DAVIS TAX FREE HIGH INCOME FUND INC, 485BPOS, 1998-01-30

DAVIS TAX FREE HIGH INCOME FUND INC
485BPOS, 1998-01-30

Previous: GNI GROUP INC /DE/, SC 13G/A, 1998-01-30

Next: HALLWOOD GROUP INC, SC 13G, 1998-01-30

<PAGE>

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. 25

AND

REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940

REGISTRATION NO. 811-3270

AMENDMENT NO. 26

DAVIS TAX-FREE HIGH INCOME FUND, INC.

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

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

Agent For Service: Thomas D. Tays, 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 February 2, 1998, pursuant to paragraph (b)
-----
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, 1997

<PAGE>

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

POST-EFFECTIVE AMENDMENT NO. 25 TO REGISTRATION STATEMENT NO. 2-74216
UNDER THE SECURITIES ACT OF 1933 AND AMENDMENT NO. 26 UNDER THE
INVESTMENT COMPANY ACT OF 1940 TO REGISTRATION STATEMENT NO.
811-3270.

CROSS REFERENCE SHEET
---------------------
N-1A
ITEM NO. PROSPECTUS CAPTION OR PLACEMENT
- ------- -------------------------------

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 Management's Discussion of Fund Performance (contained
in 1997 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 *
19 Determining the Price of Shares; Reduction of Class A Sales Charge
20 *
21 *
22 Performance Data
23 Financial Statements for the year ended September 30, 1997 are
incorporated by reference from the 1997 Annual Report to
Shareholders.

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

* INCLUDED IN PROSPECTUS

<PAGE>

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

CROSS REFERENCE SHEET
---------------------
N-1A
ITEM NO. PROSPECTUS CAPTION OR PLACEMENT
- ------- -------------------------------

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 Management's Discussion of Fund Performance (contained
in 1997 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
---------------------------

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

* INCLUDED IN PROSPECTUS

<PAGE>

PROSPECTUS FEBRUARY 2, 1998
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

MINIMUM INVESTMENT PLANS AVAILABLE
Initial Purchase $1,000 Exchange Privilege
Subsequent Investment $25 Automatic Investment Plan
Automatic Withdrawals Plan

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 2, 1998, 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.

-1-
<PAGE>

SUMMARY

FUND EXPENSES. The following table is intended to assist you in
understanding the various costs and expenses that an investor in the Class A,
Class B and Class C shares of the Fund will bear directly or indirectly. 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%1 4.00% 1.00%
Redeemed during second or third year.......................... None 3.00% None
Redeemed during fourth or fifth year.......................... None 2.00% None
Redeemed during sixth year.................................... None 1.00% None
Redeemed after sixth year..................................... None None None
Exchange Fee.................................................... None None None

Annual Fund operating expenses (as a percentage of average net assets)
Management fees................................................. 0.65% 0.65% 0.65%
12b-1 fees2..................................................... 0.25% 0.99% 1.00%
Other expenses.................................................. 0.36% 0.38% 0.38%
----- ----- ----
Total Fund operating expenses................................. 1.26% 2.02% 2.03%
</TABLE>
1 On certain Class A shares purchased at net asset value without a sales
load and redeemed during the first year after purchase, there is a 0.75%
deferred sales charge.

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

Example:

You would pay the following expenses on a $1,000 investment, assuming
a 5% annual return and (except as 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.......................................... $60 $86 $113 $193
Class B.......................................... $51 $83 $119 N/A
Class B (assuming no redemption at end of period) $21 $63 $109 N/A
Class C.......................................... $21 $64 $109 $236
Class C (assuming no redemption at end of period) $21 $64 $109 $236
</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.

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

The Company currently offers one investment portfolio, the Davis
Tax-Free High Income Fund (the "Fund"). The Fund offers four classes of
shares, Class A, B, C and Y. Class A shares may be purchased at a price equal
to their net asset value per share plus a front-end sales charge imposed at
the time of purchase. Purchases of $1 million or more of Class A shares may be
purchased at net asset value, but shares purchased at net asset value 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

2
<PAGE>

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 each 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 Fund may offer additional classes of shares in the future and may
at any time discontinue the offering of any class of shares. See "Purchase of
Shares--Alternative Purchase Arrangements".

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. . 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. 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 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.

3
<PAGE>

FINANCIAL HIGHLIGHTS

The following table provides you with information about the financial
history of the Fund's Class A, Class B, and Class C shares. The table
expresses the information in terms of a single Class A, B, or C share for the
respective periods presented and is supplementary information to the Fund's
financial statements which are included in the September 30, 1997 Annual
Report to Shareholders. Such report may be obtained by writing or calling the
Fund. The Fund's financial statements and financial highlights for the five
years ended September 30, 1997, have been audited by Tait, Weller & Baker
serving as independent certified public accountants, whose opinion thereon is
contained in the Annual Report.

<TABLE>
<CAPTION>
CLASS A
YEAR YEAR TEN MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Asset Value, Beginning of Period....... $ 9.15 $ 9.19 $8.90
------- ------- -----

Income From Investment Operations
Net Investment Income................. .57 .61 .40
Net Gains on Securities
(both realized and unrealized)...... .11 (.05) .30
------- ------ -----
Total From Investment Operations.... .68 .56 .70
------- ------- -----

Less Distributions
Dividends (from net investment income) (.59) (.54) (.40)
Distribution in excess of net investment
Income............................... - - -
------- ------- -----
Tax Return of capital distributions... - - -
------- ------- -----
Distributions from realized gains
from investment transactions......... (.02) (.06) (.01)
-------

Dividends from net investment income
Taxable.............................. - - -
------- ------- -----
Total Distributions................ (.61) (.60) (.41)
------- ------- -----

Net Asset Value, End of Period............ $ 9.22 $9.15 $9.19
======= ===== =====

Total Return (1)........................... 7.66% 6.33% 7.93%

Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) $92,020 $44,828 $45,461
Ratio of Expenses to Average Net Assets 1.26%(2) 1.36% 1.43%*
Ratio of Net Income to Average Net Assets 6.60% 6.64% 5.95%*
Portfolio Turnover Rate............... 112.71% 106.55% 127.80%

</TABLE>
(1) Sales charges are not reflected in calculation.
(2) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement were 1.25% for September 30, 1997. Prior
to 1996, such reductions were reflected in the expense ratios.

