DAVIS TAX FREE HIGH INCOME FUND INC, 485BPOS, 1999-01-29

DAVIS TAX FREE HIGH INCOME FUND INC
485BPOS, 1999-01-29

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<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. 27

AND

REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
REGISTRATION NO. 811-3270
AMENDMENT NO. 28

DAVIS TAX-FREE HIGH INCOME FUND, INC.

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

Agents For Service: Thomas D. Tays, Esq.
Davis Selected Advisers, L.P.
124 East Marcy Street
Santa Fe, New Mexico 87501
1-505-820-3055

-or-

Sheldon R. Stein, Esq.
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 1, 1999, pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] On ________, pursuant to paragraph (a) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] On___________, pursuant to paragraph (a)(2) of Rule 485

Title of Securities being Registered: Common Stock of:

DAVIS TAX-FREE HIGH INCOME FUND

<PAGE>

FORM N-1A
DAVIS TAX-FREE HIGH INCOME FUND
AN AUTHORIZED PORTFOLIO OF
DAVIS TAX-FREE HIGH INCOME FUND, INC.
CLASS A, CLASS B CLASS C AND CLASS Y SHARES

POST-EFFECTIVE AMENDMENT NO. 27 TO REGISTRATION
STATEMENT NO. 2-74216 UNDER THE SECURITIES ACT OF 1933
AND AMENDMENT NO. 28 UNDER THE INVESTMENT COMPANY ACT
OF 1940 TO REGISTRATION STATEMENT NO. 811-3270.

CROSS REFERENCE SHEET
---------------------
N-1A
ITEM NO. PART A CAPTION OR PLACEMENT: PROSPECTUS FOR CLASS ABC SHARES
- -------- -------------------------------------------------------------

1. Front and Back Cover pages
2. Overview of the Fund:
Investment Objective and Strategy
Determining if this Fund is Right for You
Principal Risks
Past Performance
3. Overview of the Fund: Fees and Expenses of the Fund
4. How We Manage the Fund
5. 1998 Annual Report
6. Who is Responsible for Your Davis Account
7. Once You Invest in the Fund
How to Open an Account
How to Buy, Sell and Exchange Shares
8. How to Choose a Share Class
9. Overview of the Fund: Financial Highlights

<PAGE>

N-1A
ITEM NO. PART A CAPTION OR PLACEMENT: PROSPECTUS FOR CLASS Y SHARES
- -------- ------------------------------------------------------------

1. Front and Back Cover pages
2. Overview of the Fund:
Investment Objective and Strategy
Determining if this Fund is Right for You
Principal Risks
Past Performance
3. Overview of the Fund: Fees and Expenses of the Fund
4. How We Manage the Fund
5. 1998 Annual Report
6. Who is Responsible for Your Davis Account
7. Once You Invest in the Fund
How to Open an Account
How to Buy, Sell and Exchange Shares
8. Not Applicable
9. Overview of the Fund: Financial Highlights

<PAGE>

N-1A PART B CAPTION OR PLACEMENT:
ITEM NO. STATEMENT OF ADDITIONAL INFORMATION
- -------- -----------------------------------

10. Cover Page
11. Organization of the Company
12. Portfolio Securities
Other Investment Practices
Investment Restrictions
13. Directors and Officers
Directors Compensation Table
14. Certain Shareholders of the Fund
15. Investment Advisory Services
Distribution of Company Shares
Other Important Service Providers
16. Portfolio Transactions
17. Organization of the Company
18. Purchase of Shares
Special Services
Exchange of Shares
Redemption of Shares
19. Federal Income Taxes
20. Distribution of Company Shares
21. Performance Data
22. 1998 Annual Report

<PAGE>

DAVIS TAX-FREE HIGH INCOME FUND

Prospectus and Application Form

Class A shares
Class B shares
Class C shares

February 1, 1999

The Securities and Exchange Commission has not approved or disapproved of these
securities. The Securities and Exchange Commission has not determined whether
this prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.

(Davis logo)

OVER 25 YEARS OF RELIABLE INVESTING

1
<PAGE>

TABLE OF CONTENTS

Overview of the Fund
Investment Objective and Strategy
Determining if this Fund is Right for You
Principal Risks
Past Performance
Fees and Expenses of the Fund
Financial Highlights

Who Is Responsible for Your Davis Account

How We Manage the Fund

Once You Invest in One of the Davis Funds

How to Choose a Share Class

How to Open an Account

How to Buy, Sell and Exchange Shares

The Davis Funds: Over 25 Years of Reliable Investing

Other Fund Documents

2
<PAGE>

OVERVIEW OF DAVIS TAX-FREE HIGH INCOME FUND

INVESTMENT OBJECTIVE AND STRATEGY

Davis Tax-Free High Income Fund's investment objective is to provide current
income free from federal income tax by investing in municipal obligations.
Municipal obligations are debt securities, such as municipal bonds and
municipal notes, issued by state and local governments or their agencies or
instrumentalities. Interest earned on tax-exempt securities may still be
subject to other forms of taxation, including state and local taxes and federal
alternative minimum taxes.

The Fund's Adviser and Sub-Adviser are committed to fundamental research. We
search for tax-exempt securities which offer yields which fully compensate for
the risk of owning the securities. We often buy high yield, high-risk
tax-exempt securities because we think the potential earnings justify holding a
security that is not investment grade.

You can find more detailed information about the types of securities that the
Fund buys in the section called HOW WE MANAGE THE FUND.

[SIDEBAR:]
Please see the inside back cover page of this prospectus to learn about the
Davis investment philosophy.

DETERMINING IF THIS FUND IS RIGHT FOR YOU

YOU SHOULD CONSIDER INVESTING IN THIS FUND IF:

o You are looking for current income that is exempt from federal income
taxes.
o You are looking for a fixed income investment in tax-exempt securities as
part of your asset allocation plan to balance your stock portfolio.
o You are investing for the long-term (three years or more).

YOU SHOULD NOT INVEST IN THIS FUND IF:

o Your current tax situation does not allow you to benefit from tax-exempt
income.
o You are looking for an appropriate investment for a tax-sheltered
investment such as a qualified retirement plan.
o You are not comfortable investing in high yield, high-risk tax-exempt
securities.
o You are subject to the alternative minimum tax.
o You are investing for the short-term (less than three years).

3
<PAGE>

PRINCIPAL RISKS

If you buy shares of Davis Tax-Free High Income Fund, you may lose some or all
of the money that you invest. This section describes what we think are the most
significant factors that can cause the Fund's performance to suffer.

INTEREST RATE SENSITIVITY. Most tax-exempt securities pay a fixed rate of
interest and if market rates of interest increase, the market value of the
tax-exempt securities usually decline.

CHANGES IN DEBT RATING. If a rating agency gives a tax-exempt security a low
rating, the value of the security will decline because investors will demand a
higher rate of return.

CREDIT RISK. Like any borrower, the issuer of a tax-exempt security may be
unable to make its interest and principal payments. The Fund may invest up to
100% of its assets in high yield, high-risk tax-exempt securities. High yield,
high-risk securities may involve greater credit risks which are discussed in
the section entitled, "HOW WE MANAGE THE FUND."

LEGISLATIVE RISK. The special tax status of tax-exempt securities may be
undermined or changed by future federal or state legislation.

An investment in Davis Tax-Free High Income Fund is not a bank deposit and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.

You can find more detailed information about the risks of the Fund's particular
investments in the section called HOW WE MANAGE THE FUND.

PAST PERFORMANCE

The bar chart and the table below provide an indication of the risks of
investing in Davis Tax-Free High Income Fund by showing changes in the Fund's
year-to-year performance and by showing how the Fund's average annual returns
for one, five and ten years compare to those of the Lehman Brothers 10-year
Municipal Bond Index, a widely recognized unmanaged index of municipal bond
performance. How the Fund has performed in the past is not necessarily an
indication of how the Fund will perform in the future.

4
<PAGE>

DAVIS TAX-FREE HIGH INCOME FUND
TOTAL RETURN OVER THE LAST 10-YEAR PERIOD
(AS OF DECEMBER 31ST OF EACH YEAR)
CLASS B SHARES

1989 11.01%
1990 2.81%
1991 11.73%
1992 8.45%
1993 8.32%
1994 2.18%
1995 7.97%
1996 5.54%
1997 6.95%
1998 3.85%

Best Quarter: Q2 `89 4.33%
Worst Quarter: Q1 `94 (0.97)%

The bar chart does not reflect any sales charges. Total return would have been
less if it reflected those charges. The return for the other classes of shares
offered by this prospectus will differ from the Class B returns shown in the
chart, depending on the expenses of that class.

DAVIS TAX-FREE HIGH INCOME FUND AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDING DECEMBER 31, 1998)

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS LIFE OF FUND
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES (SINCE 12/1/94) 0.32% NA NA 5.82%
- ----------------------------------------------------------------------------------------------
LEHMAN BROTHERS. 10-YEAR
REVENUE BOND INDEX 6.67% NA NA 9.77%
- ----------------------------------------------------------------------------------------------
CLASS B SHARES (SINCE 3/21/85) (0.10)% 4.96% 6.83% 6.99%
- ----------------------------------------------------------------------------------------------
LEHMAN BROTHERS 10-YEAR
REVENUE BOND INDEX 6.67% 6.33% 8.51% NA
- ----------------------------------------------------------------------------------------------
CLASS C SHARES (SINCE 8/18/97) 2.87% NA NA 4.92%
- ----------------------------------------------------------------------------------------------
LEHMAN BROTHERS 10-YEAR
REVENUE BOND INDEX 6.67% NA NA 8.01%*
- ----------------------------------------------------------------------------------------------
</TABLE>

* Lehman Brothers as of August 31, 1997.

<PAGE>

DAVIS TAX-FREE HIGH
INCOME FUND CLASS B SHARES YIELD
(AS OF DECEMBER 31, 1998)

30-DAY SEC YIELD xx%
TAX-EQUIVALENT YIELD xx%

You can obtain Davis Tax-Free High Income Fund's most recent 30-day SEC Yield
and Tax-Equivalent Yield (calculated at a 39.6% marginal tax rate) by calling
us toll-free at 1-800-279-0279, Monday through Friday, 7 a.m. to 4 p.m.
Mountain Time.

