisory services to Davis High Income
Fund, Inc., employee benefit plans, institutions, trusts and individuals. The
Sub-Adviser's offices are located at 380 Foam Street, Suite 205, Monterey, CA
93940. B. Clark Stamper is the controlling shareholder of the Sub-Adviser.

PORTFOLIO MANAGEMENT. B. Clark Stamper has been the primary portfolio
manager of the Fund since June, 1990. He was a Senior Vice President of the
Adviser's General Partner and a Vice President of all of the Davis Funds. He
has been the portfolio manager of Davis High Income Fund, Inc., (a high-yield
corporate bond fund) since June, 1990. He was the portfolio manager of the
Davis Government Bond Fund (formerly, Bond Fund) of Davis Series, Inc. (a U.S.
Government Securities fund) from June, 1990 until April 30, 1995. He was the
portfolio manager of Selected Capital Preservation Trust's U.S. Government
Income Fund from May 1, 1993 until April 30, 1995.

The distributor is reimbursed by the Fund for some of its distribution
expenses through Distribution Plans which have been adopted with respect to
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. See "Distribution Plans" below for more detail.

13
<PAGE> 18

DISTRIBUTION PLANS

The Fund bears some of the costs of selling its shares under Distribution
Plans adopted with respect to its Class A, Class B and Class C shares pursuant
to 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 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, or the Adviser's General Partner. 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 September 30, 1996, the Distributor paid $2,181,621 in
commissions with respect to the sale of Fund shares 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 an initial commission and service and
maintenance fees to its salespersons and other firms for selling new Class C
shares, shareholder servicing and maintenance of shareholder accounts.

14
<PAGE> 19

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 Plans 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 a majority of the outstanding voting shares
of the respective class. Payments pursuant to a Distribution Plan are included
in the operating expenses of the class.

As described above, 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 dealer's registered
representatives, advertising or equipment, or to defray the expenses of dealer
meetings. 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. You should enclose a check (minimum $1,000)
payable as indicated on the Form. All purchases made by check should be in U.S.
dollars 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

15
<PAGE> 20
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 TAX-FREE HIGH INCOME FUND, INC.
Shareholder Name,
Shareholder Account Number,
Federal Routing Number 011000028,
DDA Number 9904-606-2

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. 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 Withdrawal Plan.
Instead, shares purchased are automatically credited to an account maintained
for you on the books of the Fund by State Street. You 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 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 at the end of 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, 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 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 Fund at 1-800-279-0279.

Depending on the amount of the purchase and the anticipated length of time
of 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-

16
<PAGE> 21
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.

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
CHARGE AS CONCESSION TO
SALES CHARGE APPROXIMATE YOUR DEALER AS
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%<F*>

<FN>
- -------------
<F*> On purchases of $1 million or more, the investor pays no front-end sales
charge but a contingent deferred sales charge, of 0.75% may be imposed if
shares purchased after December 1, 1996 are redeemed within the first year
after purchase. The Distributor may pay the financial service firm a
commission during the first year after purchase at an annual rate as
follows:
</TABLE>

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

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.
</TABLE>

There are a number of ways to reduce the 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.

17
<PAGE> 22

(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 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
back of this prospectus.

(iv) Rights of Accumulation: If you notify your dealer or the Distributor,
you may include the Class A shares you already own (valued at maximum offering
price) in calculating the price applicable to your current purchase.

(v) 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 Fund, Davis High Income Fund, Inc. 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.

(vi) 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-Advisers 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 of 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 adviser or financial planner on the books 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.
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.

18
<PAGE> 23
after purchase. However, on Class B shares of the Fund which were (i) purchased
prior to December 1, 1994 or (ii) 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
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 or exchange fee. (Conversion of pre-December 1, 1994 Class B shares
represented by stock certificates will require the return of the stock
certificates to the Fund's transfer agent). 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 interests 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 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 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
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 contingent deferred sales charge is
imposed when you redeem amounts derived from (a) increases in the value of
shares 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 contingent deferred sales
charge will be redeemed first. Thereafter, shares held the longest will be the
first to be redeemed.

19
<PAGE> 24

The contingent deferred sales charge (CDSC) on Class A, B and C Shares that
are subject to 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
withdrawal 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
withdrawal 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-Advisers 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 shares held in such account
falls below an established minimum amount; (g) certain other exceptions related
to defined contribution plans as described in the Statement of Additional
Information.

AUTOMATIC INVESTMENT PLAN. Shareholders may arrange for automatic monthly
investing whereby State Street will be authorized to initiate a debit to the
shareholder's bank account of a specific amount (minimum $25) each month which
will be used to purchase Fund shares. 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 3rd and 28th day of each
month. After each automatic investment, the shareholder will receive a
transaction confirmation and the debit should be reflected on the shareholder's
next bank statement. The plan may be terminated at any time by the shareholder.
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 a fund
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 60 or more days' notice. If you would like to participate in
this program, you may use the appropriate designation on the Application Form.

20
<PAGE> 25

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".

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
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.

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 to which any Class B or Class C
shares are subject 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 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.

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 Davis Fund's applicable
offering price. If you would like to participate in this program, you may use
the appropriate designation on the Application Form.

21
<PAGE> 26

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 a shareholder 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 a 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 such notice as is required by applicable regulatory
authorities (currently 60 days).

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 note under "Telephone Privilege" which is also
applicable to exchanges.

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 of them
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 Company 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 signature guarantee is also required in the event that
any modification to the Company's application is made after the account is
established, including the selection of the Expedited Redemption Privilege. In
some situations such as where corporations, trust 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.

22
<PAGE> 27

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
such redemption delay by paying for your shares with a certified or cashier's
check or 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 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 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.

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 the redemption 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 single 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 your call. Payments 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 where 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.

23
<PAGE> 28

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
Fund shares will remain subject to an escrow or segregated account to which any
of the exchanged shares were subject. If you utilize this program using Class B
or Class C shares, any applicable contingent deferred sales charges 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. Call
or write the Fund if you want further information on the Automatic Withdrawals
Plan.

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 of or all 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 CDSC assessed on Class B or Class C
shares will be returned to the account. Class B or Class C 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. See
"Federal Income Taxes".

DETERMINING THE PRICE OF SHARES

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
number of total outstanding shares. 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
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.

24
<PAGE> 29

The net asset value per share is determined as of the earlier of the close
of the exchange or 4:00 p.m. Eastern Time on each day the New York Stock
Exchange is open. 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. If the purchase order
or redemption request is placed with your dealer, then the applicable price is
normally computed as of 4:00 p.m. Eastern Time on the day the dealer receives
the order, provided that the dealer receives the order before 4:00 p.m. Eastern
Time. Otherwise, the applicable price is the next determined net asset value.
It is the responsibility of your dealer to promptly forward purchase and
redemption orders to the Distributor. 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."

DIVIDENDS AND DISTRIBUTIONS

Income dividends are declared and distributed monthly and distributions of
net realized capital gains, if any, will normally be paid annually. To provide
stable distributions for its shareholders, the Fund at times may continue to
pay distributions based on expectations of future investment results 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. Because Class B and Class C shares incur higher
distribution services fees and bear certain other expenses, such shares will
have a higher expense ratio and will pay correspondingly lower dividends than
Class A shares.

You will receive quarterly confirmation statements for dividends declared
and shares purchased through reinvestment of dividends. Dividends declared in
December to shareholders of record in December, and paid by the end of January
of the subsequent year will be treated as received by the shareholder in the
earlier year. You will receive confirmations after each purchase other than
through dividend reinvestment, and after each redemption. Information
concerning distributions will be mailed to shareholders annually. Distributions
will be classified in terms of non-taxable return of capital, federal
tax-exempt income and taxable income. Since some states may not tax their
residents on the portion of the Fund's distributions representing income from
governmental entities in such states, information about state sources of
tax-exempt distributions will also be reported annually.

Shareholders have the option to receive all dividends and distributions in
cash, to have all dividends and distributions reinvested, or to have income
dividends and short-term capital gain distributions paid in cash and long-term
capital gain distributions reinvested. Reinvestment of all dividends and
distributions is automatic for accounts utilizing the Automatic Withdrawal
Plan. The reinvestment of dividends and distributions is made at net asset
value (without any initial or contingent deferred sales charge) on the dividend
payment date. Upon receipt of the second dividend check which has been returned
as undeliverable, undelivered dividends will be invested in additional shares
at the current net asset value and the account designated as a dividend
reinvestment account.

25
<PAGE> 30

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 effects of
federal, state and local tax laws on an investment in the Fund.

The Fund intends to qualify, as it has since its inception, 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 required distribution of the
Fund exceeds 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.

Dividends paid to shareholders from interest earned by the Fund from
municipal obligations and from exempt interest dividends received by the Fund
from investment companies investing in tax-exempt securities are not includible
in a shareholder's gross income for federal income tax purposes, although a
portion of such dividends may be subject to the alternative minimum tax as
discussed below. Distributions of net interest income derived from other
sources, if any, and of net short-term capital gains realized by the Fund will
be taxable to shareholders as ordinary income. Net long-term capital gain
distributions, if any, will be taxable to shareholders as long-term capital
gain regardless of how long the shares of the Fund have been held.
Distributions will be treated the same for tax purposes whether received in
cash or in additional shares of the Fund.

Interest paid on "specified private activity bonds" issued after August
7, 1986, as defined in the Code, although exempt from federal income tax, will
constitute a tax preference item for purposes of both the individual and the
corporate alternative minimum tax. If the Fund were to own any such bonds, it
is expected that a portion of the exempt income distributed by the Fund would
be treated as a preference item for shareholders based upon the proportionate
share of the interest from the specified private activity bonds received by the
Fund. In the case of a corporate shareholder, the alternative minimum tax base
may also include a portion of all the other tax-exempt income. Corporate
shareholders are advised to consult their own tax advisers with respect to the
corporate alternative minimum tax.

A gain or loss for tax purposes may be realized on the redemption of
shares. If a shareholder realizes a loss on the sale or exchange of any shares
held for six months or less and during such period the shareholder received any
exempt-interest dividends, then such loss is disallowed to the extent of the
amount of the exempt-interest dividends. If a shareholder realizes a loss on
the sale or exchange of any shares held for six months or less and during such
period the shareholder received any capital gains dividends, then such loss (to
the extent it is allowed) is treated as a long-term capital loss to the extent
of such capital gain dividends. Interest on indebtedness incurred by
shareholders to purchase or carry shares of the Fund will not be deductible for
federal income tax purposes. 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.

The Fund may not be an appropriate investment vehicle for entities which
are "substantial users" (or "related persons" thereto) of facilities
financed by "industrial development bonds" as such terms are defined in the
Internal Revenue Code. Such entities (or persons) should consult their own tax
advisers before investing.

26
<PAGE> 31

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 irrespective of the class or subclass
thereof, (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 Fund 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 outstanding
shares of the Fund.

PERFORMANCE DATA

From time to time, the Fund may advertise information regarding its
performance. Such information may consist of "yield," "total return,"
"taxable equivalent yield," "distribution rate," "annualized current
distribution rate" and "tax equivalent distribution rate." Each of these
performance figures is based upon historical results and is not intended to
indicate future performance, and, except for "distribution rate,"
"annualized current distribution rate" and "tax equivalent distribution
rate" is standardized in accordance with regulations of the Securities and
Exchange Commission ("SEC"). All such performance will be calculated
separately for each class of shares.

"Yield" is computed by dividing the net investment income per share (as
defined in applicable SEC regulations) 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.

"Taxable Equivalent Yield". The yield necessary from a taxable
investment, which on an after-tax basis is equal to the yield of a tax free
investment, based on the maximum federal income tax bracket for a given period.

27
<PAGE> 32
rate which is not tax-exempt. All 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 the 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 an initial
amount invested at the beginning of the period to the ending redeemable value
of the investment. In the event the Fund advertises its total return, the
stated periods will generally be one year, five years and ten years, but the
Fund may also advertise total return for longer or shorter periods, including
the life of the Fund. The computation of total return assumes reinvestment of
all dividends and distributions, and deduction of all charges and expenses.

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 may quote information from publications such as The Wall Street
Journal, Money Magazine, Forbes, Barron's, Newsweek, Chicago Tribune, The New
York Times, U.S. News and World Report, USA Today, Fortune, Investors Business
Daily, Financial World, Smart Money, No-Load Fund Investor and Kiplinger's and
may cite information from Morningstar, Value Line or the Investment Company
Institute. The Fund may compare its performance to the performance of mutual
fund indexes as reported by Lipper Analytical Services, Inc. ("Lipper") or
CDA Investment Technologies, Inc., two widely recognized independent mutual
fund reporting services.

For more information on the Fund's performance, see "Performance Data" in
the Statement of Additional Information. Please remember that performance
information is based upon historical results and is not necessarily indicative
of future performance.

The Fund's 1996 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.

28
<PAGE> 33

APPENDIX

QUALITY RATINGS OF DEBT SECURITIES

MOODY'S MUNICIPAL AND 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 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.

29
<PAGE> 34

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.

30
<PAGE> 35

MOODY'S MUNICIPAL NOTE RATINGS

MIG 1 -- The best quality, with strong protection provided by established
cash flows, superior liquidity support or demonstrated broad-based access to
the market for refinancing.

MIG 2 -- High quality, with margins of protection ample although not so
large as in the preceding group.

MIG 3 -- Favorable quality, with all security elements accounted for but
lacking the undeniable strength of the preceding grades. Liquidity and cash
flow protection may be narrow and market access for refinancing is likely to be
less well established.

STANDARD & POOR'S MUNICIPAL NOTE RATINGS

SP-1 -- Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics are given a
(+) designation.

SP-2 -- Satisfactory capacity to pay principal and interest.

SP-3 -- Speculative capacity to pay principal and interest.

MOODY'S COMMERCIAL PAPER RATINGS

Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers: Prime-1 (superior capacity), Prime-2 (strong capacity) and
Prime-3 (acceptable capacity). In assigning ratings to an issuer which
represents that its commercial paper obligations are supported by the credit of
another entity or entities, Moody's evaluates the financial strength of the
indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total
rating assessment.