* Annualized.

4
<PAGE>

CLASS B

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <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
------- ----- ----- ----- ----- ----- ----- ----- -----

Income From Investment
Operations
Net Investment
Income................ .53 .54 .48 .44 .54 .54 .67 .59 .55 .61
Net Gains or Losses
on Securities (both
realized and unrealized) .08 (.05) .10 (.18) .29 .27 .22 (.09) .24 .51
------ ----- ------ ------ ----- ----- ----- ------ ----- -----
Total From
Investment Operations. .61 .49 .58 .26 .83 .81 .89 .50 .79 1.12
------ ----- ----- ----- ----- ----- ----- ----- ----- -----

Less Distributions
Dividends (from net
Investment income).... (.52) (.48) (.48) (.44) (.54) (.54) (.67) (.59) (.55) (.61)
Distribution in
excess of net investment
income................ - - (.01) (.07) (.10) (.12) (.11) (.12) (.12) (.12)
Tax Return of
Capital distributions. - - - (.03) (.03) (.07) - (.07) (.11) (.08)
Distribution from
Realized gains from
Investment transactions (.02) (.06) (.01) (.28) - - - - - (.04)
Dividends from net
Investment income-
Taxable............... - - - - - - - - - -
--- --- --- --- --- --- --- --- --- --
Total Distributions..... (.54) (.54) (.50) (.82) (.67) (.73) (.78) (.78) (.78) (.85)
------ ---- ---- ---- ---- ---- ---- ---- ---- ----

Net Asset Value,
End of Period........... $ 9.19 $9.12 $9.17 $9.09 $9.65 $9.49 $9.41 $9.30 $9.58 $9.57
======= ===== ===== ===== ===== ===== ===== ===== ===== =====

Total Return (1)........... 6.89% 5.51% 6.64% 2.81% 9.10% 8.89% 10.09% 5.37% 8.63% 12.54%

Ratios/S1upplemental Data
Net Assets, End of
Period (000 omitted).. $132,934 109,488 126,727 188,874 164,018 124,227 91,718 80,283 71,339 58,871
Ratio of Expenses to
Average Net Assets.... 2.02% 2.10% 2.14% 2.07% 2.26% 2.41% 2.41% 2.44% 2.39% 2.46%
Ratio of Net Income
to Average Net Assets 5.87% 5.89% 5.37% 4.49% 5.50% 5.53% 7.13% 6.08% 5.63% 6.36%

Portfolio Turnover Rate. 112.71% 106.55% 127.80% 113.46% 107.80% 47.31% 55.07% 28.77% 22.85% 33.72%

</TABLE>

(1) Contingent deferred sales charges are not reflected in calculation.

<PAGE>

CLASS C
<TABLE>
<CAPTION>
AUGUST 18, 1997
(COMMENCEMENT
OF OPERATIONS)
THROUGH
SEPTEMBER 30,
1997
<S> <C>
Net Asset Value,
Beginning of Period ................................... $ 9.20
---------
Income From Investment Operations
Net Investment Income ................................. .04
Net Gains on Securities
(both realized and unrealized) ...................... .03
---------
Total From Investment Operations .................... .07
---------
Less Distributions
Dividends (from net
investment income) ................................. (.02)
Distributions From
Realized Capital Gains ................................... --
---------
Total Distributions ................................ (.02)
---------
Net Asset Value, End of Period ........................... $ 9.25
=========

Total Return 1 ............................................ 0.77%

Ratios/Supplemental Data
Net Assets, End of
Period (000 omitted) ................................ $ 2,430
Ratio of Expenses
to Average Net Assets ............................. 2.03%*
Ratio of Net Income
to Average Net Assets .............................. 5.85%*

Portfolio Turnover Rate .............................. 112.71%
</TABLE>

1 Sales charges are not reflected in calculation.

* Annualized.

<PAGE>

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. Sub-classifications which may have unique investment and
risk profiles include "Municipal Lease Obligations" and "High Yield, High Risk
Debt Securities". The section entitled "Municipal Obligations" in the
Statement of Additional Information contains a more complete discussion of
revenue bonds and municipal lease obligations.
High Yield, High Risk Debt Securities are described below.

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 Fund may purchase up to 50% of the outstanding debt obligations
of an issuer. Some of the securities which the Fund may hold not have an
established market and suck lack of liquidity could cause the Fund difficulty
at times in selling these securities at favorable prices.

7
<PAGE>

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.

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 many 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 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 may adversely impact the market value of
high yield, high risk securities and could adversely impact the Fund's net
asset value.

8
<PAGE>

An economic downturn or significant increase in interest rates is
likely to have a negative effect 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.

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, 1997. 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.

9
<PAGE>

COMPOSITION OF THE FUND'S PORTFOLIO BY QUALITY RATING AS A PERCENTAGE OF
TOTAL NET ASSETS AT SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
FUND'S ASSESSMENT OF GENERAL DEFINITION
MOODY'S/S&P RATING CATEGORY PERCENTAGE NON-RATED SECURITIES OF BOND QUALITY
- --------------------------- ---------- -------------------- --------------
<S> <C> <C> <C>
Aaa/AAA ............................ 36.19% 0.20% Highest quality
Aa/AA ............................ 6.63% 0.41% High quality
A/A ............................ 14.46% 0.56% Upper medium grade
Baa/BBB ............................ 7.23% 4.72% Medium grade
Ba/BB ............................ 7.26% 10.88% Some speculative elements
B/B ............................ 0.65% 6.57% 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........................... 23.34% 0.00% Not rated by Moody's or S&P
Short-term Investments.............. 4.24% 0.00%
------ -----
100.00% 23.34%
</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 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.