FEES AND EXPENSES OF THE FUND

FEES YOU MAY PAY AS A DAVIS TAX-FREE HIGH INCOME FUND SHAREHOLDER
(Paid Directly from Your Investment)

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES CLASS C SHARES
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a 4.75% None None
percentage of offering price)
- --------------------------------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) Imposed on Redemptions 0.75% 4.00% 1.00%
(as a percentage of the lesser of the net asset value of the
shares redeemed or the total cost of such shares)
- --------------------------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None None None
- --------------------------------------------------------------------------------------------------------------------
Exchange Fee None None None
- --------------------------------------------------------------------------------------------------------------------
</TABLE>

ANNUAL FUND OPERATING EXPENSES
FOR FISCAL YEAR ENDED SEPTEMBER 30, 1998
(Deducted from the Fund's Assets)

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES CLASS C SHARES
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Management Fees 0.63% 0.63% 0.63%
- --------------------------------------------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25% 1.00% 1.00%
- --------------------------------------------------------------------------------------------------------------------
Other Expenses 0.16% 0.17% 0.14%
- --------------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 1.04% 1.80% 1.77%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

EXAMPLE

This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.

The example assumes that you invest $10,000 in the Fund for the time periods
indicated. The example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain the same. Although your
actual costs may be higher or lower, your costs--based on these
assumptions--would be:

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
IF YOU SELL YOUR SHARES IN... 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES $576 $790 $1,022 $1,686
- ----------------------------------------------------------------------------------------
CLASS B SHARES $583 $866 $1,175 $1,822
- ----------------------------------------------------------------------------------------
CLASS C SHARES $280 $557 $959 $2,084
- ----------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------
IF YOU STILL HOLD YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
AFTER...
- ----------------------------------------------------------------------------------------
CLASS A SHARES $576 $790 $1,022 $1,686
- ----------------------------------------------------------------------------------------
CLASS B SHARES $183 $566 $975 $1,822
- ----------------------------------------------------------------------------------------
CLASS C SHARES $180 $557 $959 $2,084
- ----------------------------------------------------------------------------------------
</TABLE>

FINANCIAL HIGHLIGHTS

These tables are designed to show you the financial performance of Davis
Tax-Free High Income Fund for the past five years. Some of the information
reflects financial results for a single Fund share. The total returns represent
the rate that an investor would have earned (or lost) money on an investment in
the Fund. It assumes that all dividends and capital gains have been reinvested.

KPMG LLP has audited the information for fiscal year 1998. KPMG LLP's report,
along with the Fund's financial statements, is included in the annual report,
which is available by request. Another firm audited the information for the
previous fiscal years.

<PAGE>

DAVIS TAX-FREE HIGH INCOME FUND
CLASS A

<TABLE>
<CAPTION>
DECEMBER 1, 1994
(INCEPTION OF
YEAR ENDED SEPTEMBER 30, CLASS) THROUGH
------------------------------ SEPTEMBER 30,
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period..................................... $ 9.22 $ 9.15 $ 9.19 $ 8.90
------ ------ ------ ------
Income From Investment Operations
Net Investment Income......................... 0.54 0.57 0.61 0.40
Net Realized and Unrealized Gains or Losses... 0.04 0.11 (0.05) 0.30
------ ------ ------ ------
Total From Investment Operations...... 0.58 0.68 0.56 0.70
------ ------ ------ ------
Dividends and Distributions
Dividends from Net Investment Income.......... (0.54) (0.59) (0.54) (0.40)
Distribution from Realized Gains.............. (0.05) (0.02) (0.06) (0.01)
Distributions in Excess of Net Investment
Income.................................... (0.02) - - -
------ ------ ------ ------
Total Distributions..................... (0.61) (0.61) (0.60) (0.41)
------ ------ ------ ------
Net Asset Value, End of Period................... $ 9.19 $ 9.22 $ 9.15 $ 9.19
====== ====== ====== ======
Total Return (1)................................. 6.53% 7.66% 6.33% 7.93%

Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted)............................... $243,878 $ 92,020 $44,828 $45,461
Ratio of Expenses to
Average Net Assets.......................... 1.04% 1.26%(2) 1.36% 1.43%*
Ratio of Net Investment Income to
Average Net Assets.......................... 5.37% 6.60% 6.64% 5.95%*
Portfolio Turnover Rate(3).................... 126.28% 112.71% 106.55% 127.80%
</TABLE>

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

(2) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 1.25% for September 30, 1997. Prior to
1996, such reductions were reflected in the expense ratios.

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

* Annualized.

<PAGE>

DAVIS TAX-FREE HIGH INCOME FUND
CLASS B

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period.......................... $ 9.19 $ 9.12 $ 9.17 $ 9.09 $ 9.65
------- ------- ------- ------- -------
Income From Investment Operations
Net Investment Income............ 0.49 0.53 0.54 0.48 0.44
Net Realized and Unrealized Gains
or Losses........................ 0.02 0.08 (0.05) 0.10 (0.18)
------- ------- ------- ------- -------
Total From Investment
Operations................... 0.51 0.61 0.49 0.58 0.26
------- ------- ------- ------- -------
Dividends and Distributions
Dividends from Net
Investment Income................ (0.48) (0.52) (0.48) (0.48) (0.44)
Distribution from Realized Gains.. (0.05) (0.02) (0.06) (0.01) (0.28)
Distribution in Excess
of Net Investment Income......... (0.01) - - (0.01) (0.07)
Tax Return of Capital
Distributions................... - - - - (0.03)
------- ------- ------- ------- -------
Total Distributions............ (0.54) (0.54) (0.54) (0.50) (0.82)
------- ------- ------- ------- -------
Net Asset Value, End of Period........ $ 9.16 $ 9.19 $ 9.12 $ 9.17 $ 9.09
======= ======= ======= ======= =======
Total Return (1)...................... 5.74% 6.89% 5.51% 6.64% 2.81%

Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted).................... $255,300 $132,934 $109,488 $126,727 $188,874
Ratio of Expenses to
Average Net Assets............... 1.80%(2) 2.02% 2.10% 2.14% 2.07%
Ratio of Net Investment Income
to Average Net Assets............ 4.62% 5.87% 5.89% 5.37% 4.49%
Portfolio Turnover Rate(3)......... 126.28% 112.71% 106.55% 127.80% 113.46%
</TABLE>

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

(2) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 1.79% for September 30, 1998. Prior to
1996, such reductions were reflected in the expense ratios.

<PAGE>

DAVIS TAX-FREE HIGH INCOME FUND
CLASS C

<TABLE>
<CAPTION>
AUGUST 18, 1997
(INCEPTION
YEAR OF CLASS)
ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
---- ----
<S> <C> <C>
Net Asset Value, Beginning of Period............. $ 9.25 $ 9.20
------ ------
Income From Investment Operations
Net Investment Income......................... 0.49 0.04
Net Realized and Unrealized Gains............. 0.03 0.03
------ ------
Total From Investment Operations......... 0.52 0.07
------ ------
Dividends and Distributions
Dividends from Net Investment Income.......... (0.48) (0.02)
Distributions in Excess of Net Investment
Income..................................... (0.02) -
Distribution from Realized Gains.............. (0.05) -
------ ------
Total Distributions....................... (0.55) (0.02)
------ ------
Net Asset Value, End of Period................... $ 9.22 $ 9.25
====== ======
Total Return (1)................................. 5.74% 0.77%

Ratios/Supplemental Data
Net Assets, End of Period (000 omitted)...... $36,594 $2,430
Ratio of Expenses to Average Net Assets....... 1.77%(2) 2.03%*
Ratio of Net Investment Income to
Average Net Assets.......................... 4.65% 5.85%*
Portfolio Turnover Rate(3).................... 126.28% 112.71%
</TABLE>

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

(2) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 1.76% for September 30, 1998.

* Annualized.

<PAGE>

WHO IS RESPONSIBLE FOR YOUR DAVIS ACCOUNT

A number of entities provide services to Davis Tax-Free High Income Fund. This
section shows how the Fund is organized, the entities that perform these
services, and how these entities are compensated. Additional information on the
organization of the Fund is provided in the Fund's Statement of Additional
Information. For information on how to receive this document, see the back
cover of this prospectus.

INVESTMENT ADVISER

Davis Selected Advisers, LP
Referred to throughout this prospectus as "Davis Selected Advisers"
124 East Marcy Street
Santa Fe, NM 87501

o Provides investment advice for Davis Tax-Free High Income Fund's portfolio.
o Manages Davis Tax-Free High Income Fund's business affairs.
o Provides day-to-day administrative services.
o Serves as investment adviser for all of the Davis Funds, other mutual
funds, and other institutional clients.
o Annual Adviser Fee for fiscal year September 30, 1998 (based on average net
assets): 0.63%

INVESTMENT SUB-ADVISERS

Davis Selected Advisers-NY, Inc.
Referred to throughout this prospectus as "Davis Selected Advisers-NY"
609 Fifth Avenue
New York, NY 10017

o Performs investment management and research services for Davis Tax-Free
High Income Fund and other institutional clients.
o Wholly owned subsidiary of Davis Selected Advisers.
o Annual Fee: Davis Selected Advisers pays the fee, not the Fund.

Stamper Capital & Investments, Inc.
Referred to throughout this prospectus as "Stamper Capital"
380 Foam Street, Suite 205
Monterey, CA 93940

o Manages the Fund's day-to-day investment operations.
o Annual Fee: Davis Selected Advisers pays the fee, not the Fund.

11
<PAGE>

CUSTODIAN AND TRANSFER AGENT

State Street Bank and Trust Company
Also referred to as "State Street Bank and Trust"
PO Box 8406
Boston, MA 02266-8406

o Prices the Fund daily.
o Holds share certificates and other assets of the Fund.
o Maintains records of shareholders.
o Issues and cancels share certificates.
o Supervises the payment of dividends.