STANDARD & POOR'S COMMERCIAL PAPER RATINGS

The S&P commercial paper rating is a current assessment of the likelihood
of timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from `A' for the highest
quality to `D' for the lowest. Issues assigned an `A' rating are regarded as
having the greatest capacity for timely payment. Within the `A' category, the
numbers 1, 2 and 3 indicate relative degrees of safety. The addition of a plus
sign to the category A-1 denotes that the issue is determined to possess
overwhelming safety characteristics.

31
<PAGE> 36

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

NOTES

32
<PAGE> 37
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 adviser, 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.

33
<PAGE> 38

EXPEDITED REDEMPTION PRIVILEGE

/ / If you wish the Expedited Redemption Privilege please check the box to the
left and complete the following information.

I (we) hereby authorize State Street Bank and Trust Company, Davis Selected
Advisers, L.P., Davis Distributors, LLC, and/or the Davis Funds to act upon
instructions received by telephone or telegraph, believed by them to be
genuine, and to redeem shares in my (our) account in any of the Davis Funds
and to wire the proceeds of such redemption to the predesignated bank
listed below. I (we) hereby agree that neither State Street Bank and Trust
Company, nor Davis Selected Advisers, L.P., nor Davis Distributors, LLC nor
the Davis Funds nor any of their officers or employees, will be liable for
any loss, liability, cost or expense for acting upon such instructions.

<TABLE>
<S> <C>
- ------------------------------------------------------------- -------------------------------------------------------------
Signature of Shareholder Signature of Co-Shareholder

- ------------------------------------------------------------- -------------------------------------------------------------
Name of Commercial Bank (Title of Account at Bank)

- ------------------------------------------------------------- -------------------------------------------------------------
(Street) (Account Number at Bank)

- ------------------------------------------------------------- -------------------------------------------------------------
(City) (State) (Zip) (ABA/Transit Routing Number)
</TABLE>

34
<PAGE> 39

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

NOTES

35
<PAGE> 40
===============================================================================

NOTES

36
<PAGE> 41

PROSPECTUS FEBRUARY 1, 1997
CLASS Y SHARES AS REVISED AUGUST 15, 1997

DAVIS TAX-FREE HIGH INCOME 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

Davis Tax-Free High Income Fund, Inc. (the "Fund") seeks to provide
current income free from federal income tax by investing in debt obligations
issued by state and local governments or their agencies or instrumentalities
("municipal obligations"). THE FUND MAY INVEST UP TO 100% OF ITS
ASSETS IN LOWER RATED BONDS, COMMONLY KNOWN AS "JUNK BONDS," WHICH
ENTAIL GREATER RISKS, INCLUDING DEFAULT RISKS, THAN THOSE FOUND IN
HIGHER RATED SECURITIES. Investors should carefully consider these risks
before investing. 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. 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 February 1, 1997 as revised August 15, 1997, has
been filed with the Securities and Exchange Commission and is incorporated
herein by reference. A copy of this Statement 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.

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> 42

<TABLE>
TABLE OF CONTENTS

<CAPTION>
PAGE
<S> <C>
Summary 2
Financial Highlights 3
Investment Objectives and Policies 4
Adviser, Sub-Advisers 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 13
Federal Income Taxes 13
Fund Shares 14
Performance Data 15
Shareholder Inquiries 16
Appendix - Quality Ratings of Debt Securities 16
</TABLE>

<PAGE> 43

SUMMARY

FUND EXPENSES. The following table is intended to assist you in
understanding the various costs and expenses that an investor in the Y shares
of the Fund will bear directly or indirectly. Because the Y shares were not
offered prior to September 1, 1996, the information is based on the expenses
of the Class A shares for the Fund's fiscal year ended September 30, 1996.
THE INFORMATION CONCERNING "OTHER EXPENSES" IS ESTIMATED FOR THE
FIRST FULL FISCAL YEAR THAT THE CLASS Y SHARES ARE OFFERED.
Expenses have been restated to give effect to the reduction in management fees
which took place on May 1, 1996. Expenses have also been restated to give
effect to the elimination of 12b-1 fees and the reduction of transfer agent
fees for Class Y shares. You can refer to "Adviser, Sub-Advisers 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 0.65%
12b-1 fees 0.00%
Other expenses 0.40%
-----
Total Fund operating expenses 1.05%
</TABLE>

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:

<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class Y $11 $33 $58 $128
</TABLE>

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.

<PAGE> 44

THE FUND. Davis Tax-Free High Income Fund, Inc. is an open-end,
diversified management investment company incorporated in Maryland in 1981 and
is registered under the Investment Company Act of 1940.

The Fund offers four classes of shares. Class A, Class B and Class 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 ("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 fee based program, sponsored and
maintained by a registered broker-dealer approved by the Distributor ("Wrap
Program Investors").

INVESTMENT ADVISER, SUB-ADVISERS AND DISTRIBUTOR. Davis Selected
Advisers, L.P., (the "Adviser") is the investment adviser for the Fund. Davis
Distributors, LLC (the "Distributor") serves as the principal underwriter for
the Fund. Stamper Capital & Investments, Inc. (the "Sub-Adviser") is employed
by the Adviser to provide day to day management of the Fund's portfolio. The
Adviser has also entered into a Sub-Advisory Agreement with its wholly-owned
subsidiary, Davis Selected Advisers - NY, Inc. ("DSA-NY"). DSA-NY performs
research and other services for the Fund on behalf of the Adviser. For more
information see "Adviser, Sub-Advisers 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 and distributed 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. There is no charge for
this service.

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 &
Trust Co., c/o The Davis Funds, P.O. Box 8406, Boston, MA 02266-8406. During
drastic market conditions, the Distributor may experience difficulty 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 8:00 a.m. and 4:00 p.m. Mountain Time.

<PAGE> 45

FINANCIAL HIGHLIGHTS

The following financial highlights are derived from the financial
statements of the Fund and have been audited by Tait, Weller and Baker,
independent auditors. The table expresses the information in terms of a
single Class A share for the respective periods presented and is supplementary
information to the Fund's financial statements which are included in the
September 30, 1996 Annual Report to Shareholders. Such Reports may be
obtained by writing or calling the Fund. The Fund's financial statements and
financial highlights for the five years ended September 30, 1996, have been
audited by the Fund's independent certified public accountants, whose opinion
thereon is contained in the Annual Report.

CLASS A
SIX MONTHS ENDED YEAR ENDED TEN MONTHS ENDED
MARCH 31, 1997 SEPTEMBER 30, SEPTEMBER 30,

(UNAUDITED) 1996 1995
----------- ---- ----
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 9.15 $ 9.19 $ 8.90
------- ------- -------

Income (Loss) From Investment Operations
- ----------------------------------------

Net Investment Income .30 .61 .40

Net Gains (Losses) on Securities
(both realized and unrealized) .02 (.05) .30
------- ------- -------

Total From Investment Operations .32 .56 .70
------- ------- -------

Less Distributions
- ------------------

Dividends (from net investment income) (.29) (.54) (.40)

Distributions from realized gains
from investment transactions (.02) (.06) (.01)
------- ------- -------

Total Distributions (.31) (.60) (.41)
------- ------- -------

Net Asset Value, End of Period $ 9.16 $ 9.15 $ 9.19
======= ======= =======

Total Return 3.47% 6.33% 7.93%
- ------------

Ratios/Supplemental Data
- ------------------------

Net Assets, End of Period (000 omitted) $50,492 $44,828 $45,451

Ratio of Expenses to Average Net Assets 1.40%<F*> 1.36% 1.43%<F*>

Ratio of Net Income to Average Net Assets 6.74%<F*> 6.64% 5.95%<F*>

Portfolio Turnover Rate 55.40% 106.55% 127.80%

<FN>
<F*> Annualized.
</TABLE>

<PAGE> 46

INVESTMENT OBJECTIVE AND POLICIES

GENERAL. The Fund's investment objective is to provide current income
free from federal income tax by investing in municipal obligations. In
seeking to achieve this investment objective, the Fund will normally have at
least 80% of its net assets invested in municipal obligations without
limitation as to quality ratings, maturity ranges or types of issuers. The
Sub-Adviser will select particular municipal obligations for the Fund if, in
its view after analysis, the increased yield offered, regardless of published
ratings, is sufficient to compensate for the level of assumed risk. The Fund
may invest up to 100% of its assets in high yield, high risk obligations. See
"High Yield, High Risk Debt Securities" and "Portfolio Composition," below.
The average maturity of the Fund's portfolio will vary; however, it is
anticipated that a significant portion of the portfolio will be invested in
long-term obligations of 20 years or more since such securities generally
produce higher yields than shorter-term obligations. A more complete
description of bond ratings is contained in the Appendix. The Fund may invest
in shares of investment companies primarily investing in short-term municipal
obligations, but will not do so if it would cause more than 10% of its total
assets to be invested in such shares. Such other investment companies usually
have their own management costs or fees and the Fund's Adviser earns its
regular fee on such assets.

If you are subject to the Federal alternative minimum tax, you should
note that the Fund may invest up to 20% of its total assets in municipal
obligations issued to finance private activities. The interest from these
investments is a tax preference item for purposes of the alternative minimum
tax.

MUNICIPAL OBLIGATIONS. Municipal obligations are bonds or notes
issued by a state or local governmental entity to obtain funds for various
public purposes or facilities such as airports, bridges, highways, housing,
hospitals, schools, streets, water and sewer systems, mass transit and utility
and power facilities. They are also used to refund outstanding obligations or
for general operating expenses. In addition, they may be used for the
construction or purchase of privately operated facilities deemed to be of
public purpose and benefit.

<PAGE> 47

The two general classifications of municipal bonds are "general
obligation" bonds and "revenue" bonds. General obligation bonds are secured
by the issuer's pledge of its faith, credit and taxing power for the payment
of principal and interest. They are usually paid from general revenues of the
issuing governmental entity. Revenue bonds are usually payable only out of a
specific revenue source rather than from general revenues and ordinarily are
not backed by the faith, credit or general taxing power of the issuing
governmental entity.

The Fund may invest in municipal bonds and certificates of participation
that constitute involvement in lease obligations or installment purchase
contract obligations (hereafter collectively called "lease obligations") of
municipal authorities or entities. Although lease obligations do not
constitute general obligations of the municipality for which the
municipality's taxing power is pledged, a lease obligation is ordinarily
backed by the municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property, the
disposition of the property in the event of foreclosure might prove difficult.
The Fund will seek to minimize these risks by not investing more than 10% of
its investment assets in lease obligations that contain "non-appropriation"
clauses.

Yields on municipal obligations are dependent on many factors, including
interest rate conditions, general conditions of the municipal bond market,
size of a particular offering, maturity of the obligation and rating of the
issue, if any. The value of outstanding obligations will vary as a result of
changing evaluations of the ability of their issuers (or other revenue source)
to meet the interest and principal payments, which can also result in rating
changes. Such values will also change in response to changes in the interest
rates payable on new issues. As discussed below, portfolio values will also
change in response to changes in the level of interest rates.

Municipal obligations, like other marketable obligations, fluctuate in
price. Payments of interest and principal are dependent upon the ability of
the issuers (or other revenue source) to meet their obligations. Payments on
general obligation bonds are dependent on the tax base of the issuing
governmental entity. Payments on revenue bonds, unless guaranteed by a taxing
authority, are dependent upon the revenues from a specific project or facility
or payments from a private company which operates the facility.

The principal and interest on revenue bonds for private facilities are
typically paid out of rents or other specified payments made to the issuing
governmental entity by the company using or operating the facilities. The
most common type of these obligations are industrial revenue bonds and
pollution control revenue bonds. Industrial revenue bonds are issued by
governmental entities to provide financing aid to communities to locate
privately operated industrial plants or community facilities such as
hospitals, hotels, business or residential complexes, convention halls or
sport complexes. Pollution control revenue bonds are issued to provide
funding for air, water and solids pollution control systems for privately
operated industrial or commercial facilities. Sometimes, the funds for
payment of such obligations come solely from revenue generated by operation of
the facility. Absent a guarantee by the issuing governmental entity, revenue
bonds for private facilities do not represent a pledge of credit, general
revenues or taxing powers of the issuing governmental entity and the private
company operating the facility is the sole source of payment of the
obligation. This type of revenue bond frequently provides a higher rate of
return than other municipal obligations but may entail greater risk than an
obligation which is guaranteed by a governmental unit with taxing power.
Federal income tax laws place substantial limitations on industrial revenue
bonds, and particularly those "specified private activity bonds" issued after
August 7, 1986. See "Federal Income Taxes." However, the Fund's management
does not believe that these limitations will impair the Fund's ability to
purchase or sell bonds in accordance with the Fund's objectives and policies.

<PAGE> 48

Subject to the restrictions described below, the Fund's portfolio may be
invested in new issue bonds and in bonds whose interest payments are from
revenues of similar projects (such as utilities or hospitals) or whose issuers
share the same geographic location. As a result, the Fund's portfolio may be
more susceptible to similar economic, political or regulatory developments
than would a portfolio of bonds with a greater variety of issuers. This may
result in greater market fluctuations in the Fund's share price. The Fund may
purchase up to 50% of the outstanding debt obligations of an issuer. Some of
the securities which the Fund may hold may not have an established market and
such lack of liquidity could cause the Fund difficulty at times in selling
these securities at favorable prices.

The market value of fixed income securities will generally be affected
by changes in the level of rates. Increases in interest rates tend to reduce
the market value of fixed income investments and declines in interest rates
tend to increase their value. Moreover, debt issues with longer maturities,
which tend to produce higher yields, are subject to potentially greater
capital appreciation or depreciation than securities with shorter maturities.
Fluctuations in the market value of the Fund's portfolio securities subsequent
to their acquisition will not affect cash income from such securities but will
be reflected in the Fund's net asset value. In addition, the future earning
power of an obligor and its ability to service debt may affect the market
price of higher yielding debt.