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.

10
<PAGE>

The Adviser and Sub-Adviser are authorized to place portfolio transactions
with Shelby Cullom Davis & Co., a member of the New York Stock Exchange which
may be deemed to be an affiliate of the Adviser, if the commissions are fair
and reasonable and comparable to commissions charged by non-affiliated
qualified brokerage firms for similar services. Research services and
placement of orders by securities firms for shares of the Fund may be taken
into account as a factor in placing portfolio transactions. 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.

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.

SUB-ADVISER. The Sub-Adviser 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.

11
<PAGE>

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.

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, the
Adviser's General Partner, or DSA-NY. Up to 0.25% of average net assets is
used to reimburse the Distributor for the payment of service and maintenance
fees to its salespersons and other firms for shareholder servicing and
maintenance of shareholder accounts.

If, due to the foregoing payment limitations, the Fund is unable to
pay the Distributor the 4% commission on new sales of Class B shares, the
Distributor intends, but is not obligated, to accept new orders for shares and
pay commissions in excess of the payments it receives from the Fund. The
Distributor intends to seek full payment from the Fund of any excess amounts
with interest at 1% over the prime rate at such future date when and to the
extent such payments on new sales would not be in excess of the limitations.
The Fund is not obligated to make such payments; the amount (if any), timing
and condition of any such payments are solely within the discretion of the
directors of the Fund who are not interested persons of the Distributor or the
Fund and have no direct or indirect financial interest in the Class B
Distribution Plan (the "Independent Directors"). If the Class B Distribution
Plan is terminated, the Distributor will ask the Independent Directors to take
whatever action they deem appropriate with regard to the payment of any excess
amounts. As of September 30, 1997, the Distributor paid $2,900,917 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 commissions and service and maintenance fees
to its salespersons and other firms for selling new Class C shares,
shareholder servicing and maintenance of shareholder accounts.

12
<PAGE>

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 herein, dealers or others may receive different levels
of compensation depending on which class of shares they sell. The Distributor
may make expense reimbursements for special training of a dealer's registered
representatives or personnel of dealers and other firms who provide sales or
other services in respect to the Fund and/or its shareholders, or to defray
the expenses of meetings, advertising, or equipment. Any such amounts may be
paid by the Distributor from the fees it receives under the Class A, Class B
and Class C Distribution Plans.

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

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

PURCHASE OF SHARES

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

There are three ways to make an initial investment in the Fund. One
way is to fill out the Application Form included in this Prospectus and mail
it to State Street Bank and Trust Company ("State Street") at the address on
the Form. The dealer must also sign the Form. Your dealer or sales
representative will help you fill out the Form. 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. THIRD PARTY
CHECKS WILL NOT BE ACCEPTED. When purchases are made by check, redemptions
will not be allowed until the investment being redeemed has been in the
account for 15 calendar days.

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

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

13
<PAGE>

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-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.

14
<PAGE>

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

<TABLE>
<CAPTION>
Customary
Sales Charge Charge as Concession to
as Approximate Your Dealer as
Percentage Percentage Percentage
of Offering of Amount of Offering
Amount of Purchase Price Invested Price
- ------------------ ----------- ----------- --------
<S> <C> <C> <C>
$ 99,999 or less........................................ 4-3/4% 5.0% 4%
$ 100,000 to $249,999....................................... 3-1/2% 3.6% 3%
$ 250,000 to $499,999....................................... 2-1/2% 2.6% 2%
$ 500,000 to $749,999....................................... 2% 2.0% 1-3/4%
$ 750,000 to $999,999........................................ 1% 1.0% 3/4 of 1%
$ 1,000,000 or more........................................ 0% 0.0% 0%*
</TABLE>

* On purchases of $1 million or more, the investor pays no front-end sales
charge but a contingent deferred sales charge, of 0.75% is imposed if shares
purchased at net asset value 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:

Purchase Amount Commission
--------------- ----------
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.

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.

(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, B, and C shares of the Davis Funds
you already own (except shares of Davis Government Money Market Fund) 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., Davis International Total Return Fund, and all funds offered by Davis
Series, Inc. (other than Davis Government Money Market Fund), separately or
under combined Statements of Intention or Rights of Accumulation to determine
the price applicable to your purchases of Class A shares of the Fund.

(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

15
<PAGE>

spouse, child, parent, grandparent, brother or sister ("immediate family
members") of all of the foregoing, and any employee benefit or payroll
deduction plan established by or for such persons; (3) Class A shares
purchased by any registered representatives, principals and employees (and any
immediate family member) of securities dealers having a sales agreement with
the Distributor; (4) initial purchases of Class A shares totaling at least
$250,000 but less than $5,000,000, made at any one time by banks, trust
companies and other financial institutions on behalf of one or more clients
for which such institution acts in a fiduciary capacity; (5) Class A shares
purchased by any single account covering a minimum of 250 participants (this
250 participant minimum may be waived for certain fee based mutual fund
marketplace programs) and representing a defined benefit plan, defined
contribution plan, cash or deferred plan qualified under 401(a) or 401(k) of
the Internal Revenue Code or a plan established under section 403(b), 457 or
501(c)(9) of such Code or "rabbi trusts"; (6) Class A shares purchased by
persons participating in a "wrap account" or similar fee-based program
sponsored and maintained by a registered broker-dealer approved by the Fund's
Distributor or by investment advisers or financial planners who place trades
for their own accounts or the accounts of their clients and who charge a
management, consulting or other fee for their services; and clients of such
investment advisers or financial planners who place trades for their own
accounts if the accounts are linked to the master account of such 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.