BOARD OF DIRECTORS

The Fund's Board of Directors has general supervisory responsibilities of the
Davis Funds and supervises the investment adviser's duties.

DISTRIBUTOR

Davis Distributors, LLC
Referred to throughout this prospectus as "Davis Distributors"
124 East Marcy Street
Santa Fe, NM 87501

o Oversees purchases of shares and promotional activities for Davis Funds.
o Wholly owned subsidiary of Davis Selected Advisers.
o Serves as distributor for all of the Davis Funds and other mutual funds
managed by Davis Selected Advisers.

FOUNDER AND CHIEF INVESTMENT OFFICER OF THE ADVISER

SHELBY M.C. DAVIS
Responsibilities:

o Chief Investment Officer of Davis Selected Advisers.
o President of all the Davis Funds.

Other Experience:

o Served as Davis New York Venture Fund's Portfolio Manager from its
inception in 1969 until February 1997.
o Served as Portfolio Manager of a growth and income fund managed by Davis
Selected Advisers from May 1993 until February 1997.

12
<PAGE>

PORTFOLIO MANAGER

B. CLARK STAMPER
Responsibilities:
Portfolio Manager of the Fund since June 1990.

Other Experience:

o Portfolio Manager of Davis Intermediate Investment Grade Bond Fund
(formerly Davis High Income Fund) from June 1990 until October 1998.
o Served as Portfolio Manager of Davis Government Bond Fund from June 1990
until April 1995.
o Served as Portfolio Manager of Selected Capital Preservation Trust's U.S.
Government Income Fund from May 1993 until April 1995.

[BOXED]

OUR CODE OF ETHICS

We allow the officers and employees of Davis Funds and their affiliates to buy
and sell securities for their own personal accounts. However, in order to do so
they must agree to a number of restrictions, listed in our company Code of
Ethics.

13
<PAGE>

HOW WE MANAGE THE FUND

WHAT WE INVEST IN AND WHY

Davis Tax-Free High Income Fund's investment objective is to provide current
income free from federal income tax by investing in municipal obligations. The
Fund pursues this objective by investing primarily in tax-exempt securities
issued by state and local government entities, the most common form being
municipal bonds. During normal market conditions, at least 80% of the Fund's
assets are invested in tax-exempt securities. The Fund may invest up to 100% of
its assets in high yield, high-risk tax-exempt securities. For additional
information on taxes, please see ONCE YOU INVEST IN ONE OF THE DAVIS FUNDS.

TAX-EXEMPT SECURITIES

WHAT THEY ARE. Tax-exempt securities are issued by states and their political
subdivisions, and duly constituted state and local authorities and corporations
as well as certain U.S. territories or possessions, such as Puerto Rico, the
Virgin Islands and Guam. Tax-exempt securities are issued to fund public
infrastructure projects such as streets and highways, schools, water and sewer
systems, hospitals, and airports. Tax-exempt securities may also be issued to
refinance outstanding obligations as well as to obtain funds for general
operating expenses and for loans to other public institutions and facilities.

Because the projects benefit the public, Congress has granted exemption from
federal income taxes for the interest income earned from owning tax-exempt
securities. Interest earned on tax-exempt securities may still be subject to
other forms of taxation, including state and local taxes and federal
alternative minimum taxes.

Tax-exempt securities include:

o General obligation bonds which are secured by the issuer's pledge of its
full faith, credit, and taxing power for the payment of principal and
interest;
o Revenue bonds which are payable from the revenue derived from a particular
facility or class of facilities, or in some cases, from the proceeds of a
special excise tax or other specific revenue source, but not for the
general taxing power;
o Lease obligations backed by municipality's covenant to budget for the
payments due under the lease obligation; and
o Industrial development bonds issued by or on behalf of public authorities
to obtain funds for privately operated facilities.

14
<PAGE>

HIGH YIELD, HIGH-RISK TAX-EXEMPT SECURITIES

Up to 100% of the Fund's total assets may be invested in high yield, high-risk
tax-exempt securities.

Many tax-exempt securities are assigned ratings by agencies that evaluate the
quality of publicly offered debt. There are several agencies that evaluate and
rate debt securities. Two of the most prominent are Standard & Poor's and
Moody's Investors Service.

When they evaluate the quality of a debt instrument, rating agencies look at
factors like the issuer's current financial condition and economic prospects,
the value of any collateral that secures the debt and the issuer's history of
paying other debt. Ratings assigned by credit agencies do not evaluate market
risk.

Each agency has its own system for "grading" debt. Standard & Poor's has eleven
ratings, ranging from D for securities that are in default to AAA for
securities that are almost certain to be repaid. Moody's Investors Service has
nine ratings, with C being the lowest and Aaa being the highest.

A security is called "investment grade" if a respected agency assigns it a
favorable credit rating. In contrast, a debt security is considered "high
yield, high-risk" if it is rated BB or lower by Standard and Poor's or Ba or
lower by Moody's Investors Service. Securities with these low ratings are also
referred to as "junk bonds." Many institutional investors, such as pension
plans and municipal governments, are only permitted to buy investment grade
debt.

HOW WE PICK THEM. The Fund will invest in a tax-exempt security when our
analysis indicates that the security offers a yield that fully compensates for
its risk. The Fund often buys high yield, high-risk tax-exempt securities
because we think the potential earnings justify holding a security that is not
investment grade. Our research focuses upon factors effecting the credit
worthiness of the issuing municipality, including the economic vitality of the
region, and the collateral and revenues supporting the tax-exempt security.

WHY WE BUY THEM. We buy tax-exempt securities to earn current income free from
federal income taxes.

RISKS. Factors that influence the value of tax-exempt securities are primarily
interest rate sensitivity, changes in debt rating, credit risk, and legislative
risk:

*INTEREST RATE SENSITIVITY. Most tax-exempt securities pay a fixed rate of
interest and if market rates of interest increase, the market value of the
tax-exempt securities usually decline.

15
<PAGE>

*CHANGES IN DEBT RATING. If a rating agency gives a tax-exempt security a low
rating, the value of the security will decline because investors will demand a
higher rate of return.

*CREDIT RISK. Like any borrower, the issuer of a tax-exempt security may be
unable to make its payments. The Fund may invest up to 100% of its assets in
high yield, high-risk tax-exempt securities. High yield, high-risk tax-exempt
securities may involve greater credit risks which are discussed below.

*LEGISLATIVE RISK. The special tax status of tax-exempt securities may be
undermined or changed by future federal or state legislation.

High yield, high-risk tax-exempt securities present greater credit risk than do
investment grade tax-exempt securities. High yield, high-risk tax-exempt
securities are subject to these four additional risks:

o OVERBURDENED ISSUERS. Many issuers only resort to offering high yield,
high-risk tax-exempt securities when they cannot issue investment grade
securities. These issuers are unlikely to have a cushion from which to make
their payments when their revenues (from taxes or other sources) are poor
or when the economy in general is in decline.
o PRIORITY. Issuers of high yield, high-risk tax-exempt securities are likely
to have a substantial amount of other debt. Most, if not all, of this other
debt will be "senior" to the high yield, high-risk tax-exempt securities;
an issuer must be current on its senior obligations before it can pay
lower-ranking obligations. In addition, some of the other debt may be
secured by the issuer's primary assets. If the issuer defaults on those
other debts, the lenders may seize their collateral--possibly forcing the
issuer into bankruptcy.
o DIFFICULT TO RESELL. Many investors simply do not want high yield,
high-risk tax-exempt securities, and others are prohibited from buying
them.
o VOLATILE PRICES. Prices of high yield, high-risk tax-exempt securities are
more volatile than prices of higher rated securities. In periods of
economic difficulty or rising interest rates, prices of high yield,
high-risk tax-exempt securities may decline more than prices of investment
grade securities.

OTHER SECURITIES AND INVESTMENT STRATEGIES

There are other securities which the Fund may invest in, and investment
strategies which the Fund may employ, but they are not principal investment
strategies. These securities and investment strategies are discussed in the
Statement of Additional Information.

16
<PAGE>

tax-exempt securities, we may reduce our risk by investing in short-term
securities until market conditions improve. Many short-term investments do not
earn interest free from federal income tax. In such a circumstance, the
short-term investments will not contribute to the Fund's investment objective
of earning current income free from federal income taxes.

ADDITIONAL RISKS FOR THE FUND: YEAR 2000 ISSUES

Like all financial service providers, the Adviser, Sub-Advisers, Distributor,
and third parties providing investment advisory, administrative, transfer
agent, custodial and other services utilize systems that may be affected by
Year 2000 transition issues (many computer software systems in use today cannot
distinguish the year 2000 from the year 1900 because of the way dates are
encoded and calculated).

Difficulties with Year 2000 issues could have a negative impact on handling
securities trades, payments of interest, pricing and account services.
Although, at this time, there can be no assurance that there will be no adverse
impact on the Funds, the Service Providers have advised the Funds that they
have been actively working on necessary changes to their computer systems to
prepare for Year 2000 issues and expect that their systems, and those of other
parties they deal with, will be adapted in time for this event. In addition,
there can be no assurance that the entities issuing tax-exempt securities which
the Fund invests in will not experience difficulties with Year 2000 issues
which may negatively affect the market value of those securities.

17
<PAGE>

RISK SPECTRUM

Davis Selected Advisers manages eleven mutual funds in the Davis family. Each
fund has a distinct investment objective and strategy. The following graph
shows how these funds compare to each other in terms of risk. Davis Tax-Free
High Income Fund has a risk level we characterize as "medium to low."