The average maturity and the mix of investments of the Fund will vary as
the Sub-Adviser seeks to provide a high level of income considering the
available alternatives in the market. 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 obligor and inversely with current interest
rate levels, the net asset value of its shares will fluctuate. Consequently,
there can be no assurance that the Fund's objectives can be achieved or that
its shareholders will be protected from the risk of loss inherent in security
ownership. An investment in the Fund may not constitute a complete investment
program and may not be appropriate for all investors or for short-term
investing. The Sub-Adviser attempts to adjust investments as considered
advisable in view of prevailing or anticipated market conditions as perceived
by the Sub-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.

There are market and investment risks with any security and the value of
an investment in the Fund will fluctuate over time. In seeking to achieve its
investment objective, the Fund will invest in fixed income securities based on
the Sub-Adviser's analysis without relying on any published ratings. The Fund
will invest in a particular security if, in the Sub-Adviser's view, the
increased yield offered, regardless of published ratings, is sufficient to
compensate for the assumed risk. Since investments will be based upon the
Sub-Adviser's analysis rather than on the basis of published ratings,
achievement of the Fund's goals may depend more upon the abilities of the
Sub-Adviser than would otherwise be the case. Investments in lower rated or
non-rated securities, while generally providing greater income and opportunity
for gain than investments in higher rated securities, entail greater risk of
loss of income and principal. See "High Yield, High Risk Debt Securities"
below for a discussion of various risk factors related to high yield, high
risk fixed income securities.

<PAGE> 49

HIGH YIELD, HIGH RISK DEBT SECURITIES. As discussed above, the
Fund may invest in low rated securities offering high current income. Such
securities will ordinarily be in the lower rating categories of recognized
rating agencies, including securities rated BBB or lower by Standard & Poor's
Corporation ("S&P") or Baa or lower by Moody's Investors Service, Inc.
("Moody's") or, if unrated, deemed by the Sub-Adviser to be of an equivalent
rating. These lower-rated securities are considered speculative with respect
to capacity to pay interest and repay principal in accordance with the terms
of the obligation and generally will involve more credit risk than securities
in the higher rating categories. Securities rated BB or lower by S&P or Ba or
lower by Moody's are below investment grade and are referred to in the
financial community as "junk bonds". A brief description of the bond ratings
of these two services is contained herein under "Portfolio Composition." A
more complete description is contained in the Appendix.

The investment philosophy of the Fund with respect to high yield, high
risk bonds is based on the premise that over the long term a diversified
portfolio of high yield fixed income securities should, even taking into
account possible losses, provide a higher net return than that achievable on a
portfolio of higher rated securities. The Fund seeks to achieve a high yield
while reducing relative risk through (a) diversification, (b) credit analysis
of the obligors by the Sub-Adviser, and (c) monitoring and seeking to
anticipate changes and trends in the economy and financial markets that might
affect the prices of portfolio securities. Ratings assigned by credit
agencies do not evaluate market risks. The Sub-Adviser's judgment as to the
"reasonableness" of the risk involved in any particular investment will be a
function of its experience in managing fixed income investments and its
evaluation of general economic and financial conditions. This includes
analysis and evaluations of a specific guaranteeing entity's business and
management, cash flow, earnings coverage of interest and dividends, ability to
operate under adverse economic conditions, fair market value of the obligor's
assets; and of such other considerations as the Sub-Adviser may deem
appropriate. The Sub-Adviser, while seeking to maximize current yield, will
monitor current developments with respect to portfolio securities, potential
investments and broad trends in the economy. Achievement of the Fund's
investment objective will be more dependent upon the Sub-Adviser's credit
analysis than would be the case for funds predominantly investing in higher
rated bonds. In some circumstances, defensive strategies may be implemented
to preserve or enhance capital even at the sacrifice of current yield. There
is, however, no assurance that the Fund's objectives will be achieved or that
the Fund's approach to risk management will protect the shareholders against
loss.

The market values of such high yield, high risk municipal securities
tend to reflect individual developments of the guaranteeing entity underlying
the issue to a greater extent than do higher rated securities, which react to
a greater extent to fluctuations in the general level of interest rates. Such
securities also tend to be more sensitive to economic and industry conditions
than are higher rated securities. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis regarding individual lower rated
bonds or the high yield market, may depress the prices for such securities.
Factors such as the aforementioned which may adversely impact the market value
of high yield, high risk securities and could adversely impact the Fund's net
asset value.

An economic downturn or significant increase in interest rates is
likely to have a negative affect on the high yield, high risk bond market and
consequently on the value of these bonds. In an economic downturn, issuers
may not have sufficient revenues to meet their principal and interest payment
obligations.

The risk of loss due to default is significantly greater for the holders
of high yield, high risk bonds. The costs associated with recovering
principal and interest once a security has defaulted may impact the return to
holders of the security. If the Fund experiences unexpectedly large net
redemptions, it may be forced to sell such bonds without regard to the
investment merits of such sales. This could decrease the Fund's net assets.
Since some of the Fund's expenses are fixed, this could also reduce the Fund's
rate of return. The Fund has not experienced this problem to date.

<PAGE> 50

The Fund may have difficulty disposing of certain high yield, high risk
bonds because there may be a thin trading market for such bonds. Because not
all dealers maintain markets in all high yield, high risk bonds, the Fund
anticipates that such bonds could be sold only to a limited number of dealers
or institutional investors. The lack of a liquid secondary market may have an
adverse impact on market price and the Fund's ability to dispose of particular
issues and may also make it more difficult for the Fund to obtain accurate
market quotations or valuations for purposes of valuing the Fund's assets.
The Fund has a policy of utilizing a professional pricing service which has
experience in pricing such securities which are difficult to price so as to
obtain prices reflecting the market as accurately as possible. To the extent
that the Fund purchases illiquid or restricted bonds, it may incur securities
registration responsibilities, liabilities and costs, and liquidity and
valuation difficulties relating to such bonds.

Bonds may be subject to redemption or call provisions. If an issuer
exercises these provisions when investment rates are declining, the Fund would
be likely to replace the bond with a lower yielding bond, resulting in a
decreased return. Zero coupon and pay-in-kind bonds involve special
considerations. The market prices of these securities are generally more
volatile than the market prices of securities that pay interest periodically
and are likely to respond to changes in interest rates to a greater degree
than do securities paying interest currently that have similar maturities and
credit quality. There is the 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.
If the issuer defaults, the Fund may obtain no return at all on its
investment. Zero coupon bonds generate interest income before receipt of
actual cash payments. In order to distribute such income, the Fund may have
to sell portfolio securities under disadvantageous circumstances.

PORTFOLIO COMPOSITION. The table below reflects the Fund's
portfolio composition by quality rating for the year ended September 30, 1996,
calculated on the basis of the average weighted ratings of all bonds held
during the year. 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. 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.

<TABLE>
COMPOSITION OF THE FUND'S PORTFOLIO BY QUALITY RATING AS A PERCENTAGE OF
TOTAL ASSETS AT SEPTEMBER 30, 1996
<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 23.70% 0.29% Highest quality
Aa/AA 11.91% 0.19% High quality
A/A 14.39% 0.76% Upper medium grade
Baa/BBB 10.37% 4.76% Medium grade
Ba/BB 10.28% 12.04% Some speculative elements
B/B 2.97% 4.31% Speculative
Caa/CCC 0.00% 0.00% More speculative
Ca, C/CC, C, D 0.00% 0.00% Very speculative, may be in default
Not Rated 22.35% 0.00% Not rated by Moody's or S&P
Short-term Investments 4.03% 0.00%
------ -----
100.00% 22.35%
</TABLE>

<PAGE> 51

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.

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 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 that it
will not make an investment causing more than 15% of its net assets to be
invested in illiquid securities. In making this determination, the
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 Sub-Adviser and, if as a result of changed conditions, it is
determined that a Rule 144A Security is 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 the Fund's investments in illiquid securities if qualified
institutional buyers are unwilling to purchase such securities.

PORTFOLIO TRANSACTIONS. The Adviser and Sub-Advisers 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 Sub-Advisers believe such security will no longer continue
to provide a relatively high current yield or involves undue risk, or when the
Sub-Advisers 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. 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. The
Fund's portfolio turnover rate is set forth in "Financial Highlights".

"WHEN ISSUED" SECURITIES. Municipal obligations may at times be
purchased or sold on a delayed delivery basis or on a when-issued basis.
These transactions arise when securities are purchased or sold by the Fund
with payment and delivery taking place in the future. No payment is made
until delivery is made which may be up to 60 days after purchase. If delivery
of the obligation does not take place, no purchase will result and the
transaction will be terminated. Such transactions are considered to involve
more risk than immediate cash transactions. As a matter of non-fundamental
policy, any investment on a when issued or delayed delivery basis will not be
made if such investment would cause more than 5% of the value of the Fund's
total assets to be invested in this type of investment.

<PAGE> 52

BORROWING. The Fund may borrow money from banks for temporary or
emergency purposes in an amount not exceeding 10% of the value of its total
assets (excluding the amount borrowed) and may pledge an amount not exceeding
15% of its total assets (excluding the amount borrowed) to secure such
borrowing.

FUNDAMENTAL AND NON-FUNDAMENTAL POLICIES. The Fund has adopted
certain investment restrictions which are described in the Statement of
Additional Information. These restrictions and the Fund's investment
objectives may not be changed unless authorized by a vote of the shareholders.
All other investment policies are non-fundamental and may be changed without
shareholder approval.

ADVISER, SUB-ADVISERS AND DISTRIBUTOR

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. As discussed
below, the Adviser has hired Stamper Capital & Investments, Inc. as
Sub-adviser for the Fund. Davis Selected Advisers-NY, Inc. ("DSA-NY"), a
wholly-owned subsidiary of the Adviser, performs research and other services
for the Fund on behalf of the Adviser under a Sub-Advisory Agreement with the
Adviser. This Agreement does not affect the services provided by Stamper
Capital & Investments. The Adviser also acts as investment adviser for Davis
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. The Distributor also acts a the
principal underwriter for the Davis and Selected Funds.

The Fund pays the Adviser a fee at the annual rate of 0.65% on the first
$250 million of average net assets, 0.60% on the next $250 million of average
net assets and 0.55% on average net assets over $500 million. This fee is
higher than that of most municipal bond funds. 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 operation. All the fees paid to DSA-NY are paid by the
Adviser and not the Fund.

Stamper Capital & Investments, Inc. (the "Sub-Adviser"), is the
Sub-Adviser for the Fund and manages the Fund's day to day investment
operations. The Fund pays no fees directly to the Sub-Adviser. The
Sub-Adviser will receive from the Adviser a fee equal to 30% of the fees
received by the Adviser from the Fund. All the fees paid to Stamper Capital
will be paid by the Adviser and not the Fund. The Sub-Adviser also provides
investment advisory services to Davis High Income Fund, Inc., employee benefit
plans, institutions, trust and individuals. The Sub-Adviser's offices are
located at 380 Foam Street, Suite 205, Monterey, CA 93940. B. Clark Stamper
is the controlling shareholder of the Sub-Adviser. The Adviser may acquire a
minority interest in the Sub-Adviser.

<PAGE> 53

PORTFOLIO MANAGEMENT. B. Clark Stamper has been the primary
portfolio manager of the Fund since June, 1990. He was a Senior Vice
President of the Adviser's General Partner and a Vice President of all of the
Davis Funds. He has been the portfolio manager of Davis High Income Fund,
Inc. (a high-yield corporate bond fund) since June, 1990. He was the portfolio
manager of the Davis Government Bond Fund (formerly, Bond Fund) of Davis
Series, Inc. (a U.S. Government Securities fund) from June, 1990 until April
30, 1995. He was the portfolio manager of Selected Capital Preservation
Trust's U.S. Government Income Fund from May 1, 1993 until April 30, 1995.

The Distributor is reimbursed by the Fund for some of its distribution
expenses through Distribution Plans which have been adopted with respect to
Class A , Class B and Class C shares and approved by the Fund's Board of
Directors of such classes in accordance with Rule 12b-1 under the Investment
Company Act of 1940. The Class Y shares are not subject to Rule 12b-1 fees.

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
Selected Advisers, L.P.

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. 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:

<PAGE> 54

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. 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 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.

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".

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 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 are treated as a sale and purchase. Therefore, there will usually
be a recognizable capital gain or loss due to an exchange.

<PAGE> 55

The number of times a shareholder 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 three exchanges out of a 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 such notice as is required by applicable
regulatory authorities (currently 60 days).

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 note under "Telephone Privilege"
which is also applicable to exchanges.

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 of them 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.

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 signature guarantee is also required in the
event that any modification to the Company'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 such redemption delay by paying for your shares with a
certified or cashier's check or 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 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 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.

<PAGE> 56

DETERMINING THE PRICE OF SHARES

The net asset value per share is determined daily by dividing the total
value of investments and other assets, less any liabilities, by the number of
total outstanding shares. 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
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.

The net asset value per share is determined as of the earlier of the
close of the exchange or 4:00 p.m. Eastern Time on each day the New York Stock
Exchange is open. 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. If the purchase
order or redemption request is placed with your dealer, then the applicable
price is normally computed as of 4:00 p.m. Eastern Time on the day the dealer
receives the order, provided that the dealer receives the order before 4:00
p.m. Eastern Time. Otherwise, the applicable price is the next determined net
asset value. It is the responsibility of your dealer to promptly forward
purchase and redemption orders to the Distributor. Note that in the case of
redemptions and repurchases of shares owned by corporations, trusts or
estates, 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. See
"Redemption of Shares."

DIVIDENDS AND DISTRIBUTIONS

Income dividends are declared and distributed monthly and distributions
of net realized capital gains, if any, will normally be paid annually. To
provide stable distributions for its shareholders, the Fund at times may
continue to pay distributions based on expectations of future investment
results 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.

You will receive quarterly confirmation statements for dividends
declared and shares purchased through reinvestment of dividends. Dividends
declared in December to shareholders of record in December, and paid by the
end of January of the subsequent year will be treated as received by the
shareholder in the earlier year. You will receive confirmations after each
purchase other than through dividend reinvestment, and after each redemption.
Information concerning distributions will be mailed to shareholders annually.
Distributions will be classified in terms of non-taxable return of capital,
federal tax-exempt income and taxable income. Since some states may not tax
their residents on the portion of the Fund's distributions representing income
from governmental entities in such states, information about state sources of
tax-exempt distributions will also be reported annually.