CLASS B SHARES. Class B shares are offered at net asset value,
without a front-end sales charge. The Distributor receives and usually
reallows commissions to the firms responsible for the sale of such shares. See
"Distribution Plans". With certain exceptions described below, the Fund
imposes a deferred sales charge of 4% on shares redeemed during the first year
after purchase, 3% on shares redeemed during the second or third year after
purchase, 2% on shares redeemed during the fourth or fifth year after purchase
and 1% on shares redeemed during the sixth year after purchase. However, on
Class B shares of the Fund which 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

16
<PAGE>

Class C shares have been outstanding for more than one year, the Distributor
will make quarterly payments to the firm responsible for the sale of the
shares in amounts equal to 0.75% of the annual average daily net asset value
of such shares for sales fees and 0.25% of the annual average daily net asset
value of such shares for service and maintenance fees.

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

The CDSC on Class A, B and C Shares that are subject to a CDSC will
be waived if the redemption relates to the following; (a) in the event of the
total disability (as evidenced by a determination by the federal Social
Security Administration) of the shareholder (including registered joint owner)
occurring after the purchase of the shares being redeemed; (b) in the event of
the death of the shareholder (including a registered joint owner); (c) for
redemptions made pursuant to an automatic 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. The account minimums of
$1,000 will be waived if, pursuant to the automatic investment plan, the
account balance will meet the minimum investment requirements within twelve
months of the initial investment. For institutions that are members of the
Automated Clearing House system (ACH), such purchases can be processed
electronically on any day of the month between the 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.

TELEPHONE PRIVILEGE

17
<PAGE>

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 or redemption fee
applicable at the time of exchange will continue to apply to any shares
acquired upon exchange.

Before you decide to make an exchange, you must obtain the current
prospectus of the desired fund. Call your broker or the Distributor for
information and a prospectus for any of the other Davis Funds registered in
your state. Read the prospectus carefully. If you decide to exchange your
shares, send State Street a written unconditional request for the exchange and
follow the instructions regarding delivery of share certificates contained in
the section on "Redemption of Shares". A 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
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 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.

18
<PAGE>

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.

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

19
<PAGE>

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. Payment by
wire is usually credited to your bank account on the next business day after
your call. The Expedited Redemption Privilege may be terminated, modified or
suspended by the Fund at any time. See "Telephone Privilege".

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

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, any
applicable CDSCs will be imposed on such shares redeemed. Purchase of
additional shares concurrent with withdrawals may be disadvantageous to you
because of tax and sales load consequences. If the amount you withdraw exceeds
the dividends on your shares, your account will suffer depletion. Your
Automatic Withdrawals Plan may be terminated by you at any time without charge
or penalty. The Fund reserves the right to terminate or modify the Automatic
Withdrawals Plan at any time. 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 applicable CDSC assessed on such
shares will be returned to the account. Shares will be deemed to have been
purchased on the original purchase date for purposes of calculating the CDSC
and conversion period. This can be done by sending the Fund or the Distributor
a letter, together with a check for the reinstatement amount. The letter must
be received, together with the payment, within 30 days after the redemption or
repurchase. You can only use this privilege once.

DETERMINING THE PRICE OF SHARES

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

20
<PAGE>

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

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 CDSC) 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.

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.

21
<PAGE>

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.

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

22
<PAGE>

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.

"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. "Taxable 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.

"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.

23
<PAGE>

The Fund's 1997 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.

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.

24
<PAGE>

C - Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

STANDARD & POOR'S CORPORATE BOND RATINGS

AAA - Debt rated 'AAA' has the highest rating assigned by Standard and Poor's.
Capacity to pay interest and repay principal is extremely strong.

AA - Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree. A -
Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.

BBB - Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.

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

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.

25
<PAGE>

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.

<PAGE>

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

TERMS OF ESCROW:

1. Out of my initial purchase (or 5. I hereby irrevocably constitute
subsequent purchases if necessary) and appoint State Street my
5% of the dollar amount specified attorney to surrender for
in this Statement will be held in redemption any or all escrowed
escrow by State Street in the form shares with full power of
of shares (computed to the nearest substitution in the premises.
full share at the public offering
price applicable to the initial 6. Shares remaining after the
purchase hereunder) registered in redemption referred to in Paragraph
my name. For example, if the No. 4 will be credited to my
minimum amount specified under this account.
statement is $100,000 and the
public offering price applicable to 7. The duties of State Street are
transactions of $100,000 is $10 a only such as are herein provided
share, 500 shares (with a value of being purely ministerial in nature,
$5,000) would be held in escrow. and it shall incur no liability
whatever except for willful
2. In the event I should exchange misconduct or gross negligence so
some or all of my shares to those long as it has acted in good faith.
of another mutual fund for which It shall be under no responsibility
Davis Distributors, LLC. acts as other than faithfully to follow the
adviser, according to the terms of instructions herein. It may consult
this prospectus, I hereby authorize with legal counsel and shall be
State Street to escrow the fully protected in any action taken
applicable number of shares of the in good faith in accordance with
new fund, until such time as this advice from such counsel. It shall
Statement is complete. not be required to defend any legal
proceedings which may be instituted
3. If my total purchases are at against it in respect of the
least equal to the intended subject matter of this Agreement
purchases, the shares in escrow unless requested to do so and
will be delivered to me or to my indemnified to its satisfaction
order. against the cost and expense of
such defense.
4. If my total purchases are less
than the intended purchases, I will 8. If my total purchases are more
remit to Davis Distributors, LLC than the intended purchases and
the difference in the dollar amount such total is sufficient to qualify
of sales charge actually paid by me for an additional quantity
and the sales charge which I would discount, a retroactive price
have paid if the total purchase had adjustment shall be made for all
been made at a single time. If purchases made under such Statement
remittance is not made within 20 to reflect the quantity discount
days after written request by Davis applicable to the aggregate amount
Distributors, LLC, or my dealer, of such purchases during the
State Street will redeem an thirteen-month period.
appropriate number of the escrowed
shares in order to realize such
difference.