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
DAVIS FUNDS MED MED
LOW LOW MED HIGH HIGH
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DAVIS GROWTH OPPORTUNITY FUND O
- -------------------------------------------------------------------------------------------------------------
DAVIS INTERNATIONAL TOTAL RETURN FUND O
- -------------------------------------------------------------------------------------------------------------
DAVIS FINANCIAL FUND O
- -------------------------------------------------------------------------------------------------------------
DAVIS REAL ESTATE FUND O
- -------------------------------------------------------------------------------------------------------------
DAVIS NEW YORK VENTURE FUND O
- -------------------------------------------------------------------------------------------------------------
DAVIS GROWTH & INCOME FUND O
- -------------------------------------------------------------------------------------------------------------
DAVIS CONVERTIBLE SECURITIES FUND O
- -------------------------------------------------------------------------------------------------------------
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND O
- -------------------------------------------------------------------------------------------------------------
DAVIS TAX-FREE HIGH INCOME FUND O
- -------------------------------------------------------------------------------------------------------------
DAVIS GOVERNMENT BOND FUND O
- -------------------------------------------------------------------------------------------------------------
DAVIS GOVERNMENT MONEY MARKET FUND O
- -------------------------------------------------------------------------------------------------------------
</TABLE>

[IN BLACK AREA BELOW GRAPHIC]
For more information about any of the other Davis Funds, including charges and
expenses, ask for a prospectus. Read it carefully before investing or sending
money.

HOW WE MANAGE RISK

Risks are inherent in all investments. Investing in a mutual fund, even the
most conservative, involves risk, including the risk that you may receive
little or no return on your investment or even that you may lose part or all of
your investment. Davis Tax-Free High Income Fund employs four strategies to
minimize the risk assumed when we invest in high yield, high-risk tax-exempt
securities.

[SET OFF OR BOXED]
FOUR STRATEGIES WE USE TO MINIMIZE RISK

18
<PAGE>

3. CURRENT RESEARCH. We monitor and endeavor to anticipate relevant changes
and trends in the economy and financial markets.
4. WE MAY MAKE TEMPORARY DEFENSIVE INVESTMENTS. From time to time, Davis
Tax-Free High Income Fund may take temporary defensive positions in
response to adverse market, economic or political conditions.

ONCE YOU INVEST IN THE FUND

This section describes: how your investment is valued, how you earn money on
your investment, and how the government may tax these earnings.

HOW YOUR SHARES ARE VALUED

Once you open an account in Davis Tax-Free High Income Fund, you are entitled
to buy and sell shares on any business day. The share price of your investment
changes depending on the total value of the Fund's investments.

Each business day, we determine the value of Fund shares by adding up the total
value of investments plus other assets (such as cash), subtracting liabilities,
and dividing the result by the total number of shares outstanding. This share
figure is known as the net asset value (NAV).

Net asset values for all the Davis Funds are determined each day the Funds are
open for business. A business day is defined as any day the New York Stock
Exchange is open for trading. We calculate net asset value either at the close
of the Exchange or at 4 p.m. Eastern Time, whichever comes first.

The net asset values of all Davis Fund shares are published daily in the
business section of most major newspapers. If you have access to the Internet,
you can also check net asset value on our web site (www.davisfunds.com).

19
<PAGE>

HOW SECURITIES IN THE PORTFOLIO ARE VALUED

We use current market valuations to value the securities in Davis Tax-Free High
Income Fund:

o Debt securities maturing in more than 60 days may be valued by an
independent pricing service. In particular, the Fund relies on a
professional pricing service that has experience in valuing securities with
limited resale markets so as to obtain prices that reflect the market as
accurately as possible.
o Debt securities maturing in 60 days or less are usually valued at an
amortized (gradually reduced) cost.
o Securities with unavailable market quotations and other assets are valued
at "fair value"--which is determined or directed by the Board of Directors.

HOW WE PAY EARNINGS

There are three ways you can receive payments from Davis Tax-Free High Income
Fund:

o TAX-EXEMPT DIVIDENDS. Distributions to shareholders of net tax-exempt
income.
o TAXABLE DIVIDENDS. Distributions to shareholders of net taxable income and
short-term capital gains on investments.
o CAPITAL GAINS. Profits received by the Fund from the sale of securities
held for the long-term, which are then distributed to shareholders.

Davis Tax-Free High Income Fund usually pays monthly dividends and generally
distributes capital gains, if any, in November or December. Unless you choose
otherwise, Davis Tax-Free High Income Fund automatically reinvests your
dividends and capital gains in additional Fund shares.

You can request to have your dividends and capital gains paid to you by check,
deposited directly into your bank account, paid to a third party, or sent to an
address other than your address of record.

We also offer a Dividend Diversification Program, which allows you to have your
dividends and capital gains reinvested in shares of another Davis Fund.

You will receive a statement each year detailing the amount of all dividends
and capital gains paid to you during the previous year. To ensure that these
distributions are reported properly to the U.S. Treasury, you must certify on
your Application Form (or on Form W-9) that your Taxpayer Identification Number
is correct and you are not subject to backup withholding (which means that you
are paying back taxes for failing to report all interest and dividends).

20
<PAGE>

If you fail to report a correct Taxpayer I.D. Number, under-reported dividend
or interest income, or are already subject to backup withholding, Davis
Tax-Free High Income Fund is required by law to withhold a portion of any
distributions you may receive--and send it to the U.S. Treasury.

(set off)
HOW TO PUT YOUR DIVIDENDS AND CAPITAL GAINS TO WORK

You can have all dividends and capital gains automatically invested in the same
share class of this or other Davis Funds. To be eligible for this DIVIDEND
DIVERSIFICATION PROGRAM, all accounts involved must be registered under the
same name and have a minimum initial value of $250. All future investments must
total $25 or more. Shares are purchased at the chosen fund's net asset value on
the dividend payment date. You can make changes to your selection or withdraw
from the program with 60 days notice. To participate in this program, fill out
the cross-reinvest information in the appropriate section of the Application
Form.

HOW YOUR DIVIDENDS AND CAPITAL GAINS ARE TAXED

Your federal income tax treatment will vary depending on the type of
distribution that you receive from the Fund.

1 NOT SUBJECT TO TAX. Generally, your dividends will not be subject to
federal income tax if they come from interest that the Fund earns from
tax-exempt securities.
2 ORDINARY INCOME. If the Fund distributes net interest income derived from
sources other than tax-exempt securities, or distributes short-term capital
gains, those amounts will be taxable to you as ordinary income.
3 CAPITAL GAINS. Net long-term capital gain distributions, if any, will be
taxable to you as long-term capital gain, regardless of how long you have
owned your Fund shares. More information is provided in the instructions
that come with your tax return.
4 ALTERNATIVE MINIMUM TAX. If the Fund invests in certain "private activity
bonds" (which are bonds to finance privately-owned facilities that serve a
public purpose), the interest on those bonds will be exempt from federal
income tax, but will constitute a "tax preference item" for purposes of
both the individual and the corporate alternative minimum tax.

When you sell or exchange shares of the Fund, it may result in a taxable gain
or loss. If you hold Fund shares for six months or less, and then realize a
loss on the sale of those shares, the tax treatment of your loss will be
affected by any distributions that you received while you held your shares. In
particular:

21
<PAGE>

o If you received exempt-interest dividends during that holding period, then
your loss will be disallowed to the extent of those dividends.
o If you received capital gains dividends during that holding period, then
your loss (to the extent it is allowed) will be treated as a long-term
capital loss to the extent of those dividends.

Investment earnings (dividends and capital gains) are taxable in the year in
which they were declared, not paid--whether they are received in cash or
reinvested in shares.

Dividends and distributions from the Fund, even if federally tax-exempt, may
still be subject to state and local income taxes.

[sidebar]
We recommend that you consult with a tax adviser about any dividends and
capital gains you may receive from Davis Tax-Free High Income Fund,
particularly if you are subject to the "alternative minimum tax" or if you are
a "substantial user" of facilities financed by "industrial development bonds."
These terms are all defined in the Internal Revenue Code, and are beyond the
scope of this discussion. We also recommend that you consult with a tax adviser
about the state and local tax laws that affect you.

HOW TO CHOOSE A SHARE CLASS

Before you can buy any shares in Davis Tax-Free High Income Fund, you need to
decide which class of shares best suits your needs. The Fund offers four
classes of shares: A, B, C and Y. Class Y shares (which are offered through a
separate prospectus) are available only to qualified institutional investors.
Each class is subject to different expenses and sales charges.

You may choose to buy one class of shares rather than another, depending on the
amount of the purchase and the expected length of time of investment. Long-term
shareholders of Class B or C shares may pay more than the maximum front-end
sales charge allowed by the National Association of Securities Dealers.

SPECIAL NOTE: Institutions buying $5 million or more may be eligible to buy
Class Y shares of Davis Tax-Free High Income Fund, offered through a separate
prospectus. With Class Y shares, you pay no sales charges or distribution fees.
To find out more about Class Y shares, contact your sales representative or our
distributor, Davis Distributors.

[Set Off]
DISTRIBUTION FEES. The Fund has adopted plans under Rule 12b-1 that allow the
Fund to pay distribution and other fees for the distribution of its shares and
for services provided to shareholders. Class A shares pay 0.25% of average
annual net assets while Class B and C shares pay 1.00% of average annual net
assets. Because these fees are paid out of

22
<PAGE>

the Fund's assets on an on-going basis, over time these fees will increase the
cost of your investment and may cost you more than paying other types of sales
charges.

CLASS A SHARES

Class A shares may be best for you if you are a long-term investor who is
willing to pay the entire sales charge at the time of purchase. In return, you
pay a lower distribution fee than the two other share classes:

o You buy Class A shares at their net asset value per share plus a sales
charge, which is 4.75% for any investment below $100,000 (see chart below).
The term "offering price" includes the front-end sales charge.
o There is no limit on how much you can invest in this share class.
o The Fund pays a distribution fee--up to 0.25% of the average daily net
asset value--each year you hold the shares. This fee is lower than the fee
you pay for the other two classes of shares. Lower expenses translate into
higher annual return on net asset value.