<PAGE> 57

Shareholders have the option to receive all dividends and distributions
in cash, to have all dividends and distributions reinvested, or to have income
dividends and short-term capital gain distributions paid in cash and long-term
capital gain distributions reinvested. The reinvestment of dividends and
distributions is made at net asset value on the dividend payment date. Upon
receipt of the second dividend check which has been returned to State Street
as undeliverable, undelivered dividends will be invested in additional shares
at the current net asset value and the account designated as a dividend
reinvestment account.

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 effects of federal, state and local tax laws on an investment in
the Fund.

The Fund intends to qualify, as it has since its inception, 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 required distribution
of the Fund exceeds 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.

Dividends paid to shareholders from interest earned by the Fund from
municipal obligations and from exempt interest dividends received by the Fund
from investment companies investing in tax-exempt securities are not
includible in a shareholder's gross income for federal income tax purposes,
although a portion of such dividends may be subject to the alternative minimum
tax as discussed below. Distributions of net interest income derived from
other sources, if any, and of net short-term capital gains realized by the
Fund will be taxable to shareholders as ordinary income. Net long-term
capital gain distributions, if any, will be taxable to shareholders as
long-term capital gain regardless of how long the shares of the Fund have been
held. Distributions will be treated the same for tax purposes whether
received in cash or in additional shares of the Fund.

Interest paid on "specified private activity bonds" issued after August
7, 1986, as defined in the Code, although exempt from federal income tax, will
constitute a tax preference item for purposes of both the individual and the
corporate alternative minimum tax. If the Fund were to own any such bonds, it
is expected that a portion of the exempt income distributed by the Fund would
be treated as a preference item for shareholders based upon the proportionate
share of the interest from the specified private activity bonds received by
the Fund. In the case of a corporate shareholder, the alternative minimum tax
base may also include a portion of all the other tax-exempt income. Corporate
shareholders are advised to consult their own tax advisers with respect to the
corporate alternative minimum tax.

A gain or loss for tax purposes may be realized on the redemption of
shares. If a shareholder realizes a loss on the sale or exchange of any
shares held for six months or less and during such period the shareholder
received any exempt-interest dividends, then such loss is disallowed to the
extent of the amount of the exempt-interest dividends. If a shareholder
realizes a loss on the sale or exchange of any shares held for six months or
less and during such period the shareholder received any capital gains
dividends, then such loss (to the extent it is allowed) is treated as a
long-term capital loss to the extent of such capital gain dividends. Interest
on indebtedness incurred by shareholders to purchase or carry shares of the
Fund will not be deductible for federal income tax purposes. 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.

<PAGE> 58

The Fund may not be an appropriate investment vehicle for entities which
are "substantial users" (or "related persons" thereto) of facilities financed
by "industrial development bonds" as such terms are defined in the Internal
Revenue Code. Such entities (or persons) should consult their own tax
advisers before investing.

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 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 regarding the Class A,
Class B and Class 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-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 irrespective of the class or subclass thereof, (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.

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
outstanding shares of the Fund.

PERFORMANCE DATA

From time to time, the Fund may advertise information regarding its
performance. Such information may consist of "yield," "total return,"
"taxable equivalent yield," "distribution rate," "annualized current
distribution rate" and "tax equivalent distribution rate." Each of these
performance figures is based upon historical results and is not intended to
indicate future performance, and, except for "distribution rate," "annualized
current distribution rate" and "tax equivalent distribution rate" is
standardized in accordance with regulations of the Securities and Exchange
Commission ("SEC"). All such performance will be calculated separately for
each class of shares.

<PAGE> 59

"Tax Equivalent Yield". The yield necessary from a taxable investment,
which on an after-tax basis is equal to the yield of a tax free investment,
based on the maximum federal income tax bracket for a given period.

"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. "Tax equivalent distribution rate" is computed by dividing the
portion of the Fund's distribution rate (determined as described above) which
is tax-exempt, by one minus the stated federal income tax rate, and adding to
the resulting amount that portion, if any, of the distribution rate which is
not tax-exempt. All 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 the 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.

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 may quote information from publications such as The Wall Street
Journal, Money Magazine, Forbes, Barron's, Newsweek, Chicago Tribune, The New
York Times, U.S. News and World Report, USA Today, Fortune, Investors Business
Daily, Financial World, Smart Money, No-Load Fund Investor and Kiplinger's and
may cite information from Morningstar, Value Line or the Investment Company
Institute. The Fund may compare its performance to the performance of mutual
fund indexes as reported by Lipper Analytical Services, Inc. ("Lipper") or CDA
Investment Technologies, Inc., two widely recognized independent mutual fund
reporting services.

For more information on the Fund's performance, see "Performance Data"
in the Statement of Additional Information. Please remember that performance
information is based upon historical results and is not necessarily indicative
of future performance.

The Fund's 1996 Annual Report contains additional performance
information and will be made available upon request and without charge.

SHAREHOLDER INQUIRIES

<PAGE> 60

APPENDIX
QUALITY RATINGS OF DEBT SECURITIES

MOODY'S MUNICIPAL AND 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 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.

<PAGE> 61

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.

MOODY'S MUNICIPAL NOTE RATINGS

MIG 1 -- The best quality, with strong protection provided by established cash
flows, superior liquidity support or demonstrated broad-based access to the
market for refinancing.

MIG 2 -- High quality, with margins of protection ample although not so large
as in the preceding group.

<PAGE> 62

STANDARD & POOR'S MUNICIPAL NOTE RATINGS

SP-1. Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics are given a
(+) designation.

SP-2. Satisfactory capacity to pay principal and interest.

SP-3. Speculative capacity to pay principal and interest.

MOODY'S COMMERCIAL PAPER RATINGS

Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers: Prime-1 (superior capacity), Prime-2 (strong capacity) and
Prime-3 (acceptable capacity). In assigning ratings to an issuer which
represents that its commercial paper obligations are supported by the credit
of another entity or entities, Moody's evaluates the financial strength of the
indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total
rating assessment.

STANDARD & POOR'S COMMERCIAL PAPER RATINGS

The S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from 'A' for the highest
quality to 'D' for the lowest. Issues assigned an 'A' rating are regarded as
having the greatest capacity for timely payment. Within the 'A' category, the
numbers 1, 2 and 3 indicate relative degrees of safety. The addition of a
plus sign to the category A-1 denotes that the issue is determined to possess
overwhelming safety characteristics.

<PAGE> 63
STATEMENT OF ADDITIONAL INFORMATION

FEBRUARY 1, 1997 AS REVISED AUGUST 15, 1997

DAVIS TAX-FREE HIGH INCOME FUND, INC.

124 EAST MARCY STREET
SANTA FE, NEW MEXICO 87501
1-800-279-0279

<TABLE>
TABLE OF CONTENTS

<CAPTION>
TOPIC PAGE
<S> <C>
Fundamental Investment Restrictions 2
Municipal Obligations 3
Temporary Investments 4
Portfolio Transactions 4
Directors and Officers 5
Compensation Schedule 7
Certain Shareholders of the Fund 7
Investment Advisory Services 8
Custodian 9
Auditors 9
Determining the Price of Shares 9
Reduction of Class A Sales Charge 9
Exemptions to Class B Sales and Conversion Features 10
Distribution of Fund Shares 10
Performance Data 11
Non-Standard Distribution Rates 12
</TABLE>

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 FEBRUARY 1, 1997 AS REVISED AUGUST 15, 1997, OR
THE CLASS Y PROSPECTUS DATED FEBRUARY 1, 1997 AS REVISED AUGUST
15, 1997. THE PROSPECTUSES MAY BE OBTAINED FROM THE FUND.

THE FUND'S AUDITED FINANCIAL STATEMENTS INCLUDED IN THE ANNUAL
REPORT TO SHAREHOLDERS DATED SEPTEMBER 30, 1996 ARE EXPRESSLY
INCORPORATED HEREIN BY REFERENCE. ALL INTERIM FINANCIAL
INFORMATION REFLECTS ALL ADJUSTMENTS WHICH ARE, IN THE OPINION OF
MANAGEMENT, NECESSARY TO A FAIR STATEMENT OF THE RESULTS FOR SUCH
INTERIM PERIOD.

<PAGE> 64
FUNDAMENTAL INVESTMENT RESTRICTIONS

The investment restrictions set forth below and the Fund's investment
objective 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 or total or net assets.

1. The Fund may not invest in securities other than municipal obligations
and temporary investments, and may not make loans to others except
through such investments.

2. The Fund may not purchase or sell real estate (but this will not prevent
the Fund from investing in municipal obligations secured by real estate
or interests therein) or commodities or commodity contracts.

3. The Fund may not purchase more than 50% of the outstanding debt
obligations of any one issuer. For this purpose, all debt obligations
of an issuer are treated as a single class of securities. This
restriction does not apply to debt obligations issued, guaranteed or
insured by the U.S. Government, its agencies or instrumentalities ("U.S.
Government Securities").

4. The Fund may not make an investment that would cause more than 5% of the
value of its total assets to be invested in the securities (other than
U.S. Government Securities) of any one issuer. For this purpose, each
state or local governmental entity shall be deemed a separate "issuer,"
except that where the entity issuing a municipal obligation differs from
the entity whose revenues are the primary source of the payment of the
obligation, the entity whose revenues are the primary source of payment
shall be deemed the sole issuer with regard to that obligation.

5. The Fund may not make an investment that would cause 25% or more of the
value of its total assets to be invested in municipal obligations the
issuers of which are located in the same state. For this purpose, the
location of an issuer shall be deemed to be the location of the
governmental entity issuing the obligation, regardless of the location
of the entity whose revenues are the primary source of payment or the
location of the project or facility which may be the subject of the
obligation.

6. The Fund may not write or purchase put or call options.

7. The Fund may not make an investment that would cause 25% or more of the
value of its total assets to be invested in revenue bonds or notes the
payment for which comes from revenues from any one type of activity.
For this purpose, the term "type of activity" shall include, for
example, the following: (a) sewage treatment and disposal; (b) gas
provision; (c) electric power provision; (d) water provision; (e) mass
transportation systems; (f) housing; (g) hospitals; (h) street
development and repair; (i) toll roads; (j) airport facilities; and (k)
educational facilities. This restriction does not apply to general
obligation bonds or notes or to pollution control revenue bonds.

8. The Fund may not purchase securities of other registered investment
companies (as defined in the Investment Company Act of 1940), except (i)
shares of open-end investment companies investing primarily in municipal
obligations with remaining maturities of 13 months or less, provided
that such purchase does not cause the Fund to (a) have more than 5% of
its total assets invested in any one such company, (b) have more than
10% of its total assets invested in the aggregate of such companies or
(c) own more than 3% of the total outstanding voting stock of any such
company; or (ii) as part of a merger, consolidation, reorganization or
acquisition of assets.

9. The Fund may not sell securities short or purchase securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions.

10. The Fund may not, except for temporary defensive purposes, make an
investment in other than municipal

<PAGE> 65

obligations if such investment would cause more than 20% of the value of
the Fund's total assets to be invested in securities other than municipal
obligations.

11. The Fund may not borrow money except from banks as a temporary measure
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 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. The Fund may not buy or continue to hold securities if the directors and
officers 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 the people who
own that much or more own 5% of such securities.

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

NON-FUNDAMENTAL POLICIES. In addition to the foregoing restrictions, the
Fund may from time to time voluntarily undertake certain non-fundamental
policies which may be changed without shareholder approval.

MUNICIPAL OBLIGATIONS

Occasionally, an issuing state or local governmental entity may
guarantee the payment of a revenue bond obligation, backing payment with its
taxing power. Normally, revenue bonds are paid solely from a particular
revenue source. The revenue source may be earnings from a public project such
as tolls from roads or bridges, airport revenues, earnings of publicly owned
utilities or special excises such as special improvement levies. The revenue
source may also be a private company which is utilizing a facility constructed
through monies obtained through a governmental agency or fund. There are two
principal types of revenue bonds for private facilities, industrial
development bonds and pollution control bonds. Occasionally, such bonds are
also issued by governmental entities to obtain funds for a privately operated
general community facility such as a hospital, convention hall or sports
stadium.

Industrial development bonds are issued by a governmental entity to
obtain funds to finance a facility, typically an industrial plant or factory,
which is leased to or operated by a private (non-governmental) company. State
and local governments have the power in most states to permit the issuance of
industrial development bonds to provide financing aid to such companies in
order to encourage them to locate facilities within their communities.

Pollution control bonds are issued to provide funding for air or water
pollution control systems for privately operated industrial or commercial
facilities.

As described under "Investment Objectives and Policies" in the
Prospectus, the Fund may invest in municipal bonds and/or certificates of
participation that constitute investments in lease obligations or installment
purchase contract obligations (hereafter collectively called "lease
obligations") of municipal authorities or entities. As further described in
the Prospectus, certain of the lease obligations contain "non-appropriation"
clauses. The Fund will seek to minimize the special risks associated with
such securities by not investing more than 10% of its assets in lease
obligations that contain such clauses.

Municipal notes include tax, revenue and bond anticipation obligations
or general or revenue obligations of shorter maturities than municipal bonds,
generally five years or less, which are issued to obtain funds for various
public purposes.

There are, in addition, a variety of hybrid and special types of
municipal obligations as well as numerous differences in security, quality and
risk both within and among the classifications described above. Obligations
of a special governmental authority may, for instance, constitute a pledge of
the full credit and taxing power of the

<PAGE> 66

authority, and yet have somewhat less security than a general state or city
obligation in view of the limitations on the authority's taxing power compared
to the broader taxing power of a state or a city.

Due to the increasing needs of state and local governments and their
widening view of public purpose, a variety of types of federal tax-exempt
financing obligations have been developed over the years and new types of
obligations may be expected in the future.