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.

- ---------------------------------- ----------------------------------
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)

<PAGE>

TABLE OF CONTENTS

PAGE

Summary........................................................... 2

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

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

Adviser, Sub-Adviser and Distributor.............................. 11

Distribution Plans................................................ 12

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

Telephone Privilege............................................... 17

Exchange of Shares................................................ 18

Redemption of Shares.............................................. 19

Determining the Price of Shares................................... 20

Dividends and Distributions....................................... 21

Federal Income Taxes.............................................. 21

Fund Shares....................................................... 22

Performance Data.................................................. 23

Shareholder Inquiries............................................. 24

Appendix - Quality Ratings of Debt Securities..................... 24

<PAGE>

PROSPECTUS FEBRUARY 2, 1998
CLASS Y SHARES

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

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 2, 1998, 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.

1
<PAGE>

SUMMARY

FUND EXPENSES. The following table is intended to assist you in
understanding the various costs and expenses that an investor in the Class Y
shares of the Fund will bear directly or indirectly. Because no Class Y shares
were outstanding as of September 30, 1997, the information is based on the
expenses of the Class A shares for the Fund's fiscal year ended September 30,
1997. 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 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........................................................... 0.27%
-----
Total Fund operating expenses................................... 0.92%
</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.......... $9 $29 $51 $113
</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.

The Company currently offers one investment portfolio, the Davis
Tax-Free high Income Fund (the "Fund"). 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").

2
<PAGE>

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.

3
<PAGE>

FINANCIAL HIGHLIGHTS

The following financial highlights are derived from the financial
statements of the Fund and have been audited by Tait, Weller and Baker serving
as 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, 1997 Annual Report to Shareholders. Such Report may be obtained
by writing or calling the Fund. The Fund's financial statements and financial
highlights for the five years ended September 30, 1997, have been audited by
Tait, Weller and Baker, independent certified public accountants, whose
opinion thereon is contained in the Annual Report. No information is presented
for the Class Y shares because no Class Y shares were outstanding as of
September 30, 1997. Data are derived from data of the Class A shares of the
Fund and reflect the impact of Rule 12b-1 distribution expenses paid by the
Class A shares. The Class Y Shares are not subject to Rule 12b-1 distribution
expenses and per share data for periods beginning on and after Class Y shares
are outstanding will not reflect the deduction of such expenses.

Income (Loss) From Investment Operations
Net Investment Income................. .57 .61 .40
Net Gains (Losses) on Securities
(both realized and unrealized).. .11 (.05) .30
----- ------ -----
Total From Investment Operations.... .68 .56 .70
----- ----- -----

Less Distributions
Dividends (from net investment income) (.59) (.54) (.40)

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

Total Distributions................ (.61) (.60) (.41)
------ ------ ------

Net Asset Value, End of Period............ $9.22 $9.15 $9.19
===== ===== =====

Total Return 1............................. 7.66% 6.33% 7.93%

Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) $92,020 $44,828 $45,451
Ratio of Expenses to Average Net Assets 1.26%(2) 1.36% 1.43%*
Ratio of Net Income to Average Net Assets 6.60% 6.64% 5.95%*
Portfolio Turnover Rate............... 112.71% 106.55% 127.80%
</TABLE>

1 Sales charges are not reflected in calculation.
2 Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement were 1.25% for September 30, 1997. Prior to
1996, such reductions were reflected in the expense ratios.
* Annualized.

4
<PAGE>

INVESTMENT OBJECTIVE AND POLICIES

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. Sub-classifications which may have unique investment and
risk profiles include "Municipal Lease Obligations" and "High Yield, High Risk
Debt Securities". The section entitled "Municipal Obligations" in the
Statement of Additional Information contains a more complete discussion of
revenue bonds and municipal lease obligations. High Yield, High Risk Debt
Securities are described below.

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.

5
<PAGE>

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.

6
<PAGE>

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 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.

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.

PORTFOLIO COMPOSITION. The table below reflects the Fund's portfolio
composition by quality rating for the year ended September 30, 1997,
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.

7
<PAGE>

COMPOSITION OF THE FUND'S PORTFOLIO BY QUALITY RATING AS A PERCENTAGE OF
TOTAL NET ASSETS AT SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
FUND'S ASSESSMENT OF GENERAL DEFINITION
MOODY'S/S&P RATING CATEGORY PERCENTAGE NON-RATED SECURITIES OF BOND QUALITY
- --------------------------- ---------- -------------------- -------------
<S> <C> <C> <C>
Aaa/AAA ............................ 36.19% 0.20% Highest quality
Aa/AA ............................ 6.63% 0.41% High quality
A/A ............................ 14.46% 0.56% Upper medium grade
Baa/BBB ............................ 7.23% 4.72% Medium grade
Ba/BB ............................ 7.26% 10.88% Some speculative elements
B/B ............................ 0.65% 6.57% 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........................... 23.34% 0.00% Not rated by Moody's or S&P
Short-term Investments.............. 4.24% 0.00%
------ -----
100.00% 23.34%
</TABLE>

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. Portfolio securities may be purchased or sold whenever the
Adviser or Sub-Advisers believe it would be beneficial to do so, without
regard to the holding period. 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 dealer markups or brokerage
commissions. However, it is anticipated that most securities transactions will
be principal transactions, in which no brokerage commissions are incurred. The
Adviser and Sub-Adviser are authorized to place portfolio transactions with
Shelby Cullom Davis & Co., a member of the New York Stock Exchange which may
be deemed to be an affiliate of the Adviser, if the commissions are fair an
reasonable and comparable to commissions charged by non-affiliated qualified
brokerage firms for similar services. Research services and placement of
orders by securities firms

8
<PAGE>

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".