<TABLE>
<CAPTION>
CLASS A SHARES SALES CHARGES
- -------------------------------------------------------------------------------
AMOUNT OF PURCHASE SALES CHARGE SALES CHARGE AMOUNT OF SALES
(PERCENTAGE OF (PERCENTAGE OF NET CHARGE RETAINED BY
OFFERING PRICE) AMOUNT INVESTED) THE DEALER
(PERCENTAGE OF
OFFERING PRICE)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Under $100,000 4.75% 5.00% 4.00%
- -------------------------------------------------------------------------------
$100,000 - $250,000 3.50% 3.60% 3.00%
- -------------------------------------------------------------------------------
$250,000 - $500,000 2.50% 2.60% 2.00%
- -------------------------------------------------------------------------------
$500,000 - $750,000 2.00% 2.00% 1.75%
- -------------------------------------------------------------------------------
$750,000 - $1 million 1.00% 1.00% 0.75%
- -------------------------------------------------------------------------------
$1 MILLION OR MORE* NONE NONE NONE
- -------------------------------------------------------------------------------
</TABLE>

* You pay no front-end sales charge on purchases of $1 million or more, but if
you sell those shares within the first year you may pay a deferred sales charge
of 0.75%. Davis Distributors may pay the dealer a commission during the first
year after purchase at the following rates:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
PURCHASE AMOUNT COMMISSION
- -------------------------------------------------------------------------------
<S> <C>
FIRST $3 MILLION 0.75%
- -------------------------------------------------------------------------------
NEXT $2 MILLION 0.50%
- -------------------------------------------------------------------------------
OVER $5 MILLION 0.25%
- -------------------------------------------------------------------------------
</TABLE>

If a commission is paid for purchases of $1 million or more, the dealer will be
paid with distribution fees received from the Fund. If distribution fee limits
have already been reached for the year, Davis Distributors itself will pay the
commissions.

23
<PAGE>

As the chart above shows, the sales charge gets smaller as your purchase amount
increases. There are several ways you may combine purchases to qualify for a
lower sales charge.

YOU CAN COMBINE PURCHASES OF CLASS A SHARES

o WITH OTHER FAMILY MEMBERS. If you buy shares for yourself, your spouse and
any children under the age of 21, all the shares you buy will be counted as
a single purchase.
o WITH CERTAIN GROUPS. If you buy shares through a group organized for a
purpose other than to buy mutual fund shares, the purchases will be treated
as a single purchase
o UNDER A STATEMENT OF INTENTION. If you enter a Statement of Intention and
agree to buy Class A shares of $100,000 or more over a 13-month period, all
of the shares you buy during that period will be counted as a single
purchase. Before entering a Statement of Intention, please read the terms
and conditions in the Statement of Additional Information. Under a
Statement of Intention, you agree to permit our service provider, State
Street Bank and Trust, to hold fund shares in escrow to guarantee payment
of any sales charges that may be due if you ultimately invest less than you
agreed to invest over the covered 13-month period.
o UNDER RIGHTS OF ACCUMULATION. If you notify your dealer or our distributor,
Davis Distributors, you can include the Class A, B and C shares you already
own (except shares of Davis Government Money Market Fund) when calculating
the price for your current purchase.
o WITH CLASS A SHARES OF OTHER DAVIS FUNDS. If you buy Class A shares of this
or any other Davis Fund except Davis Government Money Market Fund, all of
the shares you buy will be counted as a single purchase. This includes
shares purchased under a Statement of Intention or Rights of Accumulation.

CLASS A SHARES FRONT-END SALES CHARGE WAIVERS

We will not charge a sales charge on purchases of Class A shares for:

o Shareholders making purchases with dividends or capital gains that are
automatically reinvested.
o Purchases by directors, officers and employees of Davis Tax-Free High
Income Fund, its investment adviser or its affiliates, and their immediate
families.
o Purchases by employees and people affiliated with broker-dealer firms
offering Fund shares.
o Financial institutions acting as fiduciaries making single purchases of
$250,000 or more.

24
<PAGE>

o Wrap accounts offered by securities firms, fee-based investment advisers or
financial planners.
o State and local governments.

[sidebar]
Wrap accounts are investment programs offered by broker-dealers who place a
client's funds with one or more investment advisers and charge a fee for their
services.

CLASS B SHARES

Class B shares may be best for you if you are willing to pay a higher
distribution fee than Class A shares for eight years in order to avoid paying
an initial sales charge.

o You buy the shares at net asset value (no initial sales charge).
o You can invest up to $250,000 in Class B shares.
o If you sell Class B shares within six years of purchase, you must pay a
deferred sales charge. This charge decreases over time as you own the
shares (see chart below).
o After you hold Class B shares for eight years, they are automatically
converted into Class A shares without paying a front-end sales charge.
Class A shares pay a lower distribution fee.
o The Fund pays a distribution fee of 1% of the average daily net asset value
each year you hold the shares. Higher expenses translate into lower annual
return on net asset value.

CLASS B SHARES DEFERRED SALES CHARGES

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
SALES MADE AFTER PURCHASE AMOUNT OF DEFERRED SALES CHARGE
- -------------------------------------------------------------------------------
<S> <C>
YEAR 1 4%
- -------------------------------------------------------------------------------
YEARS 2-3 3%
- -------------------------------------------------------------------------------
YEARS 4-5 2%
- -------------------------------------------------------------------------------
YEAR 6 1%
- -------------------------------------------------------------------------------
YEARS 7-8 NONE
- -------------------------------------------------------------------------------
</TABLE>

25
<PAGE>

CLASS C SHARES

Class C shares may be best for you if you are willing to pay a higher
distribution fee than Class A shares pay in order to avoid paying an initial
sales charge.

o You buy the shares at net asset value (no initial sales charge).
o You cannot invest more than $1 million in Class C shares.
o If you sell the shares within one year of purchase, you must pay a deferred
sales charge of 1%.
o The Fund pays a distribution fee of 1% of the average daily net asset value
each year you hold the shares. Higher expenses translate into lower annual
return on net asset value.

DEFERRED SALES CHARGE

As an investor in the Fund, you may pay a deferred sales charge as a percentage
of the net asset value of the shares you sell or the total cost of the shares,
whichever is lower. Fund investors pay a deferred sales charge in the following
cases:

o As a Class A shareholder, only if you buy shares valued at $1 million or
more without a sales charge and sell the shares within one year of
purchase.
o As a Class B shareholder, if you sell shares within six years of purchase.
The percentage decreases over the six year period.
o As a Class C shareholder, if you sell shares within one year of purchase.

To keep deferred sales charges as low as possible, we will first sell shares in
your account that are not subject to deferred sales charges (if any). We do not
impose a deferred sales charge on shares acquired through dividend
reinvestments or capital gain distributions.

DEFERRED SALES CHARGE WAIVERS

We will waive deferred sales charges on sales of Class A, B and C shares if:

o You sell shares that were acquired through reinvestment of dividends or
capital gains.
o You sell shares that were not subject to a commission at the time of
purchase (the amount of purchase totaled $1 million or more and the shares
were held for more than a year).
o You (or a registered joint owner) die or have been determined to be totally
disabled sometime after the purchase of shares.
o You sell shares under the Automatic Withdrawals Plan amounting to, in a
12-month period, up to 12% of the value of the account when you began
participating in the Plan.

26
<PAGE>

o Your fund sells the remaining shares in your account under an Involuntary
Redemption.
o You qualify for an exception relating to defined contribution plans. These
exceptions are described in the Statement of Additional Information.
o You are a director, officer or employee of Davis Selected Advisers or one
of its affiliates (or a family member of a director, officer or employee).

If the net asset value of the shares that you sell has increased since you
purchased them, any deferred sales charge will be based on the original cost of
the shares.

[boxed]
If you have any additional questions about choosing a share class, please call
us toll-free at 1-800-279-0279, Monday through Friday, 7 a.m. to 4 p.m.
Mountain Time. If you still are not sure about which class is best for you,
contact your financial adviser.

27
<PAGE>

HOW TO OPEN AN ACCOUNT

You can open an account if you invest at least $1,000 for a non-retirement plan
account. The Fund does not offer retirement plan accounts.

(chart)
THREE WAYS YOU CAN OPEN AN ACCOUNT

1. BY MAIL. Fill out the Application Form included in this prospectus and mail
it to our service provider, State Street Bank and Trust. Both you and your
dealer must sign the form. Include a check made payable to the DAVIS FUNDS. All
purchases by check should be in U.S. dollars. Davis Funds will not accept
third-party checks.

2. BY DEALER. You may have your dealer order and pay for the shares. In this
case, you must pay your dealer directly. Your dealer will then order the shares
from our distributor, Davis Distributors. Please note that your dealer may
charge a service fee or commission for buying these shares.

3. BY WIRE. You may wire federal funds directly to our service provider, State
Street Bank and Trust. Before you wire an initial investment, you must call
Davis Distributors to let them know the fund and share class you will be
buying. After the initial wire purchase is made, you will need to fill out a
Plan Adoption Agreement or Application Form and return it to State Street Bank
and Trust. To ensure that the purchase is credited properly, follow these wire
instructions:

State Street Bank and Trust Company
Boston, MA 02210
Attn: Mutual Fund Services
Davis Tax-Free High Income Fund
Shareholder Name
Shareholder Account Number
Federal Routing Number 011000028
DDA Number 9904-606-2

Generally, the Fund does not issue share certificates for purchases. You can
receive certificates if you are a Class A shareholder who is not participating
in the Automatic Withdrawals Plan. If you are eligible and wish to receive
certificates, you must make the request at the time of purchase.

28
<PAGE>

RETIREMENT PLAN ACCOUNTS

Because Davis Tax-Free High Income Fund's investment objective is to earn
current income free from federal income tax, it is not an appropriate
investment for retirement accounts and does not offer retirement plan accounts.

HOW TO BUY, SELL AND EXCHANGE SHARES

Once you have opened an account with Davis, you can add to--or withdraw
from--your initial purchase. This section provides an overview of the types of
transactions you can perform as a shareholder of Davis Tax-Free High Income
Fund. This includes how to initiate these transactions, and the charges that
you may incur (if any) when buying, selling and exchanging shares.

An Exchange is when you sell shares in one Davis Fund to buy shares in another
Davis Fund in response to changes in your goals or in market conditions.