The ratings of Moody's Investors Services Inc. ("Moody's") and Standard
and Poor's Corporation ("S&P") represent their opinions as to the quality of
the municipal obligations which they undertake to rate. It should be
emphasized, however, that ratings are general and are not absolute standards
of quality. Consequently, municipal bonds with the same maturity, coupon and
rating may have different yields while bonds of the same maturity and coupon
with different ratings may have the same yield.

From time to time, proposals have been introduced in Congress for the
purposes of restricting or eliminating the federal income tax exemption for
interest on municipal obligations. Similar proposals may be introduced in the
future. If such a proposal were to be enacted, the availability of municipal
obligations for investment by the Fund and the value of the Fund's portfolio
would be affected. In such event, the Fund would re-evaluate its investment
objective and policies in view of such developments.

TEMPORARY INVESTMENTS

At various times the Fund may hold cash or invest in securities other
than municipal obligations. Income from such securities may be taxable as
ordinary income. Such temporary investments may be made in any of the
following circumstances, provided that such an investment does not cause over
20% of the value of the Fund's total assets to be so invested: (1) when assets
are allocated for settlement of purchases; (2) when net cash inflow from sales
of the Fund's shares or sales of portfolio securities is of a size which does
not allow for prompt investment in attractively priced municipal obligations;
or (3) when highly liquid assets are needed to meet anticipated redemptions,
dividends or other cash needs.

In addition, during periods of adverse markets when it is deemed
advisable and practicable to take a temporary defensive position to protect
capital, the Fund may have more than 20% of its assets invested in temporary
investments and cash. While reserving this freedom to act for defensive
purposes, the Fund intends to limit its holdings of temporary taxable
investments and cash to meet the requirements for federal income tax exemption
on the dividends which the Fund pays from its municipal obligation or other
income exempt from federal income tax.

Although on occasion the Fund may purchase temporary investments, it is
the Fund's intention to be invested primarily in municipal obligations.
Temporary investments will be made only under the conditions specified herein.

Temporary investments will be made exclusively in: (1) shares of
investment companies primarily investing in short-term instruments the income
of which is exempt from federal income tax (subject to certain limitations as
to the Fund's investments in other investment companies set forth under
"Investment Restrictions"); (2) U.S. Government Securities; (3) commercial
paper rated within the highest grade by either Moody's or S&P (Prime-1 or A-1,
respectively); (4) other short-term debt securities issued or guaranteed by
corporations having outstanding debt rated within the two highest grades by
Moody's (Aaa or Aa) or S&P (AAA or AA); (5) certificates of deposit of
domestic commercial banks subject to regulation by the U.S. Government, or any
of its agencies or instrumentalities, with assets of $1 billion or more based
on the most recent published reports; or (6) repurchase agreements with
domestic banks or securities dealers involving any of the securities which the
Fund is permitted to hold. (Such agreements will involve the purchase of
securities subject to resale to the seller on a specified date within 7 days
of purchase at a specified price based on an agreed interest rate.) Rating
requirements apply as of the time of purchase.

<PAGE> 67

PORTFOLIO TRANSACTIONS

Stamper Capital & Investments, Inc., (the "Sub-Adviser") makes
investment decisions and arranges for the placement of portfolio transactions
for the Fund, subject to review by the Board of Directors and its Committee on
Brokerage. In this regard, the Sub-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
Sub-Adviser considers the dealer's financial responsibility and reputation,
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 Sub-Adviser's staff. In accordance with this policy,
brokerage transactions, if any, are not executed solely on the basis of the
lowest commission rate available. Research services provided to the
Sub-Adviser by or through dealers who effect portfolio transactions for the
Fund may be used in servicing other accounts managed by the Sub-Adviser and,
likewise, services provided by dealers used for transactions of other accounts
may be utilized by the Sub-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 Sub-Adviser deems the purchase or sale of a
security to be in the best interests of the Fund as well as other fiduciary
accounts, the Sub-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 Sub-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 Board of Directors deems that any disadvantage in the
procedure is outweighed by the increased selection available and the increased
opportunity to engage in volume transactions.

The Sub-Adviser believes that research from dealers is desirable,
although not essential, in carrying out its functions, in that such outside
research supplements the efforts of the Sub-Adviser by corroborating data and
enabling the Sub-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
issuers, 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
Sub-Adviser researches, at its own expense, each security included in, or
being considered for inclusion in, the Fund's portfolio.

The Fund has paid no brokerage commissions since its inception.
Securities have generally been purchased or sold on a principal basis without
commissions. The price of such transactions may include a profit for the
dealer involved.

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
Shelby M.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.
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 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, Bass & Associates (a financial consulting firm);
formerly, First Deputy City Treasurer, City of Chicago, and Executive Vice
President, Chicago Title and Trust Company.
<PAGE> 68

JEREMY H. BIGGS (8/16/35),<F*> 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, World Total Return Fund, L.P.; Member,
Gordon, Feinblatt, Rothman, Hoffberger and Hollander, LLC (attorneys);
Director, Mid-Atlantic Realty Trust.

EUGENE M. FEINBLATT (10/28/19), 233 East Redwood Street, Baltimore, MD
21202. Director of the Company and each of the Davis Funds except Davis
International Series, Inc.; of Counsel, Gordon, Feinblatt, Rothman, Hoffberger
and Hollander, LLC (attorneys).

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, Santa Fe Center Enterprises; President and Chief
Executive Officer, Howard Energy International Utilities; Director, CH2M-Hill,
Inc.; Retired Chairman and President, 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, PLX Technology, Inc. (a manufacturer of semi-conductor
circuits); Director, Intel Corp. (a manufacturer 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
except Davis International Series, Inc.; Managing General Partner, 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, Mid-Atlantic
Realty Trust; Director and President, CPC, Inc. (a real estate company);
Director and Vice President, Merchant Terminal Corporation; formerly, Director
of Equitable Bancorporation, Equitable Bank and Maryland National Bank, and
formerly, Director and President, 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,
Bigham, Englar, Jones and Houston (attorneys); United States Counsel to
Aerolineas Argentina; Director, various private companies.

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).

EDWIN R. WERNER (4/1/22), 207 Gosling Hill Drive, Manhasset, NY 11030.
Director of the Company and each of the Davis Funds except Davis International
Series, Inc.; President, The Estates of North Hills New York; formerly,
Chairman and CEO, Empire Blue Cross and Blue Shield of New York.

SHELBY M.C. DAVIS (3/20/37),<F*> 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,
Venture Advisers, Inc., effective August 15, 1995; Employee of Capital Ideas,
Inc. (financial consulting firm); Consultant to Fiduciary Trust Company
International; Director, Shelby Cullom Davis Financial Consultants, Inc.
<PAGE> 69
ANDREW A. DAVIS (6/25/63), 124 East Marcy Street, Santa Fe, NM 87501.
Vice President of the Company and each of the Davis Funds; Director and
President, Venture Advisers, Inc. effective August 15, 1995; formerly, Vice
President and head of convertible security research, PaineWebber,
Incorporated.

CHRISTOPHER C. DAVIS (7/13/65), 70 Pine Street, 43rd Floor, New York, NY
10270-0108. Vice President of the Company and each of the Davis Funds except
Davis International Series, Inc.; Director, Venture Advisers, Inc.

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, Davis Selected Advisers, L.P. Former
President and Chief Executive Officer of First of Michigan Corporation.
Former 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, Venture Advisers, Inc.

EILEEN R. STREET (3/11/62), 124 East Marcy Street, Santa Fe, NM 87501.
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; Senior Vice President and Chief Financial Officer,
Venture Advisers, Inc.

SAMUEL P. YNZUNZA (8/13/62), 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. Senior Vice President and General Counsel, Davis
Selected Advisers, L.P. Former Corporate Counsel for INVESCO Funds Group, Inc.
and Franklin Resources, 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; Partner 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; Partner D'Ancona & Pflaum, the Company's legal
counsel.

The Company does not pay salaries to any of its officers. The Adviser
performs certain services on behalf of the Company and is reimbursed by the
Company for the costs of providing these services. See "Investment Advisory
Services."

DIRECTORS' COMPENSATION SCHEDULE

During the fiscal year ended September 30, 1996, the compensation paid
to the directors who are not considered to be interested persons of the Fund
was as follows:

<TABLE>
<CAPTION>
AGGREGATE FUND TOTAL
NAME COMPENSATION COMPLEX COMPENSATION<F*>
---- ------------ ------------------------
<S> <C> <C>
Wesley E. Bass 7,375 24,250
Marc P. Blum 7,200 23,550
Eugene M. Feinblatt 6,400 20,900
Jerry D. Geist 6,300 20,550
D. James Guzy 7,250 23,700
G. Bernard Hamilton 7,150 23,300
LeRoy E. Hoffberger 7,150 23,500
Laurence W. Levine 7,150 23,500
Christian R. Sonne 7,250 23,450
Edwin R. Werner 7,150 23,300

<FN>
<F*> Complex compensation is the aggregate compensation paid, for services as a
Director, by all mutual funds with the same investment adviser.
</TABLE>

<PAGE> 70

CERTAIN SHAREHOLDERS OF THE FUND

The following table sets forth, as of August 12, 1997, 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 shares. As of such date there were 6,223,261.443
Class A shares of the Fund outstanding and the directors and officers of the
Fund, as a group, owned 20,970.086 Class A shares, or approximately 0.337% of
the Fund's outstanding Class A shares. As of such date there were
12,588,029.805 Class B shares of the Fund outstanding. The directors and
officers of the Fund do not presently own or intend to own any Class B shares
of this Fund. The Fund is not aware of any shareholder who beneficially owns
in excess of 25% of the Fund's total outstanding shares.

<TABLE>
<CAPTION>
NUMBER OF PERCENT OF CLASS
NAME AND ADDRESS SHARES OWNED OUTSTANDING
- ---------------- ------------ -----------
<S> <C> <C>
CLASS B SHARES

Merrill Lynch Pierce Fenner & Smith 931,707.836 7.40%
Mutual Fund Operations
4800 Deerlake Drive East, 3rd Floor
Jacksonville, FL 32246-6484
</TABLE>

INVESTMENT ADVISORY SERVICES

Davis Selected Advisers, L.P. serves as investment adviser for the Fund
pursuant to an 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 advice, and furnishes statistical, executive
and clerical personnel, bookkeeping, office space, and equipment necessary to
carry out its management functions and such corporate managerial duties as are
requested by the Board of Directors of the Fund. The Fund bears all expenses
other than those specifically assumed by the Adviser under the Agreement,
including preparation of its tax returns, financial reports to regulatory
authorities, dividend determinations and 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 as follows: 0.65% 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 aggregate advisory fees paid by the Fund to the
Adviser during the fiscal years ended September 30, 1996, 1995 and 1994 were
$1,149,436, $1,360,042 and $1,335,905, respectively.

Stamper Capital & Investments, Inc., serves as the Fund's Sub-Adviser
under a Sub-Advisory Agreement with the Adviser. The Fund pays no fees
directly to the Sub-Adviser. The Sub-Adviser manages the day to day
investment operations of the Fund, subject to the Adviser's overall
supervision. For its services, the Sub-Adviser receives a fee from the
Adviser equal to 30% of the fees received by the Adviser from the Fund. The
Sub-Adviser receives no fees directly from the Fund.

The Adviser has also entered into a Sub-Advisory Agreement with it
wholly-owned subsidiary, Davis Selected Advisers-NY, Inc. ("DSA-NY") where
DSA-NY performs research and other services on behalf of the Adviser. Under
the Agreement, the Adviser pays all of DSA-NY' s direct and indirect costs of
operation. All the fees paid to DSA-NY are paid by the Adviser and not the
Fund. This Agreement does not affect the services provided by Stamper Capital
& Investments.

<PAGE> 71

The reimbursable costs for certain accounting and administrative
services for fiscal years ended September 30, 1996, 1995 and 1994 were
$45,000, $37,998 and $30,996, respectively. The reimbursable costs for
qualifying the Fund's shares for sale with state agencies for such periods
were $12,000, $10,002 and $8,004, respectively. The reimbursable costs for
providing shareholder services for such periods were $12,245, $17,914 and
$17,616, respectively.

The Advisory and Sub-Advisory Agreements also make 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 and the Sub-Advisory Agreements will terminate
automatically upon assignment and are 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
each 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 Advisory Agreement and Sub-Advisory Agreements provide that the
Adviser, Sub-Adviser or DSA-NY, in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of its duties, will not be
liable for any act or omission in the cause of, or connected with rendering
service under the Agreement or for any losses that may be sustained in the
purchase, holding or sale of any security.

The Adviser, Sub-Adviser and DSA-NY 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. Each Code of Ethics requires
investment personnel to disclose personal securities holdings upon
commencement of employment and all subsequent trading activity to the firm'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.

CUSTODIAN

The Custodian of the Fund's assets is State Street Bank and Trust
Company, c/o The Davis Funds, P.O. Box 8406, Boston, MA 02266-8406. The
Custodian maintains all of the instruments representing the investments of the
Fund and all cash. The Custodian 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 Fund's auditors are Tait, Weller & Baker, Two Penn Center, Suite
700, Philadelphia, PA 19102-1707. The audit includes examination of annual
financial statements furnished to shareholders and filed with the Securities
and Exchange Commission, consultation on financial accounting and reporting
matters, and meeting with the Audit Committee of the Board of Directors. In
addition, the auditors review federal and state income tax returns and related
forms.

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, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

<PAGE> 72

REDUCTION OF CLASS A SALES CHARGES

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 and
(ii) 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 Distributor 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.

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 at one time the total amount indicated. 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 Distributor
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 the
Fund's Class A shares 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 certain other Funds advised and
distributed by the Adviser, including Davis High Income Fund, Inc.,
Davis New York

<PAGE> 73

Venture Fund, Inc., Davis International Series, Inc. and Davis 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 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 High Income Fund, Inc. and Davis Series, Inc.
Financial Value 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%.

In all the above instances where you wish to claim this right of
combining the Fund's shares you own with shares 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 occasionally may 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.