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.

The Sub-Adviser 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, 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.

9
<PAGE>

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 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.

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:

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.

10
<PAGE>

TELEPHONE PRIVILEGE

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

REDEMPTION OF SHARES

11
<PAGE>

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.

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

DETERMINING THE PRICE OF SHARES

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.

12
<PAGE>

DIVIDENDS AND DISTRIBUTIONS

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

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.

13
<PAGE>

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 included
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.

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.

14
<PAGE>

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 "taxable 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 "taxable 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.

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.

15
<PAGE>

The Fund's 1997 Annual Report contains additional performance
information and will be made available upon request and without charge.

SHAREHOLDER INQUIRIES

APPENDIX
QUALITY RATINGS OF DEBT SECURITIES

MOODY'S MUNICIPAL AND CORPORATE BOND RATINGS

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.

16
<PAGE>

C - Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

STANDARD & POOR'S CORPORATE BOND RATINGS

AAA - Debt rated 'AAA' has the highest rating assigned by Standard and Poor's.
Capacity to pay interest and repay principal is extremely strong. AA - Debt
rated 'AA' has a very strong capacity to pay interest and repay principal and
differs from the highest rated issues only in small degree.

A - Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.

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

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

17
<PAGE>

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

STANDARD & POOR'S COMMERCIAL PAPER RATINGS

18
<PAGE>

TABLE OF CONTENTS

PAGE

Summary........................................................... 2
Financial Highlights.............................................. 4
Investment Objectives and Policies................................ 5
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

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

FEBRUARY 2, 1998

DAVIS TAX-FREE HIGH INCOME FUND, INC.

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

TABLE OF CONTENTS

TOPIC PAGE

Fundamental Investment Restrictions........................ 2
Municipal Obligations...................................... 3
Temporary Investments...................................... 4
Portfolio Transactions .................................... 5
Directors and Officers..................................... 6
Directors Compensation Schedule............................ 7
Certain Shareholders of the Fund........................... 8
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........ 11
Distribution of Fund Shares................................ 11
Performance Data........................................... 12
Non-Standard Distribution Rates............................ 13

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 2, 1998, OR THE CLASS Y PROSPECTUS DATED FEBRUARY 2, 1998. THE
PROSPECTUSES MAY BE OBTAINED FROM THE FUND.

THE FUND'S AUDITED FINANCIAL STATEMENTS INCLUDED IN THE ANNUAL REPORT TO
SHAREHOLDERS DATED SEPTEMBER 30, 1997 ARE EXPRESSLY INCORPORATED HEREIN BY
REFERENCE.

<PAGE>

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 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

2
<PAGE>

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

The discussion in this section supplements the discussion in the
prospectus.

REVENUE BONDS. 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.

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.

MUNICIPAL LEASE OBLIGATIONS. The Fund may invest in municipal bonds
and certificates of participation that constitute investment 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.

MUNICIPAL NOTES, HYBRID, AND SPECIAL TYPES OF MUNICIPAL OBLIGATIONS.
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,

3
<PAGE>

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 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.

GEOGRAPHIC AND INDUSTRY CONCENTRATION. Subject to the restrictions
described herein, the Fund's portfolio may be invested 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.

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) High quality short term obligations, including
variable demand notes, issued by municipalities, local and state govenments,
and other entities; (3) U.S. Government Securities; (4) commercial paper rated
within the highest grade by either Moody's or S&P (Prime-1 or A-1,
respectively); (5) 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); (6) 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 (7) 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.

4
<PAGE>

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 from its inception through
September 30, 1997. 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.

5
<PAGE>

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.

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

MARC P. BLUM (9/9/42), 233 East Redwood Street, Baltimore, MD 21202. Director
of the Company and each of the Davis Funds except Davis International Series,
Inc.; Chief Executive Officer, 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; 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.

6
<PAGE>

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

ANDREW A. DAVIS (6/25/63), *124 East Marcy Street, Santa Fe, NM 87501.
Director and Vice President of the Company and each of the Davis Funds except
Davis International Series, Inc. (which he serves as Vice President); Director
and President, Venture Advisers, Inc. ; 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. Director and Vice President of the Company and each of the Davis
Funds; Director , Vice Chairman, 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.

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 asterisk following the names of Jeremy H. Biggs, Andrew A. Davis, and
Christopher C. Davis indicates that each director is considered to be an
"interested person" of the Fund, as defined in the Investment Company Act of
1940.

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, 1997, 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*
---- ------------ --------------------
<S> <C> <C>
Wesley E. Bass 5,375 24,375
Marc P. Blum 5,150 23,600
Eugene M. Feinblatt 4,600 20,700
Jerry D. Geist 5,000 23,050
D. James Guzy 5,150 23,750
G. Bernard Hamilton 5,000 24,700
LeRoy E. Hoffberger 5,150 23,550
Laurence W. Levine 5,150 23,550
Christian R. Sonne 5,150 23,600
Edwin R. Werner 5,000 23,200
</TABLE>

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

7
<PAGE>

CERTAIN SHAREHOLDERS OF THE FUND

The following table sets forth, as of December 31, 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 18,707,874 Class
A shares of the Fund outstanding and the directors and officers of the Fund,
as a group, owned 21,520 Class A shares, or approximately 0.12% of the Fund's
outstanding Class A shares. As of such date there were 19,357,169 Class B
shares, 1,406,284 Class C shares, and 13,071 Class Y shares of the Fund
outstanding. The directors and officers of the Fund do not presently own or
intend to own any Class B shares, Class C shares, or Class Y shares of 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 A SHARES

Smith Barney, Inc. 2,176,279 11.63%
Mutual Fund Operations
4800 Deerlake Drive East, 3rd Floor
Jacksonville, FL 32246-6484

CLASS B SHARES

Merrill Lynch Pierce Fenner & Smith 2,325,276 12.01%
Mutual Fund Operations
4800 Deerlake Drive East, 3rd Floor
Jacksonville, FL 32246-6484

CLASS C SHARES

Merrill Lynch Pierce Fenner & Smith 421,103 29.94%
Mutual Fund Operations
4800 Deerlake Drive East, 3rd Floor
Jacksonville, FL 32246-6484

CLASS Y SHARES

Merrill Lynch Pierce Fenner & Smith 13,057 99.89%
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, 1997, 1996 and 1995 were
$1,065,546, $1,149,436, and $1,360,042, 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.