(chart)
THREE WAYS TO BUY, SELL AND EXCHANGE SHARES

1. BY TELEPHONE. Call 1-800-279-0279. You can speak directly with a Davis
representative during our business hours or use our automated telephone
system any time, day or night.

2. BY MAIL. Send the request to our service provider, State Street Bank and
Trust.

Regular Mail

State Street Bank and Trust Company
c/o Davis Funds
PO Box 8406
Boston, MA 02266-8406

Overnight Mail

State Street Bank and Trust Company
c/o Davis Funds
66 Brooks Drive
Braintree, MA 02184

3. BY DEALER. Contact a dealer, who will then make the transaction through our
distributor, Davis Distributors. Please note that your dealer may charge a
service fee or commission for each transaction.

29
<PAGE>

Generally, the Fund does not issue share certificates for purchases. Each time
you add to or withdraw from your account, you will receive a statement showing
the details of the transaction--along with any other transactions you made
during the current year.

WHEN YOUR TRANSACTIONS ARE PROCESSED

The per-share price for purchases or sales made through our distributor, Davis
Distributors, will be processed on the same day if the order is received (as
described above) before 4 p.m. Eastern Time. If State Street Bank and Trust
requires additional documents to complete the purchase or sale, the transaction
price will be determined at the close of business after all required documents
are received.

For your transaction to be counted on the day you place your order with your
broker-dealer or other financial institution, they must:

o Receive your order before 4 p.m. Eastern Time.
o Promptly transmit the order to State Street Bank and Trust.

BUYING MORE SHARES

You can buy more shares at any time by mail or through a dealer. The minimum
purchase amount is $25.

When you purchase shares by mail, send a check made payable to the DAVIS FUNDS
for the amount of purchase to our service provider, State Street Bank and
Trust. If you have the purchase form from your most recent statement, include
it with the check. If you do not have a purchase form, include a letter with
your check stating the name of the fund and the class of shares you wish to
buy. If you know your account number, include it on the check.

When you buy shares through a dealer, you may be charged a service fee or
commission for performing the transaction.

30
<PAGE>

[SET OFF]
MAKING AUTOMATIC INVESTMENTS

An easy way to increase your investments in this or other Davis Funds is to
sign up for the AUTOMATIC INVESTMENT PLAN. Under this plan, you arrange for a
set amount of money to be taken from your bank account and invested in Fund
shares. The minimum amount you can invest each month is $25. The account
minimums of $1,000 for non-retirement accounts (the Fund does not offer
retirement accounts) will be waived if you meet the minimum requirement within
a year.

Purchases can be processed electronically on any day of the month between the
fourth and 28th days if the institution that services your bank account is a
member of the Automated Clearing House system. After each automatic investment,
you will receive a transaction confirmation, and the debit should show up on
your next bank statement.

To sign up for the Automatic Investment Plan, fill out the appropriate section
of the Application Form. You can stop automatic investments at any time by
calling Davis Distributors.

You can also use our Dividend Diversification Program to buy more shares in any
Davis Fund. See ONCE YOU INVEST IN THE FUND.

[SIDEBAR]
The Automated Clearing House system is used by most banks for electronic
transfers of money into and out of your bank account - and is regulated by the
Federal Reserve.

SELLING SHARES

You may sell back all or part of your shares to Davis Tax-Free High Income Fund
(known as a redemption) at any time, at net asset value minus any sales charges
that may be due. You can sell the shares by telephone, by mail, or through a
dealer.

When you sell shares by mail, indicate the number of shares or dollar amount
you wish to redeem and send the request to our service provider, State Street
Bank and Trust. If more than one person owns the shares you wish to sell, all
owners must sign a request.

When you sell shares through a dealer, you may be charged a service fee or
commission for performing the transaction.

Redemption proceeds are usually paid to you in cash within seven days after
State Street Bank and Trust receives your proper sale request. If any of the
shares redeemed were purchased within the last 15 days, payment to you will be
delayed until your purchase check has cleared (which may take up to 15 days
from the date of purchase).

31
<PAGE>

WHAT YOU NEED TO KNOW BEFORE YOU SELL YOUR SHARES

o You will always receive cash for sales that total less than $250,000 or 1%
of the Fund's net asset value during any 90-day period. Any sales above the
cash limit may be paid in securities and would mean you would have to pay
brokerage fees.
o Ordinarily, you only need a medallion signature guarantee on a share
certificate, stock power, or redemption request for sales of more than
$50,000. However, if you have made any changes to the Application Form
since your account was opened, or if your address of record has changed in
the last 30 days, you will need a medallion signature for all sales.
o If a certificate was issued for the shares you wish to sell, the
certificate must be signed by the owner(s) and sent to State Street Bank
and Trust along with the redemption request.
o A sale may produce a gain or loss. Gains may be subject to tax.

MEDALLION SIGNATURE GUARANTEE
A written confirmation from an eligible guarantor institution, such as a
securities broker-dealer or a commercial bank, that the signature(s) on the
account is(are) valid. Unfortunately, no other form of signature verification
can be accepted.

STOCK POWER
A letter signed by the owner of the shares that gives State Street Bank and
Trust permission to transfer ownership of the shares to another person or
group.

SPECIAL SALE SITUATIONS

o The Securities and Exchange Commission can suspend payment of sales under
certain emergency circumstances if the New York Stock Exchange is closed
for reasons other than customary closings and holidays.
o Davis Tax-Free High Income Fund may make sales payments in securities if
Davis Tax-Free High Income Fund's Board of Directors decides that making
cash payments would harm the Fund.

SPECIAL NOTE: When you make a sale or withdrawal, a deferred sales charge may
be imposed if:

o You buy $1 million or more of Class A shares and sell them within a year of
purchase.
o You sell Class B shares within six years of purchase.
o You sell Class C shares within one year of purchase.

32
<PAGE>

IF YOU DECIDE TO BUY BACK SHARES YOU SOLD

If you decide to buy back some or all of the shares you sold in this Fund
within 60 days of sale and notify us in writing, you can take advantage of the
SUBSEQUENT REPURCHASE PRIVILEGE. With this privilege, which you can use only
once, you will not be charged a sales charge, and any deferred sales charge you
paid on the original sale will be returned to your account. You must send a
letter to our service provider, State Street Bank and Trust, along with a check
for the repurchased shares.

IF YOUR ACCOUNT FALLS BELOW $250

If your account balance falls below $250 (as a result of a redemption or
exchange), we may sell your remaining shares in Davis Tax-Free High Income Fund
at net asset value. We will first notify you by mail, giving you at least 60
days notice that an INVOLUNTARY REDEMPTION may take place. If you can increase
your account balance to above $250 during the notice period, the involuntary
redemption will be canceled.

[SET OFF]
MAKING AUTOMATIC WITHDRAWALS

If you hold more than $10,000 in your account, you can sell a set dollar amount
each month or quarter. When you participate in this program, known as the
AUTOMATIC WITHDRAWALS PLAN, shares are sold so that you will receive the
payment around the 25th day of the month. Note that because withdrawals are
sales, they may produce a gain or loss. If you purchase additional shares at
the same time that you make a withdrawal, you may have to pay taxes and a sales
load. Gains may be subject to tax. To sign up for the Automatic Withdrawals
Plan, fill out the appropriate section of the Application Form.

You may stop automatic withdrawals at any time without charge or penalty by
calling Davis Distributors.

[SET OFF]
WIRING SALE PROCEEDS TO YOUR BANK ACCOUNT

If you are an investor with a non-retirement account (the Fund does not offer
retirement accounts), you can have your sale proceeds electronically
transferred to a commercial bank account. This is known as an ELECTRONIC WIRE
PRIVILEGE. To sign up for this option, simply fill out the appropriate section
of the Application Form. There is a $5 charge by State Street Bank and Trust
for wire service, and receiving banks may also charge for this service. Payment
by Automated Clearing House 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 you call. While State Street Bank and Trust will
also accept electronic wire sales by telephone, fax or dealer, you still need
to fill out and submit the information under the Electronic Wire Privilege
section of the Application Form.

33
<PAGE>

EXCHANGING SHARES

You can transfer shares of Davis Tax-Free High Income Fund to shares in the
same class of any other Davis Fund without having to pay a sales charge. This
is known as an exchange. You can exchange shares by telephone, by mail or
through a dealer. The initial exchange must be for at least $1,000 (unless you
are participating in the Automatic Exchange Program). Exchanges are normally
performed on the same day of the request if received by 4 p.m. Eastern Time.

Shares in different Davis Funds may be exchanged at relative net asset value.
However, if any Davis Fund shares being exchanged are subject to a sales
charge, Statement of Intention, or other limitation, the limitation will
continue to apply to the shares received in the exchange. When you exchange
shares in a Davis Fund for shares in Davis Government Money Market Fund, the
holding period for any sales charge does not run during the time that you own
Davis Government Money Market Fund shares. For example, Class B shares are
subject to a declining sales charge for six years. Any period that you are
invested in shares of Davis Government Money Market Fund will be added to the
six year declining sales charge period.

When you exchange shares by mail, you must send our service provider, State
Street Bank and Trust, a written request for the exchange. If you hold share
certificates, the certificates must by signed by the owner(s) and sent to State
Street Bank and Trust along with the exchange request. No medallion signature
guarantee is required unless shares are also being sold for cash and would
otherwise require a medallion signature guarantee.

When you exchange shares through a dealer, you may be charged a service fee or
commission for performing the transaction.

Before you decide to make an exchange, you must obtain the current prospectus
of the desired fund. For federal income tax purposes, exchanges between funds
are treated as a sale and a purchase. Therefore, there will usually be a
recognizable capital gain or loss due to an exchange.

There are limits to the number of exchanges you can make each year. Currently,
four exchanges are allowed during a 12-month period. Davis Distributors must
approve any exchanges above the limit in writing.

34
<PAGE>

YOU CAN MAKE EXCHANGES AMONG ANY OF THE DAVIS FUNDS WITHOUT HAVING TO PAY ANY
SALES CHARGE.