EXEMPTIONS TO CLASS B SALES AND CONVERSION FEATURES

Class B shares of the Davis New York Venture Fund, Inc. are made
available to Retirement Plan Participants such as 401K or 403B 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 o 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.

<PAGE> 74

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 mutual 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.

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 such 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
prospectuses in excess of those which the Fund must file with the Securities
and Exchange Commission and other regulatory authorities or those forwarded to
existing shareholders. The continuation and assignment provisions of the
Distributing Agreement are the same as those of the Advisory Agreement.

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 Plan are limited to an annual rate of 1.00% of the
average daily net asset value of such shares.

To the extent that any investment advisory fees paid by the Company may
be deemed to be indirectly financing any activity which is primarily intended
to result in the sale of shares of the Company 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 outstanding
shares. The Adviser 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 September 30, 1996, 1995, and 1994, the
Distributor (or its predecessor) earned commissions of $294,738, $643,155 and
$2,385,580, respectively under the Class B Distribution Plan. During the
fiscal year ended September 30, 1996, the Distributor reallowed $265,116, to
qualified dealers responsible for the sale and maintenance of Fund shares.

<PAGE> 75

PERFORMANCE DATA

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. Based upon the 30-day period ended March 31, 1997
the yield was 6.89% and 6.51%, respectively for the Fund's Class A and Class B
shares. Such yield figure was determined by dividing the net investment income
per share earned during the specified 30-day period by the maximum offering
price per share on the last day of the period, according to the following
formula:

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

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.

TAX EQUIVALENT YIELD. Tax equivalent yield is the yield that a
taxable investment must generate in order to equal the Fund's yield for an
investor in a stated federal income tax bracket. The Fund's tax equivalent
yield is computed separately for each class in accordance with the
standardized method prescribed by the Securities and Exchange Commission, by
dividing that portion of such Fund's yield (computed as described above) that
is tax exempt by one minus the stated federal income tax rate, and adding the
resulting number to that portion, if any, of the Fund's yield that is not tax
exempt.

TOTAL RETURN. Total return measures both the net investment income
generated by, and the effect of any realized or unrealized appreciation or
depreciation of, the underlying investments in the Fund's portfolio. The
Fund's total return figures are computed 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 in the advertisement 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 as described in the
Prospectus, and (ii) deducts (a) the maximum front-end or applicable
contingent deferred sales charge from the hypothetical initial $1,000
investment for the one year calculation, 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 year ended March 31, 1997 and the period beginning December 1, 1994
and ended March 31, 1997 (life of Class) were 2.13% and 5.44%, respectively.

The average annual total return figures for the Fund's Class B shares
during the one, five and ten year periods ended March 31, 1997 were 3.33%,
6.24% and 6.64%, respectively.

<PAGE> 76

NON-STANDARD DISTRIBUTION RATES

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, 1997, the historical
distribution rate with respect to the Fund's Class A and Class B shares was
5.80% and 5.41%, 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 and Class B
shares for the month ended March 31, 1997 was 6.05% and 5.62%, respectively.

TAX EQUIVALENT DISTRIBUTION RATE. Tax equivalent distribution
rate is computed by dividing that portion of the annualized current
distribution rate (computed as described above) which is tax-exempt by one
minus the stated federal income tax rate, and adding the resulting figure to
that portion, if any, of the annualized current distribution rate which is not
tax-exempt. Based upon the maximum federal income tax rate of 39.6% and the
annualized current distribution rate for the month ended March 31, 1997, the
tax equivalent distribution rate with respect to the Fund's Class A and Class
B shares was 10.02% and 9.30%, respectively.
<PAGE> 77
FORM N-1A

DAVIS TAX-FREE HIGH INCOME FUND, INC.

POST-EFFECTIVE AMENDMENT NO. 24 UNDER THE SECURITIES
ACT OF 1933
REGISTRATION STATEMENT NO. 2-74216

AND

AMENDMENT NO. 25 UNDER THE INVESTMENT COMPANY ACT OF 1940
REGISTRATION NO. 811-3270

PART C

OTHER INFORMATION
-----------------

Item 24. Financial Statements and Exhibits
---------------------------------

(a) Financial Statements:

Included in Part A:

(i) Financial Highlights
(Supplementary Information)

Included in Part B by incorporation from the 1996 Annual Report:

(i) Schedule of Investments at September 30, 1996.

(ii) Statement of Assets & Liabilities at September 30, 1996.

(iii) Statement of Operations for the year ended September 30,
1996.

(iv) Statement of Changes in Net Asset for the years ended
September 30, 1996 and 1995.

(v) Notes to Financial Statements.

(vi) Financial Highlights.

(vii) Report of Independent Certified Public Accountants.

(b) Exhibits:

(1)(a) Articles of Incorporation, incorporated by reference to
Exhibit No. 1 of Registrant's Post-Effective Amendment
No. 21, File No. 2-74216.

(1)(b) Articles supplementary to Articles of Incorporation.

(2) Amended and Restated Bylaws, incorporated by reference to
Exhibit No. 2 of Registrant's Post-Effective Amendment
No. 21, File No. 2-74216.

(3) Not applicable.
<PAGE> 78

(4) Not applicable.

(5)(a) Advisory Agreement, incorporated by reference to Exhibit
No. 5 (a) of Registrant's Post-Effective Amendment
No. 21, File No. 2-74216.

(5)(b) Sub-Advisory Agreement between Selected/Venture Advisers,
L.P. and Stamper Capital & Investments, Inc.,
incorporated by reference to Exhibit No. 5 (b) of
Registrant's Post-Effective Amendment No. 21,
File No. 2-74216.

(5)(c) Sub-Advisory Agreement with Davis Selected
Advisers-NY, Inc.
Incorporated by reference to Exhibit No. 5 (c) of
Registrants Post Effective Amendment No. 23
File No. 2-74216.

(6)(a) Distributor's Agreement, incorporated by reference to
Exhibit No. 6 of Registrant's Post-Effective Amendment
No. 21, File No. 2-74216.

(6)(b) Transfer and Assumption Agreement

(7) Not applicable.

(8) Custodian Agreement and Transfer, Dividend Disbursing and
Plan Agent Agreement, incorporated by reference to
Exhibit No. 8 of Registrant's Pre-Effective Amendment
No. 1, File No. 2-74216

(9) Agreement Regarding Joint Insured Bond, effective
February 1, 1995, incorporated by reference to Exhibit
No. 9 of Registrant's Post-Effective Amendment No. 22,
File No. 2-74216.

(10) Opinion and Consent of Counsel (Reavis & McGrath),
incorporated by reference to Exhibit No. 10 of
Registrant's Pre-Effective Amendment No. 1,
File No. 2-74216.

(11) Consent of Auditors.

(12) Financial Statements, included in Statement of Additional
Information.

(13) Not applicable.

(14) Not applicable.

(15)(a) Distribution Plan for Class A shares.

(15)(b) Distribution Plan for Class B shares incorporated by
reference to Exhibit No. 15 (b) of Registrant's
Post-Effective Amendment No. 21, File No. 2-74216.

(15)(c) Distribution Plan for Class C Shares.

(16) Sample Computation of Yield and Average Annual Total
Return, incorporated by reference to Exhibit 16 of
Registrant's Post-Effective Amendment No. 11,
File No. 2-74216.

(17)(a) Powers of Attorney, incorporated by reference to
Exhibit 17 of Registrant's Post-Effective Amendment
No. 21, File No. 2-74216.

(17)(b) Power of Attorney for Eileen R. Street.
<PAGE> 79

(18) Plan pursuant to Rule 18f-3, as amended.

Item 25. Persons Controlled by or Under Common Control With Registrant
-------------------------------------------------------------

Not applicable

Item 26. Number of Holders of Securities
-------------------------------

<TABLE>
<CAPTION>
Number of Record Holders
Title of Class as of January 23, 1997
-------------- ----------------------
Common Stock
<S> <C>

Class A shares 1858
Class B shares 4290
Class Y shares 0
</TABLE>

Item 27. Indemnification
---------------

Exhibits Nos. 1, 5 and 6 to Registrant's Post-Effective Amendment
No. 16 are incorporated by reference.

Provisions of the Maryland General Corporation Law are set forth
in Item 4 of Part II of Registrant's Pre-Effective Amendment No. 1, which is
incorporated by reference.

On February 18, 1988 the indemnification provisions of the
Maryland General Corporation Law (the "Law") were amended to permit, among
other things, corporations to indemnify directors and officers unless it is
------
proved that the individual (1) acted in bad faith or with active and
deliberate dishonesty, (2) actually received an improper personal benefit in
money, property or services, or (3) in the case of a criminal proceeding, had
reasonable cause to believe that his act or omission was unlawful. The Law was
also amended to permit corporations to indemnify directors and officers for
amounts paid in settlement of stockholders' derivative suits.

In addition, the Registrant's directors and officers are covered
under a policy to indemnify them for loss (subject to certain deductibles)
including costs of defense incurred by reason of alleged errors or omissions,
neglect or breach of duty. The policy has a number of exclusions including
alleged acts, errors, or omissions which are finally adjudicated or
established to be deliberate, dishonest, malicious or fraudulent or to
constitute willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties in respect to any registered investment company.
This coverage is incidental to a general policy carried by the Registrant's
adviser.

Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------

The Investment Adviser of the Registrant, Davis Selected Advisers,
L.P., is also the investment adviser for Davis High Income Fund, Inc., Davis
New York Venture Fund, Inc., Davis Series, Inc., Davis International Series,
Inc. , Selected American Shares, Inc., Selected Special Shares, Inc. and
Selected Capital Preservation Trust. It also may be engaged as an investment
adviser for accounts other than mutual funds, although this is not presently
business of a substantial nature.

Shelby M.C. Davis is Director, Chairman and Chief Exective Officer
and principal owner of Venture Advisers, Inc. (the "General Partner"), and is
a Director of Shelby Cullom Davis Financial Consultants, Inc., 70 Pine Street,
New York, New York 10270. Carl R. Luff is a Director, Co-President and
Secretary of the
<PAGE> 80

General Partner.

Item 29. Principal Underwriters
----------------------

(a) Davis Selected Advisers, L.P., located at 124 East Marcy
Street, Santa Fe, NM 87501, the principal underwriter for the Registrant,
also acts as principal underwriter for Davis High Income Fund, Inc., Davis New
York Venture Fund, Inc., Davis Series, Inc., Davis International Series, Inc.,
Selected American Shares, Inc., Selected Special Shares, Inc. and Selected
Capital Preservation Trust.

(b) Management of the general partner of the Principal
Underwriter

POSITIONS AND OFFICES POSITIONS AND
NAME AND PRINCIPAL WITH GENERAL PARTNER OFFICES WITH
BUSINESS ADDRESS OF UNDERWRITER REGISTRANT
- ---------------- -------------- ------------
<S> <C> <C>
Shelby M.C. Davis Chairman President
P.O. Box 205 and Chief Executive
Hobe Sound, FL 33455 Officer

Carolyn H. Spolidoro Vice President Vice President
124 East Marcy Street
Santa Fe, NM 87501

Andrew A. Davis Co-President Vice President
124 East Marcy Street
Santa Fe, NM 87501

Christopher C. Davis Employee of Vice President
70 Pine Street, 43rd Floor Davis Selected
New York, NY 10270-0108 Advisers, L.P.

Kenneth C. Eich Senior Vice President, Vice President
124 Marcy Street Chief Operating Officer
Santa Fe, NM 87501

Eileen R. Street Senior Vice President Treasurer and
124 East Marcy Street Assistant Secretary
Santa Fe, NM 87501

Samuel P. Ynzunza Senior Vice President, Vice President and
124 East Marcy Street General Counsel Secretary
Santa Fe, NM 87501
</TABLE>

Item 30. Location of Accounts and Records
--------------------------------

Accounts and records are maintained at the offices of Davis
Selected Advisers, L.P., 124 East Marcy Street, Santa Fe, New Mexico 87501,
and at the offices of the Registrant's custodian, State Street Bank and Trust
Company, One Heritage Drive, North Quincy, Massachusetts 02107, and the
Registrant's transfer agent State Street Bank and Trust, c/o Service Agent,
BFDS, Two Heritage Drive, 7th Floor, North Quincy, Massachusetts 02107.

Item 31. Management Services
-------------------

Not applicable

Item 32. Undertakings
------------

Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of Registrant's latest annual report to shareholders
upon request and without charge.
<PAGE> 81

DAVIS TAX-FREE HIGH INCOME FUND, INC.

SIGNATURES
----------

Registrant is filing this Amendment pursuant to Rule 485(b)(ix)
by permission of the staff of the Securities and Exchange Commission.

Pursuant to the requirements of the Securities Act of 1933 and/or
the Investment Company Act of 1940, the Registrant has caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Chicago and State of Illinois on the
15th day of August, 1997.

DAVIS TAX-FREE HIGH INCOME FUND, INC.

<F*>By: /s/ Sheldon R. Stein
--------------------------------
Sheldon R. Stein,
Attorney-in-Fact

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.

Signature Title Date
--------- ----- ----
<S> <C> <C>
Shelby M.C. Davis<F*> Chief Executive Officer August 15, 1997
--------------------- & Director
Shelby M.C. Davis

Eileen R Street<F*> Principal Financial August 15, 1997
------------------- and Accounting Officer
Eileen R. Street

<FN>
<F*>Sheldon Stein signs this document on behalf of the Registrant and each of the
foregoing officers pursuant to the Powers of Attorney filed as Exhibit 17 to
Post-Effective Amendment No. 20 to Registrant's Registration Statement on Form
N-1A.
</TABLE>

/s/ Sheldon R. Stein
----------------------------------------
Sheldon R. Stein,
Attorney-in-Fact
<PAGE> 82

DAVIS TAX-FREE HIGH INCOME FUND, INC.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.

Signature Title Date
--------- ----- ----
<S> <C> <C>
Wesley E. Bass, Jr.<F*> Director August 15, 1997
-----------------------
Wesley E. Bass, Jr.