8
<PAGE>

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.

The reimbursable costs for certain accounting and administrative
services for fiscal years ended September 30, 1997, 1996 and 1995 were
$64,586, $45,000, and $37,998, respectively. The reimbursable costs for
qualifying the Fund's shares for sale with state agencies for such periods
were $12,000, $12,000, and $10,002, respectively. The reimbursable costs for
providing shareholder services for such periods were $8,728, $12,245, and
$17,914, 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 KPMG Peat Marwick 707 17th St. Suite 2300,
Denver, Colorado 80202. 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.

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.

9
<PAGE>

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 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.

10
<PAGE>

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

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 or
alliance arrangement with Merrill Lynch, and on the date the Plan
Sponsor signs the Merrill Lynch Recordkeeping Service Agreement, the
Plan has less than $3 million in assets, excluding money market
funds, invested in Applicable Investments; or

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

Plans recordkept on a daily basis by Merrill Lynch or an independent
recordkeeper under a contract with Merrill Lynch that are currently investing
in Class B shares of the Davis 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

11
<PAGE>

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 year ended September 30, 1997 the Distributor (or
its predecessor) received $1,397,698, and $1,495,059, under the Class A and
Class B distribution Plans, respectively, of which $1,168,660 and $1,311,520,
respectively, were reallowed to qualified selling dealers. During the fiscal
period from August 18, 1997 (commencement of operations) through September 30,
1997, the Distributor received $992, under the Class C Distribution Plan, all
of which was reallowed to qualified selling dealers.

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 September 30, 1997 the yield
was 5.84%, 5.40% and 5.34%, respectively for the Fund's Class A, Class B, and
Class C 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:

12
<PAGE>

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 September 31, 1997 and the period beginning December 1,
1994 and ended September 30, 1997 (life of Class) were 2.51% and 5.93% ,
respectively.

The average annual total return figures for the Fund's Class B shares
during the one, five and ten year periods ended September 30, 1997 were 3.89%,
6.02% and 7.62%, respectively.

The total return for the Fund's Class C shares during the period
beginning August 18, 1997 and ended September 30, 1997 (life of Class) was a
negative 0.23% (not annualized).

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 September 30, 1997, the historical
distribution rate with respect to the Fund's Class A, Class B, and Class C
shares was 6.12%,5.70%, and N/A, respectively.

ANNUALIZED CURRENT DISTRIBUTION RATES. Annualized current
distribution rates are computed by multiplying income dividends for a
specified month by twelve and dividing the resulting figure by the maximum
offering price on the last day of the specified period. The annualized current
distribution rate with respect to the Fund's Class A, Class B, and Class C
shares for the month ended September 30, 1997 was 6.57%, 6.16% and 6.14%,
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 September 30, 1997, the tax
equivalent distribution rate with respect to the Fund's Class A, Class B, and
Class C shares was 10.52%, 9,86%, and 9.83%, respectively.

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

In advertising and sales literature, the Fund may publish various
statistics describing its investment portfolio such as the Fund's average
Price to Book and Price to Earnings ratios, betas, alpha, R-squared, standard
deviation, etc.

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

<PAGE>

FORM N-1A

DAVIS TAX-FREE HIGH INCOME FUND, INC.

POST-EFFECTIVE AMENDMENT NO. 25 UNDER THE SECURITIES
ACT OF 1933
REGISTRATION STATEMENT NO. 2-74216

AND

AMENDMENT NO. 26 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 1997 Annual Report:

(i) Schedule of Investments at September 30, 1997.

(ii) Statement of Assets & Liabilities at September
30, 1997.

(iii) Statement of Operations for the year ended
September 30, 1997.

(iv) Statement of Changes in Net Asset for the years
ended September 30, 1997 and 1996.

(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, incorporated by reference to
Exhibit No. 1 (b) of Registrant's Post-Effective
Amendment No. 24, File No. 2-74216.

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

1
<PAGE>
(3) Not applicable.

(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, incorporated
by reference to Exhibit 6 (b) of Registrant's
Post-Effective Amendment No. 24, File No.
2-74216.

(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 (D'Ancona &
Pflaum).

(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,
incorporated by reference to Exhibit 15 (a) of
Registrant's Post-Effective Amendment No. 24,
File No. 2-74216.

(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.

2
<PAGE>
(15)(c) Distribution Plan for Class C Shares,
incorporated by reference to Exhibit 15 (c) of
Registrant's Post-Effective Amendment No. 24,
File No. 2-74216.

(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 Street,
incorporated by reference to Exhibit 17 (b) of
Registrant's Post-Effective Amendment No. 24,
File No. 2-74216.

(17)(c)* Power of Attorney for Andrew A. Davis and
Christopher C. Davis.

(18) Plan pursuant to Rule 18f-3, as amended,
incorporated by reference to Exhibit 18 of
Registrant's Post-Effective Amendment No. 24,
File No. 2-74216.

* Filed Herein

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

Not applicable

Item 26. Number of Holders of Securities

Number of Record Holders
Title of Class as of December 31, 1997
------------------
Common Stock

Class A shares 4,030
Class B shares 4,668
Class C shares 196
Class Y shares 6

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.