EQUITY FUNDS
- ------------
Davis New York Venture Fund
Davis Growth Opportunity Fund
Davis Financial Fund
Davis International Total Return Fund

GROWTH & INCOME FUNDS
- ---------------------
Davis Growth & Income Fund
Davis Real Estate Fund
Davis Convertible Securities Fund

BOND FUNDS
- ----------
Davis Intermediate Investment Grade Bond Fund
Davis Tax-Free High Income Fund
Davis Government Bond Fund

GOVERNMENT MONEY MARKET FUND
- ----------------------------
Davis Government Money Market Fund

For more information about any of the other Davis Funds, including charges and
expenses, ask for a prospectus. Read it carefully before investing or sending
money.

[SET OFF]
MAKING AUTOMATIC EXCHANGES

You can elect to make automatic monthly exchanges if all accounts involved are
registered under the same name and have a minimum initial value of $250. You
must exchange at least $25 to participate in this program, known as the
AUTOMATIC EXCHANGE PROGRAM. To sign up for this program, fill out the
appropriate section of the Application Form.

TRANSACTIONS BY TELEPHONE

A benefit of investing through Davis Funds is that you can use our telephone
system to sell or exchange shares. If you do not wish to have this option
activated for your account, mark in the box in the appropriate section of the
Application Form.

When you call Davis Distributors, you can perform a transaction with Davis
Funds in two ways:

35
<PAGE>

o Speak directly with a representative during business hours (7 a.m. to 4
p.m. Mountain Time).
o If you have a TouchTone(trademark) telephone, you can use the automated
telephone system, known as DAVIS DIRECT ACCESS, 24 hours a day, seven days
a week.

[SET OFF]
YOU CAN USE DAVIS DIRECT ACCESS TO:

o GET THE PRICE, TOTAL RETURN, AND FUND DESCRIPTION FOR ANY DAVIS FUND.
o CHECK YOUR ACCOUNT BALANCE AND OTHER ACCOUNT INFORMATION.
o BUY, SELL AND EXCHANGE SHARES.
o GET THE MAILING ADDRESS AND WIRE INSTRUCTIONS FOR ANY DAVIS FUND.
o REQUEST LITERATURE ABOUT ANY DAVIS FUND.

If you wish to sell shares by phone and receive a check in the mail:

o The maximum amount that can be issued is $25,000.
o The check can only be issued to the registered account owner.
o The check must be sent to the address on file with Davis.
o Your current address must be on file for 30 days.

When you buy, sell or exchange shares over the telephone, you agree that Davis
Funds are not liable for following telephone instructions believed to be
genuine (that is, directed by the account holder). We use certain procedures to
confirm that your instructions are genuine, including a request for personal
identification and a tape recording of the conversation. If these procedures
are not used, the Fund may be liable for unauthorized instructions.

Be aware that during unusual market conditions, Davis Funds may not be able to
accept all requests by phone.

36
<PAGE>

[INSIDE BACK COVER]

THE DAVIS FUNDS:
OVER 25 YEARS OF RELIABLE INVESTING

Davis Selected Advisers, investment adviser of the Davis Funds, has a history
of investing for the long-term. Since our founding in 1969, we have been
dedicated to delivering superior investment performance and service to our
clients.

WE ARE LONG-TERM INVESTORS. We analyze high-quality growth companies that have
been overlooked, buy their stock at value prices, and hold the shares for the
long-term. This strategy was first developed by legendary Wall Street investor
Shelby Cullom Davis, a leading financial adviser to governors and presidents.

Our investment approach has been refined for more than 25 years by his son,
Shelby M.C. Davis, who is now Chief Investment Officer of Davis Selected
Advisers. The Davis strategy is still followed today by the third generation of
family members: Christopher C. Davis and Andrew A. Davis serve as either
Portfolio Manager or Co-Portfolio Manager for many Davis Funds.

WE ARE FELLOW SHAREHOLDERS. The Davis family, directors and employees not only
manage the company's mutual funds but also invest in them. Together, we have
invested over $1 billion of our own money side-by-side with our shareholders.

Please take the time to read this prospectus carefully, and if you decide to
invest with us, keep it as a reference guide. If you need more information
about the Davis Funds, please call us or visit our Web site.

37
<PAGE>

ADDRESS AND PHONE GUIDE

OUR TELEPHONE NUMBER OUR SERVICE PROVIDER'S REGULAR MAILING
1-800-279-0279 ADDRESS
State Street Bank and Trust Company
c/o Davis Funds
PO Box 8406
Boston, MA 02266-8406

OUR MAILING ADDRESS
Davis Funds
124 East Marcy Street
Santa Fe, NM 87501

OUR INTERNET ADDRESS OUR SERVICE PROVIDER'S OVERNIGHT MAILING
http://www.davisfunds.com ADDRESS
State Street Bank and Trust Company
c/o Davis Funds
66 Brooks Drive
Braintree, MA 02184

38
<PAGE>

[BACK COVER]

OTHER FUND DOCUMENTS

For more information about Davis Tax-Free High Income Fund, request a free copy
of the Statement of Additional Information or the Annual and Semi-Annual
Reports. The sSTATEMENT OF ADDITIONAL INFORMATION provides more detailed
information about the Fund and its management and operations. An ANNUAL REPORT
discusses the market conditions and investment strategies that significantly
affected Fund performance during the last year. A SEMI-ANNUAL REPORT updates
information provided in the Annual Report for the next six months.

WHERE YOU CAN GET THESE DOCUMENTS:

o BY TELEPHONE. Call Davis Funds toll-free at 1-800-279-0279, Monday-Friday,
7 a.m. to 4 p.m. Mountain Time. You may also call this number for
shareholder inquiries.

o VIA THE INTERNET. Visit the SEC web site (www.sec.gov).

o BY MAIL. Specify the document you are requesting when writing to us.

DAVIS FUNDS
124 EAST MARCY STREET
SANTA FE, NM 87501
1-800-279-0279

Investment Company Act File No. 811-3270

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 1, 1999

DAVIS TAX-FREE HIGH INCOME FUND, INC.
124 EAST MARCY STREET
SANTA FE, NEW MEXICO 87501
1-800-279-0279

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE READ
IN CONJUNCTION WITH THE CLASS A, CLASS B AND CLASS C PROSPECTUS DATED FEBRUARY
1, 1999 AND THE CLASS Y PROSPECTUS DATED FEBRUARY 1, 1999. THE PROSPECTUSES MAY
BE OBTAINED FROM THE FUND.

THE FUND'S MOST RECENT ANNUAL REPORT AND SEMI-ANNUAL REPORT TO SHAREHOLDERS ARE
SEPARATE DOCUMENTS SUPPLIED WITH THIS STATEMENT OF ADDITIONAL INFORMATION. THE
ANNUAL REPORT, ACCOMPANYING NOTES AND REPORT OF INDEPENDENT AUDITORS APPEARING
IN THE ANNUAL REPORT ARE INCORPORATED BY REFERENCE IN THIS STATEMENT OF
ADDITIONAL INFORMATION.

<PAGE>

TABLE OF CONTENTS

PAGE

Section I: Investment Strategies and Restrictions..........................4

Investment Objective and Policies...............................4
Portfolio Securities............................................4
Other Investment Policies.......................................8
Portfolio Transactions.........................................10
Investment Restrictions........................................11

Section II: Key Persons....................................................13

Organization of the Company....................................13
Directors and Officers.........................................13
Directors Compensation Schedule................................16
Certain Shareholders of the Fund...............................16
Investment Advisory Services...................................17
Distribution of Company Shares.................................18
Other Important Service Providers..............................21

Section III: Purchase, Exchange and Redemption of Shares....................22

Purchase of Shares.............................................22
Alternative Purchase Arrangements.....................23
Class A Shares........................................23
Class B Shares........................................25
Class C Shares........................................26
Class Y Shares........................................27

Special Services...............................................27
Automatic Investment Plan.............................27
Dividend Diversification Program......................27
Telephone Privilege...................................27

Exchange of Shares.............................................28
General...............................................28
By Telephone..........................................28
Automatic Exchange Program............................28

Redemption of Shares...........................................29
General...............................................29
Expedited Redemption Privilege........................29
By Telephone..........................................30
Automatic Withdrawals Plan............................30
Involuntary Redemptions...............................30
Subsequent Repurchases................................30

2
<PAGE>

Section IV: General Information............................................31

Determining the Price of Shares................................31
Year 2000 Issues...............................................31
Dividends and Distributions....................................32
Federal Income Taxes...........................................32
Performance Data...............................................33
Non-Standard Distribution Rates................................35

Appendix A: Quality Ratings of Debt Securities..............................37
Appendix B: Term and Conditions for a Statement of Intention................39

3
<PAGE>

Section I: Investment Strategies and Restrictions

INVESTMENT OBJECTIVES AND POLICIES

Davis Tax-Free High Income Fund's ("Fund") 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.
Davis Selected Adviser L.P. ("Adviser") and or Stamper Capital & Investments,
Inc. ("Sub-Adviser") will select particular municipal obligations for the Fund
if, in their 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. 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 Appendix A. 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. As of September 30, 1998, 9% of the Fund's net assets were subject to the
Federal alternative minimum tax.

PORTFOLIO SECURITIES

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 various types of municipal obligation which the Fund purchases are
discussed 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 may not have an
established market and such lack of liquidity could cause the Fund difficulty
at times in selling these securities at favorable prices.

The market value of fixed income securities will generally be affected
by changes in the level of rates. Increases in interest rates tend to reduce
the market value of fixed income investments and declines in interest rates
tend to increase their value. Moreover, debt issues with longer maturities,
which tend to produce higher yields, are subject to potentially greater capital
appreciation or depreciation than securities with shorter maturities.
Fluctuations

4
<PAGE>

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 Adviser's and/or Sub-Adviser's analysis without relying on any published
ratings. The Fund will invest in a particular security if, in the Adviser's
and/or 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 Adviser's and/or 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 Adviser and 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.

TYPES OF MUNICIPAL OBLIGATIONS. 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.

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. 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.

5
<PAGE>

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, 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.