Marc P. Blum<F*> Director August 15, 1997
-----------------
Marc P. Blum

Eugene M. Feinblatt<F*> Director August 15, 1997
------------------------
Eugene M. Feinblatt

Jerry D. Geist<F*> Director August 15, 1997
-------------------
Jerry D. Geist

D. James Guzy<F*> Director August 15, 1997
------------------
D. James Guzy

G. Bernard Hamilton<F*> Director August 15, 1997
------------------------
G. Bernard Hamilton

LeRoy E. Hoffberger<F*> Director August 15, 1997
------------------------
LeRoy E. Hoffberger

Laurence W. Levine<F*> Director August 15, 1997
-----------------------
Laurence W. Levine

Edwin R. Werner<F*> Director August 15, 1997
--------------------
Edwin R. Werner

<FN>
<F*>Sheldon Stein signs this document on behalf of each of the
foregoing persons pursuant to the Powers of Attorney filed as Exhibit 17 to
Post-Effective Amendment No. 20 to Registrant's Registration Statement on Form
N-1A.
</TABLE>
/s/ Sheldon Stein
----------------------------------------
Sheldon Stein,
Attorney-in-Fact

<PAGE> 1

DAVIS TAX-FREE HIGH INCOME FUND, INC.
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION PURSUANT
TO SECTIONS 2-208 AND 2-208.1 OF THE MARYLAND
GENERAL CORPORATION LAW

Davis Tax-Free High Income Fund, Inc., a Maryland corporation, having
its principal office in Baltimore, Maryland, hereby certifies to the State
Department of Assessment and Taxation of Maryland that:

FIRST: Prior to the designation and reclassification of the common
stock of the corporation, the corporation had a total of 1,000,000,000 shares,
$.01 par value per share, 200,000,000 of which are unclassified, 350,000,000
shares of which are classified as Class A Common Stock, 350,000,000 of which
are classified as Class B Common Stock and 100,000,000 of which are classified
as Class C Common Stock, each with a par value of $.01 per share. The
aggregate par value of all the authorized stock is $10,000,000 of which
$2,000,000 is unclassified and $8,000,000 is classified.

SECOND: The Articles of Incorporation are hereby supplemented by (I)
changing the description of certain items and conditions under which the
classes of stock may be issued, (ii) reclassifying 50,000,000 shares of the
authorized and unissued shares of the Class A Common Stock and Class B Common
Stock as Class Y Common Stock and, (iii) classifying 50,000,000 shares of the
unclassified stock of the corporation as Davis Class Y Common Stock, all with
$.01 par value per share.

THIRD: The Class A Common Stock, Class B Common Stock, Class C Common
Stock and Class Y Common Stock shall represent investment in the same pool of
assets and shall have the same preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption except as set forth in the Articles of
Incorporation of the Corporation and as set forth below:

I. Expenses related to the distribution of each class of stock and
such other expenses as may be permitted by rule or order of
the Securities and Exchange Commission and as the Board of
Directors shall deem appropriate shall be borne solely by
each class, and the bearing of such expenses shall be
appropriately reflected (in the manner determined by the
Board of Directors) in the net asset value, dividends,
distribution and liquidation rights of the shares of such
Class;

II. The Class A Common Stock may be subject to a front-end load and
a Rule 12b-1 distribution fee as determined by the Board of
Directors from time to time prior to issuance of such stock
and, in addition, the Class A Common Stock issued after
filing of these Articles may also be subject to a contingent
deferred sales charge, as determined by the Board of
Directors from time to time prior to issuance of such stock;

III. The Class B Common Stock may be sold without a front-end sales
load and may be subject to a contingent deferred sales
charge and a Rule 12b-1 distribution fee as determined by
the Board of Directors from time to time prior to the
issuance of such stock and shall be converted to Class A
Common Shares at the end of eight (8) years after purchase
or such earlier period as determined by the Board of
Directors giving effect to reciprocal exchange privileges;

IV. The Class C Common Stock may be sold without a front-end
sales load and may be subject to a contingent deferred sales
charge and to a Rule 12b-1 distribution fee as determined by
the Board of Directors from time to time prior to issuance
of such stock;

V. The Class Y Common Stock may be sold without a front-end sales
load or contingent deferred sales charge and without a Rule
12b-1 distribution fee;

VI. Each class shall vote separately on matters pertaining only to
that class, as the Board of Directors shall from time to
time determine, and;

VII. Nothing herein shall prohibit the imposition of a redemption fee
or exchange fee upon any Class.

FOURTH: Immediately following the designation and reclassification of
stock, the Corporation will have a total of 1,000,000,000 shares, $.01 par
value per share, 150,000,000 of which will be unclassified, 300,000,000 of
which shall be classified Class A Common Stock, 300,000,000 of which shall be
classified Class B Common Stock, 100,000,000 of which shall be classified as
Class C Common Stock and 150,000,000 of which shall be classified as

<PAGE> 2

Class Y Common Stock, each with a par value of $.01 per share. The aggregate par
value of all the shares is $10,000,000 of which $1,500,000 unclassified and
$8,500,000 is classified.

FIFTH: The stock of the Corporation has been classified by the Board
of Directors of the Corporation in accordance with and pursuant to Article
FIFTH, Section (b) of the Articles of Incorporation of the Corporation.

SIXTH: The Corporation is registered as an open-end investment company
with the Securities and Exchange Commission pursuant to the Investment Company
Act of 1940.

SEVENTH: The Board of Directors duly adopted a resolution (i)
re-designating the preferences of the classes of Common Stock issued after the
filing of these articles; (ii) reclassifying 50,000,000 shares of the
authorized and unissued shares of each of the Class A Common Stock and Class B
Common as Class Y Common Stock; and (iii) designating 50,000,000 shares of the
authorized and unissued stock of the corporation Class Y Common Stock, all
with $.01 par value per share, on July 29, 1996.

EIGHTH: The effective date of these Articles Supplementary shall be
September 1, 1996.

IN WITNESS THEREOF, Davis Tax-Free High Income Fund, Inc. has caused
these presents to be signed in its name and on its behalf by its Vice
President and witnessed by its Secretary on August 18, 1996.

DAVIS TAX-FREE HIGH INCOME FUND, INC.

BY:
--------------------------------
CARL R. LUFF, VICE PRESIDENT

ATTEST:

- -------------------------------
RAYMOND O. PADILLA, SECRETARY

THE UNDERSIGNED, The Vice President of DAVIS TAX-FREE HIGH INCOME
FUND, Inc., who executed on behalf of said Corporation the foregoing Articles
Supplementary to the Charter, of which this certificate is made a part, hereby
acknowledges, in the name and on behalf of said Corporation, foregoing
Articles Supplementary to the Charter to be the corporate act of said
Corporation, and further certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein with respect
to the approval thereof are true in all material respects under the penalties
of perjury.

DATED: August 28, 1996

--------------------------------
CARL R. LUFF, VICE PRESIDENT

<PAGE> 1

EXHIBIT 6(b)

TRANSFER AND ASSUMPTION
-----------------------

THIS TRANSFER AND ASSUMPTION Is entered into as of June 1,
1997 by and among Davis Selected Advisors, L.P., a Colorado limited
partnership (the "Transferor"), Davis Distributors, L.L.C., a Delaware
limited liability company (the "Transferee") and Davis Tax-Free High Income
Fund, Inc. ("Fund"), a Maryland corporation.

WHEREAS, this Transferor is the sole member of the Transferee
and controls and manages the business of the Transferee; and

WHEREAS, the Transferor was organized to assume and continue the
distribution services business with respect to the investment companies for
which the Transferor serves as investment advisor; and

WHEREAS, the Transferor has entered into a Distributing
Agreement (the "Agreement") dated April 15, 1993 with Fund, pursuant to which
the Transferor serves as distributor of shares of capital stock of Fund;

NOW THEREFORE, the parties hereto agree as follows:

1. The Transferor hereby transfers unto the Transferee all of its
rights, obligations and liabilities under the Agreement.

2. The Transferee, in consideration of the transfer to it of all
Transferor's rights, obligations and liabilities under the
Agreement, hereby accepts and assumes such rights,
obligations and liabilities.

3. All references to Transferor in the Agreement shall, as of
June 1, 1997, be deemed to refer to the Transferee.

4. Fund hereby acknowledges and approves this transfer and agrees
that, as of June 1, 1997, the transferee shall be the other
party to the Agreement in lieu of the Transferor.

IN WITNESS THEREOF, the undersigned have caused this Transfer
and Assumption to be executed on their behalf as of the date
written above.

DAVIS SELECTED ADVISERS, L.P. DAVIS TAX-FREE HIGH INCOME FUND, INC.

BY: VENTURE ADVISERS, INC.
GENERAL PARTNER

BY:______________________________ BY:______________________________

DAVIS DISTRIBUTORS, LLC

BY:______________________________

<PAGE> 1

EXHIBIT 11

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We consent to the reference to our firm in the Registration Statement, (Form
N-1A), and related Statement of Additional Information of Davis Tax Free High
Income Fund, Inc. and to the inclusion of our report dated November 1, 1996 to
the Shareholders and Board of Directors of Davis Tax Free High Income Fund,
Inc.

/s/ Tait, Weller & Baker
-----------------------------------
Tait, Weller & Baker

Philadelphia, Pennsylvania
August 15, 1997

<PAGE> 1
EXHIBIT 15(a)

DAVIS FUNDS
MASTER RULE 12b-1 DISTRIBUTION PLAN
FOR CLASS A SHARES

THE PLAN:

PURPOSE. The Company shall finance the distribution of its Class A
shares pursuant to Rule 12b-1 under the Investment Company Act of
1940 ("Act") according to the terms of this Distribution Plan (the
"Plan").

FEES. Amounts, not exceeding in the aggregate a maximum annual
amount equal to 0.25% of the average of the daily net asset values of
the Class A shares of the Company during each fiscal year of the
Company, may be paid quarterly by the Company to the Distributor out
of the assets attributable to such shares at any time after the
effective date of the Plan to: (1) reimburse the Distributor for
-----------------------------
fees paid to its salespersons and to other firms which offer and sell
- ---------------------------------------------------------------------
the Company's shares and/or provide servicing and maintenance of
- ---------------------------------------------------------------------
shareholder accounts and (ii) reimburse the Distributor its other
- --------------------
distribution expenses, after application of the Distributor's portion
of sales charges incurred in the connection with the distribution of
Company shares, excluding overhead expense and including expenses of
promotion, sales seminars, wholesaling, advertising and sales
literature. For this purpose sales literature shall not include
reports sent to shareholders regulatory bodies which are paid for by
the Company.

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

REQUIRED APPROVALS AND TERM. Subject to paragraph 8, the Plan shall
not take effect until it has been approved by the vote of at least a
majority (as defined in the Act) of the outstanding Class A shares of
the Company. In addition, the Plan shall not take effect until it has
been approved, together with any related agreements, by votes of the
majority of both (I) the Board of Directors of the Company and (ii)
those directors of the Company who are not "interested persons" of
the Company as defined in the Act and who have no direct or indirect
financial interest in the operation of the Plan or any agreements
related to it ("Independent Directors", cast in person at a meeting
called for the purpose of voting on the Plan or such Agreements.
Unless sooner terminated pursuant to the terms hereof, the Plan shall
continue in effect for a period of one year from its effective date,
and thereafter shall continue in effect so long as such continuance
is specifically approved at least annually in the manner provided for
by Rule 12b-1 under the Act.

PERIODIC REPORTS. Any person authorized to direct the disposition
of monies paid or payable by the Company pursuant to the Plan or any
related agreement shall provide to the Company's Board of Directors,
and the Board of Directors shall review at least quarterly, a written
report of the amounts so expended and the purposes for which such
expenditures were made.

<PAGE> 2
TERMINATION. Subject to paragraph 8, the Plan may be terminated at
any time by a vote of a majority of the Independent Directors, or by
a majority vote of the outstanding Class A shares.

RELATED AGREEMENTS. Any agreement related to the Plan shall be in
writing, and shall provide:

That such agreement may be terminated at any time, without
payment of penalty, by a vote of a majority of the Independent
Directors or by a majority vote of the Class A shares on not
more than 60 days written notice to any other party to the
agreement; and

That such agreement shall terminate automatically in the
event of its assignment.

AMENDMENTS. The Plan may not be amended to increase materially the
amount of distribution expenses provided for in paragraph 2 unless
such amendment is approved in the manner provided for in paragraph 3,
and no material amendment to the Plan shall be made unless approved
by the Board of Directors and the Independent Directors.

SPECIAL PROCEDURES FOR SERIES COMPANY. If the Company is or
becomes a series company (as defined in Rule 18f-2 under the Act),
then the Plan shall not take effect as to the Class A shares of any
series and no amendment may be effected to increase materially the
amount of distribution expenses as to the Class A shares of any series
until it has been approved by the Board of Directors, the Independent
Directors and the Class A shareholders of such series in the manner
provided in paragraph 3; and no material amendment to the Plan in
respect to such shares shall be made unless approved as to such
shares by the Board of Directors and Independent Directors. The Plan
may be terminated as to any series at any time by a majority vote of
the Independent Directors and by a majority vote of the Class A
shareholders of the series.

<PAGE> 1

EXHIBIT 15(c)

DAVIS HIGH INCOME FUND, INC.
DAVIS TAX-FREE HIGH INCOME FUND, INC.
DAVIS SERIES, INC.
MASTER RULE 12B-1 DISTRIBUTION PLAN
FOR CLASS C SHARES

THE PLAN:
- ---------

1. PURPOSE. The Company shall finance the distribution of its Class C
shares pursuant to Rule 12b-1 under the Investment Company Act of 1940 ("Act")
according to the terms of this Distribution Plan (the "Plan").

1. FEES. Amounts, not exceeding in the aggregate a maximum amount equal
to the lesser of (a) .3125% of the averages of the daily net asset values of
the Company or (b) the maximum amount provided by an applicable rule or
regulation of the National Association of Securities Dealer, Inc. during each
fiscal quarter of the Company elapsed after the inception of the Plan may be
paid by the Company to the Distributor at any time after the inception of the
Plan in order: (i) to pay the Distributor commissions in respect of shares of
the Company previously sold at any time after the inception of the Plan, all
or any part of which may be or may have been reallowed or otherwise paid to
others by the Distributor in respect of or in furtherance of sales of shares
of the Company after the inception of the Plan; and (ii) to enable the
Distributor to pay or to have paid to others who sell the Company's shares a
maintenance or service fees, at such intervals as the distributor may
determine, in respect of that Company's shares previously sold by any such
others at any time after the inception of the Plan and remaining outstanding
during the period in respect of which such fee is or has been paid.