3
<PAGE>
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

Information pertaining to business and other connections of
Registrant's investment adviser is incorporated by reference to the Prospectus
and Statement of Additional Information contained in Parts A and B of this
Registration Statement at the sections entitled "Adviser, Sub-Adviser, and
Distributor" in the Prospectus and "Investment Advisory Services" in the
Statement of Additional Information.

Item 29. Principal Underwriter

(a) Davis Distributors, LLC, a wholly owned subsidiary of the
Adviser, located at 124 East Marcy Street, Santa Fe, NM 87501, is the
principal underwriter for the Registrant and also acts as principal
underwriter for Davis New York Venture Fund, Inc., Davis High Income 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 Principal Underwriters:

<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES WITH POSITIONS AND OFFICES
BUSINESS ADDRESS UNDERWRITER WITH REGISTRANT
- ---------------- ----------- ---------------
<S> <C> <C>
Kenneth C. Eich President Vice President
124 East Marcy Street
Santa Fe, NM 87501

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

Thomas D. Tays Senior Vice President and Secretary Vice President and Secretary
124 East Marcy Street
Santa Fe, NM 87501

Russell O. Wiese Senior Vice President None
124 East Marcy Street
Santa Fe, NM 87501

Sharra Reed Assistant Treasurer None
124 East Marcy Street
Santa Fe, NM 87501
</TABLE>
(c) Not applicable.

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,

4
<PAGE>

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.

DAVIS TAX-FREE HIGH INCOME FUND, INC.

SIGNATURES

Registrant certifies that this amendment meets all of the
requirements for effectiveness pursuant to Rule 485(b). 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 30th day of January, 1998.

DAVIS TAX-FREE HIGH INCOME FUND, INC.

*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 on January 30, 19998 by the following
persons in the capacities indicated.

Signature Title
--------- -----
Shelby M.C. Davis* Chief Executive Officer
----------------- & Director
Shelby M.C. Davis

Eileen R Street* Principal Financial
--------------- and Accounting Officer
Eileen R. Street

*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 and
17(b) to Post-Effective Amendments No. 20 and 24 to Registrant's Registration
Statement on Form N-1A.

/s/ Sheldon R. Stein
-----------------------
Sheldon R. Stein,
Attorney-in-Fact

5
<PAGE>

DAVIS TAX-FREE HIGH INCOME FUND, INC.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on January 30, 1998 by the following
persons in the capacities indicated.

Signature Title
--------- -----

Wesley E. Bass, Jr.* Director
-------------------------
Wesley E. Bass, Jr.

Jeremy H. Biggs* Director
-------------------------
Jeremy H. Biggs

Marc P. Blum* Director
-------------------------
Marc P. Blum

Andrew A. Davis* Director
-------------------------
Andrew A. Davis

Christopher C. Davis* Director
-------------------------
Christopher C. Davis

Eugene M. Feinblatt* Director
-------------------------
Eugene M. Feinblatt

Jerry D. Geist* Director
-------------------------
Jerry D. Geist

D. James Guzy* Director
-------------------------
D. James Guzy

G. Bernard Hamilton* Director
-------------------------
G. Bernard Hamilton

LeRoy E. Hoffberger* Director
-------------------------
LeRoy E. Hoffberger

Laurence W. Levine* Director
-------------------------
Laurence W. Levine

Christian R. Sonne* Director
-------------------------
Christian R. Sonne

Edwin R. Werner* Director
-------------------------
Edwin R. Werner

*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 and Exhibit 17(c) to this Registration Statement

/s/ Sheldon Stein
--------------------------
Sheldon Stein,
Attorney-in-Fact

<PAGE>

[LETTERHEAD OF D'ANCONA & PFLAUM]

January 28, 1998

Davis Tax-Free High Income Fund, Inc.
124 East Marcy Street
Santa Fe, New Mexico 87501

Ladies and Gentlemen:

We have acted as counsel for Davis Tax-Free High Income Fund, Inc.
(the "Fund") in connection with the registration under the Securities Act of
1933 (the "Act") of an indefinite number of shares of beneficial interest of
the series of the Fund designated Davis Tax-Free High Income Fund (the
Shares") in registration statement No. 2-74216 on Form N-1A (the "Registration
Statement").

In this connection we have examined originals, or copies certified or
otherwise identified to our satisfaction, of such documents, corporate and
other records, certificates and other papers as we deemed it necessary to
examine for the purpose of this opinion, including the Articles of
Incorporation and bylaws of the Fund, actions of the Board of Directors of the
Fund authorizing the issuance of shares of the Fund and the Registration
Statement.

Based on the foregoing examination, we are of the opinion that upon
the issuance and delivery of the Shares of the Fund in accordance with the
Articles of Incorporation and the actions of the Board of Directors
authorizing the issuance of the Shares, and the receipt by the Fund of the
authorized consideration therefor, the Shares so issued will be validly
issued, fully paid and nonassessable.

We consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not admit that we are in
the category of persons whose consent is required under section 7 of the Act.

Very truly yours,

/s/ D'ANCONA & PFLAUM

<PAGE>

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 11, 1997
to the Shareholders and Board of Directors of Davis Tax-Free High Income Fund,
Inc.

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

Philadelphia, Pennsylvania
January 29, 1998

<PAGE>

DAVIS TAX-FREE HIGH INCOME, INC.

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned
constitutes and appoints Andrew A. Davis, Sheldon R. Stein and Arthur Don, and
each of them, his attorneys-in fact, each with the power of substitution, for
him in any and all capacities, to sign any post-effective amendments to the
registration statement under the Securities Act of 1933 (Registration No.
2-74216) and/or the Investment Company Act of 1940 (Registration No.
811-3270), 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 his substitute or
substitutes, may do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney as of the 30th day of January, 1998.

- --------------------
Andrew Davis,
Director

- --------------------
Christopher Davis,
Director