2. REQUIRED APPROVALS AND TERMS. Subject to paragraph 8, the Plan shall
not take effect until it has been approved, together with any related
agreements, by votes of the majority of both (i) the Board of Directors of the
Company and (ii) those directors of the Company who are not "interested
persons" of the Company as defined in the Act and who have no direct or
indirect financial interest in the operation of the Plan or any agreements
related to it (the "Independent Directors"), cast in person at a meeting
called for the purpose of voting on the Plan or such agreements. Unless
sooner terminated pursuant to the terms hereof, the Plan shall continue in
effect for a period of one year from its effective date, and thereafter shall
continue in effect so long as such continuance is specifically approved at
least annually in the manner provided for by Rule 12b-1 under the Act.

3. PERIODIC REPORTS. Any person authorized to direct the disposition of
monies paid or payable by the Company pursuant to the Plan or any related
agreement shall provide to the Company's Board of Directors, and the Board of
Directors shall review at least quarterly, a written report of the amounts so
expended and the purposes for which such expenditures were made.

4. TERMINATION. Subject to paragraph 8, the Plan may be terminated at
any time by a vote of a majority of the Independent Directors, or by a
majority vote of the Company's outstanding Class C shares.

5. RELATED AGREEMENTS. Any agreement related to the Plan shall be in
writing, and shall provide:

(i) That such agreement may be terminated at any time, without payment
of penalty, by vote of a majority of the Independent Directors or by a
majority vote of the Company's outstanding Class C shares on not more than 60
days written notice to any other party to the agreement; and

<PAGE> 2

1. That such agreement shall terminate automatically in the event of its
assignment.

2. AMENDMENTS. The Plan may not be amended to increase materially the
amount of distribution expenses provided in paragraph 2 unless such amendment
is approved in the manner provided in paragraph 3, and no material amendment
to the Plan shall be made unless approved by the Board of Directors and the
Independent Directors.

3. SPECIAL PROCEDURES FOR SERIES COMPANY. If the Company is or becomes
a series company (as defined in Rule 18f-2 under the Act), then the Plan shall
not take effect as to the Class C shares of any series and no amendment may be
effected to increase materially the amount of distribution expenses as to the
Class C shares of any series until it has been approved as to the Class C
shares of such series by the Board of Directors and the Independent Directors
of such series in the manner provided in paragraph 3; and no material
amendment to the Plan in respect to such shares shall be made unless approved
as to such shares by the Board of Directors and Independent Directors. The
Plan may be terminated as to any series at any time by vote of a majority of
the Independent Directors or by majority vote of the Class C shareholders of
the series.

<PAGE> 1
Exhibit 18(a)

Davis Tax-Free High Income Fund, Inc.
Plan Pursuant to Rule 18f-3, as amended
---------------------------------------

Registrant elects to offer different classes of shares of its common stock
pursuant to Rule 18f-3 under the following Plan.

1. Registrant's current Plan encompasses four classes of shares that
may be offered as follows:

(a) Class A shares with a front end sales charge ("FESC") subject to
certain exceptions, a contingent deferred sales charge ("CDSC") under certain
circumstances, and to Rule 12b-1 fees ("Rule 12b-1 fees"). The applicable
FESC, including reductions and exceptions, application of the CDSC and the
Rule 12b-1 fees are set forth in Exhibits "A" and "E" attached hereto.

(b) Class B shares at net asset value subject to (i) Rule 12b-1 fees
and (ii) a CDSC for redemptions or repurchases by the Registrant effected
within a certain period of time not exceeding eight years from the date of
purchase. Class B shares outstanding will automatically convert to Class A
shares within eight years after the end of the month in which the shares were
purchased. (However, for shares purchased before December 1, 1994 which are
represented by stock certificates, the stock certificates must be returned to
the transfer agent to effect conversion.) In addition, certain Class B shares
held by certain defined contribution plans automatically convert to Class A
shares based on increases of plan assets. The deferred sales charges,
conversion and Rule 12b-1 fees are as set forth in Exhibits "B" and "E"
attached hereto.

(c) Class C shares at net asset value subject to a fee upon redemption
within one year of purchase and Rule 12b-1 fees. The terms and conditions of
the Class C shares are as set forth in Exhibits "C" and "E" attached hereto.

(d) Class Y shares at net asset value with no Rule 12b-1 charges.
Class Y shares are available only to certain types of investors as defined in
Exhibit D attached hereto.

1
<PAGE> 2

initially purchased from the money market series may be exchanged for any class
of shares at the public offering price of the acquired shares (which may include
a sales charge) and are subject to any CDSC or other charge upon redemption
normally applicable to the acquired shares; and (iii) Class A shareholders who
are eligible to purchase Class Y shares may exchange their shares for Class Y
shares of the Fund.

2. Income, realized and unrealized capital gains and losses and
expenses not allocated to a particular class are allocated to each class on
the basis of relative net assets.

Expenses allocable to a specific class are expenses specifically
incurred for such class including the following:

(a) Rule 12b-1 expenses
(b) Incremental transfer agency expenses
(c) Incremental costs of preparing, printing and mailing shareholder
reports, proxy materials and prospectuses related to such class
(d) Registration fees and other expenses of registration of the shares
of such class under laws or regulations of any jurisdiction in which the class
of shares is to be offered
(e) Directors' fees and expenses incurred as a result of issues
relating solely to such class
(f) Legal and accounting expenses relating solely to such class

3. Each class will vote separately with respect to any matter as
required by applicable law or which separately affects that class. As
provided in the Articles of Incorporation, each dollar of net asset value per
share is entitled to one vote.

2
<PAGE> 3

Exhibit A

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 Your
as Percentage Approximate Percentage Dealer as Percentage
Amount of Purchase of Offering Price of Amount Invested of Offering 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%<F*>

<FN>
<F*>On purchases of $1 million or more, the investor pays no front-end sales
charge but a contingent deferred sales charge of 0.75% may be imposed if
shares purchased after May 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:

<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 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.

3
<PAGE> 4

(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.

(v) Rights of Accumulation: If you notify your dealer or the
Distributor, you may include the Class A shares you already own (valued at
maximum offering price) 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 High Income Fund, Inc., Davis Tax-Free High
Income Fund, Inc., Davis International Series, Inc. 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 advisors 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 advisors or financial planners who place trades for their own
accounts if the accounts are linked to the master account

4
<PAGE> 5

of such investment advisor 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.

5
<PAGE> 6

Exhibit B

CLASS B SHARES. Class B shares are offered at net asset value,
without a front-end sales charge. 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 upon 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' average daily net asset 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 the Funds' 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 interests 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.

6
<PAGE> 7

Exhibit C

CLASS C SHARES. Class C shares are offered at net asset value
without 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 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.

7
<PAGE> 8

Exhibit D

Class Y shares. Currently, Class Y shares are offered 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; (ii) any state, county, city, department, authority or similar agency
prohibited by law from paying a sales charge which invests at least
$5,000,000; 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 Adviser ("Wrap Program
Investors").

8
<PAGE> 9

Exhibit E

CONTINGENT DEFERRED SALES CHARGES. Any contingent deferred sales
charge 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 contingent deferred sales charge 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
contingent deferred sales charge will be redeemed first. Thereafter, shares
held the longest will be the first to be redeemed.

The contingent deferred sales charge (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 withdrawal 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 withdrawal 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
shares held in such account falls below an established minimum amount; (g)
certain other exceptions related to defined contribution plans as described in
the Statement of Additional Information.

9
<PAGE> 10

Exhibit F

Exchange Privileges

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.

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, to
which any Class B or Class C shares are subject at the time of exchange will
continue to apply to any shares acquired upon exchange.

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
Davis Fund's applicable offering price. If you would like to participate in
this program, you may use the appropriate designation on the Application Form.

10
<PAGE> 11

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 a shareholder 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 a 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 or more days' notice.

<PAGE> 1

EXHIBIT 17(b)

DAVIS TAX-FREE HIGH INCOME FUND, INC.

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Shelby M.C. Davis, Samuel P. Ynzunza, Sheldon R. Stein and Arthur
Don, and each of them, her attorneys-in-fact, each with the power of
substitution, for her in any and all capacities, to sign any post-effective
amendments to the registration statement under the Securities Act of 1933
(Registration No. 2-29858) and/or the Investment Company Act of 1940
(Registration No. 811-1701), whether on Form N-1A or any successor forms
thereof, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission and all
appropriate state or federal regulatory authorities. The undersigned hereby
ratifies and confirms all that each of the aforenamed attorneys-in-fact, or
her substitute or substitutes, may do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned have executed this Power of
Attorney as of the 15th day of August, 1997.

/s/ Eileen R. Street
- ------------------------------------
Eileen R. Street, Treasurer

<PAGE> 1
Exhibit 18(a)

Davis Tax-Free High Income Fund, Inc.
Plan Pursuant to Rule 18f-3, as amended
----------------------------------------

Registrant elects to offer different classes of shares of its common stock
pursuant to Rule 18f-3 under the following Plan.

1. Registrant's current Plan encompasses four classes of shares that
may be offered as follows:

purchased. (However, for shares purchased before December 1, 1994 which are
represented by stock certificates, the stock certificates must be returned to

the transfer agent to effect conversion.) In addition, certain Class B
shares held by certain defined contribution plans automatically convert to
Class A shares based on increases of plan assets. The deferred sales
charges, conversion and Rule 12b-1 fees are as set forth in Exhibits "B" and
"E" attached hereto.

(c) Class C shares at net asset value subject to a fee upon
redemption within one year of purchase and Rule 12b-1 fees. The terms and
conditions of the Class C shares are as set forth in Exhibits "C" and "E"
attached hereto.

(d) Class Y shares at net asset value with no Rule 12b-1 charges.
Class Y shares are available only to certain types of investors as defined in

<PAGE> 2
Exhibit D attached hereto.

(e) Exchange Privileges: The exchange privileges are set forth in
Exhibit "F" hereto. In summary, for a nominal exchange fee, shares of a
class may be exchanged for shares of the same class of certain other
registrants with the same investment adviser or distributor (or any series
issued by such registrants) at net asset value except that: (i) Any shares
issued in exchange for shares still subject to any unpaid FESC or CDSC or
other charge payable upon redemption remain subject to such unpaid charges;
(ii) Money market series Class A shares which were initially purchased from
the money market series may be exchanged for any class of shares at the
public offering price of the acquired shares (which may include a sales
charge) and are subject to any CDSC or other charge upon redemption normally
applicable to the acquired shares; and (iii) Class A shareholders who are
eligible to purchase Class Y shares may exchange their shares for Class Y
shares of the Fund.
2. Income, realized and unrealized capital gains and losses and
expenses not allocated to a particular class are allocated to each class on
the basis of relative net assets.

Expenses allocable to a specific class are expenses specifically
incurred for such class including the following:

(a) Rule 12b-1 expenses
(b) Incremental transfer agency expenses
(c) Incremental costs of preparing, printing and mailing shareholder
reports, proxy materials and prospectuses related to such class
(d) Registration fees and other expenses of registration of the
shares of such class under laws or regulations of any jurisdiction in which
the class of shares is to be offered
(e) Directors' fees and expenses incurred as a result of issues
relating solely to such class
(f) Legal and accounting expenses relating solely to such class

<PAGE> 3
Exhibit A

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 Your
as Percentage Approximate Percentage Dealer as Percentage
Amount of Purchase of Offering Price of Amount Invested of Offering 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%*

* On purchases of $1 million or more, the investor pays no front-end sales
charge but a contingent deferred sales charge of 0.75% may be imposed if
shares purchased after May 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>
<TABLE>
Purchase Amount Commission
---------------- -----------
<S> <C> <C>
First $3,000,000 .75%
Next $2,000,000 .50%
Over $5,000,000 .25%
</TABLE>

There are a number of ways to reduce the 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.

<PAGE> 4
(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.

(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 High Income Fund, Inc., Davis Tax-Free
High Income Fund, Inc., Davis International Series, Inc. 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.

<PAGE> 5
(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 advisors 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 advisors or financial planners who place trades for their own
accounts if the accounts are linked to the master account of such investment
advisor 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.

<PAGE> 6
Exhibit B

CLASS B SHARES. Class B shares are offered at net asset value,
without a front-end sales charge. 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 upon
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' average daily net asset 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 the Funds' 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 interests 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.

<PAGE> 7
Exhibit C

CLASS C SHARES. Class C shares are offered at net asset value
without 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 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.

<PAGE> 8
Exhibit D

Class Y shares. Currently, Class Y shares are offered 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; (ii) any state, county, city, department, authority or similar agency
prohibited by law from paying a sales charge which invests at least
$5,000,000; and (iii) any investor with an account established under a Awrap
account@ or other similar fee-based program sponsored and maintained by a
registered broker-dealer approved by the Fund-s Adviser ("Wrap Program
Investors").

<PAGE> 9
Exhibit E

CONTINGENT DEFERRED SALES CHARGES. Any contingent deferred sales
charge 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 contingent deferred sales charge
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
contingent deferred sales charge will be redeemed first. Thereafter, shares
held the longest will be the first to be redeemed.

The contingent deferred sales charge (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 withdrawal 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 withdrawal 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 shares held in such account falls below an
established minimum amount; (g) certain other exceptions related to defined
contribution plans as described in the Statement of Additional Information.

<PAGE> 10
Exhibit F

Exchange Privileges

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, to which any Class B or Class C shares are subject 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 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.

<PAGE> 11
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 Davis Fund's applicable offering price. If you would like to
participate in this program, you may use the appropriate designation on the
Application Form.

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 a shareholder 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 a 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 or more days' notice.