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 Adviser or 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.

6
<PAGE>

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 Adviser and/or 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 Adviser and/or 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 Adviser
and/or Sub-Adviser may deem appropriate. The Adviser and/or 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 Adviser and/or 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.

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

7
<PAGE>

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, 1998. 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.

COMPOSITION OF THE FUND'S PORTFOLIO BY QUALITY RATING AS A PERCENTAGE OF
TOTAL NET ASSETS AT SEPTEMBER 30, 1998

<TABLE>
<CAPTION>
FUND'S ASSESSMENT OF GENERAL DEFINITION
MOODY'S/S&P RATING CATEGORY PERCENTAGE NON-RATED SECURITIES OF BOND QUALITY
- --------------------------- ---------- -------------------- ---------------
<S> <C> <C> <C>
Aaa/AAA ............................ 48.01% 0.12% Highest quality
Aa/AA ............................ 11.76% 0.00% High quality
A/A ............................ 16.07% 0.45% Upper medium grade
Baa/BBB ............................ 6.75% 2.97% Medium grade
Ba/BB ............................ 3.77% 3.86% Some speculative elements
B/B ............................ 1.31% 1.71% 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........................... 9.11% 0.00% Not rated by Moody's or S&P
Short-term Investments.............. 3.22% 0.00%
----- -----
100.00% 9.11%
</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.

OTHER INVESTMENT POLICIES

TEMPORARY DEFENSIVE 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. For defensive purposes or to
accommodate inflows of cash awaiting more permanent investment, the Funds may
temporarily and without limitation hold high-grade short-term money market
instruments, cash and cash equivalents, including repurchase agreements.

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.

REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements,
but normally will not enter into repurchase agreements maturing in more than
seven days. A repurchase agreement, as referred to herein,

8
<PAGE>
involves a sale of securities to a Fund, with the concurrent agreement of the
seller (a bank or securities dealer which the Adviser or Sub-Adviser determines
to be financially sound at the time of the transaction) to repurchase the
securities at the same price plus an amount equal to accrued interest at an
agreed-upon interest rate, within a specified time, usually less than one week,
but, on occasion, at a later time. The repurchase obligation of the seller is,
in effect, secured by the underlying securities. In the event of a bankruptcy
or other default of a seller of a repurchase agreement, the Fund could
experience both delays in liquidating the underlying securities and losses,
including (a) possible decline in the value of the collateral during the period
while the Fund seek to enforce their rights thereto; (b) possible loss of all
or a part of the income during this period; and (c) expenses of enforcing its
rights.

The Fund will enter into repurchase agreements only when the seller
agrees that the value of the underlying securities, including accrued interest
(if any), will at all times be equal to or exceed the value of the repurchase
agreement. The Fund will not enter into a repurchase agreement maturing in more
than seven days if it would cause more than 15% of the value of its net assets
to be invested in such transactions. Repurchase agreements maturing in less
than seven days are not deemed illiquid securities for the purpose of the
Fund's 15% limitation on illiquid securities.

INVESTMENT IN OTHER INVESTMENT COMPANIES. The Fund may invest up to
10% of its total assets through other listed and unlisted investment companies.
The Fund will comply with applicable investment limitations imposed by the
Investment Company Act of 1940. Such investments may involve the payment of
premiums above the value of the portfolio securities held by such other
investment companies. The return on such investment may be reduced both by the
Fund's own expenses, including its Advisory fees, and the management fees and
expenses of the other investment company. However, due to legal currency,
liquidity or other restrictions, investments in some countries may be currently
limited and marketable investments may be made more readily by investing in
investment companies primarily investing in securities of these countries.

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 Adviser or Sub-Adviser under criteria established by
the Fund's Board of Directors, will consider whether Rule 144A securities being
purchased or held by the Fund are illiquid and thus subject to the Fund's
policy limiting investments in illiquid securities. In making this
determination, the Adviser or Sub-Adviser will consider the frequency of trades
and quotes, the number of dealers and potential purchasers, dealer undertakings
to make a market, and the nature of the security and the market place trades
(for example, the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). The liquidity of Rule 144A
Securities will also be monitored by the Adviser or 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 investments in illiquid securities if
qualified institutional buyers are unwilling to purchase such securities.

BORROWING. The Fund may borrow money for temporary or emergency
purposes. The Fund will not borrow money with the intent of leveraging its
investments. Borrowing activities are strictly limited as described in the
section entitled, "Investment Restrictions."

"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.

9
<PAGE>

PORTFOLIO TRANSACTIONS.

The Adviser and Sub-Adviser are responsible for the placement of
portfolio transactions, subject to the supervision of the Board of Directors.
The Fund has adopted a policy to seek to place portfolio transactions with
brokers or dealers who will execute transactions as efficiently as possible and
at the most favorable price. Subject to this policy, research services and
placement of orders by securities firms for Fund shares may be taken into
account as a factor in placement of portfolio transactions. In seeking the
Fund's investment objectives, the Fund may trade to some degree in securities
for the short term if the Adviser or Sub-Adviser believe that such trading is
advisable.

In placing executions and paying brokerage commissions, the Adviser or
Sub-Adviser consider the financial responsibility and reputation of the broker
or dealer, the range and quality of the services made available to the Fund and
the professional services rendered, including execution, clearance procedures,
wire service quotations and ability to provide supplemental performance,
statistical and other research information for consideration, analysis and
evaluation by the Adviser or Sub-Adviser's staff. In accordance with this
policy, brokerage transactions may not be executed solely on the basis of the
lowest commission rate available for a particular transaction. Research
services provided to the Adviser or Sub-Adviser by or through brokers who
effect portfolio transactions for the Fund may be used in servicing other
accounts managed by the Adviser or Sub-Adviser and likewise research services
provided by brokers used for transactions of other accounts may be utilized by
the Adviser or 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 Adviser or Sub-Adviser deem the purchase or sale
of a security to be in the best interests of a Fund as well as other fiduciary
accounts, the Adviser or Sub-Adviser may aggregate the securities to be sold or
purchased for a Fund with those to be sold or purchased for other accounts in
order to obtain the best net price and most favorable execution. In such event,
the allocation will be made by the Adviser or Sub-Adviser in the manner
considered to be most equitable and consistent with its fiduciary obligations
to all such fiduciary accounts, including the Fund involved. In some instances,
this procedure could adversely affect a Fund but the Adviser and Sub-Adviser
deem that any disadvantage in the procedure would be outweighed by the
increased selection available and the increased opportunity to engage in volume
transactions.

The Adviser and Sub-Adviser believe that research from brokers and
dealers is desirable, although not essential, in carrying out their functions,
in that such outside research supplements the efforts of the Adviser and
Sub-Adviser by corroborating data and enabling the Adviser and 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 companies, industries, areas of the
economy or securities prices, obtaining written materials on these or other
areas which might affect the economy and/or securities prices, obtaining
quotations on securities prices and obtaining information on the activities of
other institutional investors. The Adviser or Sub-Adviser research, at their
own expense, each security included in, or being considered for inclusion in,
the Fund's portfolios. As any particular research obtained by the Adviser and
Sub-Adviser may be useful to the Fund, the Board of Directors or its Committee
on Brokerage, in considering the reasonableness of the commissions paid by the
Fund, will not attempt to allocate, or require the Adviser or Sub-Adviser to
allocate, the relative costs or benefits of research.

The Fund has paid no brokerage commissions during the three-year
period ended September 30, 1998. 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.

Because of the Fund's investment policies, portfolio turnover rate
will vary. At times it could be high, which could require the payment of larger
amounts in brokerage commissions.

10
<PAGE>

INVESTMENT RESTRICTIONS

The fundamental investment restrictions set forth below 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.

DAVIS TAX-FREE HIGH INCOME FUND'S FUNDAMENTAL INVESTMENT RESTRICTIONS

1. MUNICIPAL SECURITIES, LENDING. 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.

During periods of normal market conditions either (1) the Fund's
assets will be invested so that at least 80% of the income will be
tax-exempt, or (2) the Fund will have at least 80% of its net assets
invested in tax-exempt securities.

2. REAL ESTATE, COMMODITIES. 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. DIVERSIFICATION OF FUND ASSETS.

(a) Fund Assets. 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.

(b) Securities of Issuers. 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").

(c) Securities of a Single State. 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.

(d) Sources of Payment. 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.

(e) Securities Other Than Municipal Obligations. 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
<PAGE>

4. PUT AND CALL OPTIONS. The Fund may not write or purchase put or call
options.

5. INVESTMENT COMPANIES. 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.

6. SELL SHORT, PURCHASE ON MARGIN. 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.

7. BORROWING. 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.

8. OWNERSHIP OF PORTFOLIO SECURITIES BY OFFICERS AND DIRECTORS. The Fund
may not buy or continue to hold securities if the directors and
officers of the Fund, the Adviser or the Adviser's General Partner own
too many of the same securities. This would happen if any of these
individuals own 1/2 of 1% or more of the securities and the people who
own that much or more own 5% of such securities.

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

10. SENIOR SECURITIES. The Fund may not issue senior securities nor sell
short more than 5% of its total assets, except as provided by the
Investment Company Act of 1940 and any rules, regulations or orders
issued thereunder. This limitation does not apply to selling short
against the box.

DAVIS TAX-FREE HIGH INCOME FUND NON-FUNDAMENTAL POLICIES. In addition to
the foregoing restrictions, the Fund is subject to certain other
non-fundamental policies which may be changed without shareholder approval
including the following:

1. ILLIQUID SECURITIES. The Fund may not purchase illiquid securities if
more than 15% of the value of the Fund's net assets would be invested
in such securities.

2. BORROWING. In addition to the fundamental policy restricting
borrowing, The Fund may borrow money from any source for temporary
purposes in an amount not exceeding 5% of total assets. The Fund will
not purchase portfolio securities on margin and will not purchase
additional portfolio securities while borrowings exceed 5% of the
total assets of the Fund.

PLEASE NOTE: Except for limitations on borrowing and illiquid securities, all
percentage restrictions, whether fundamental or non-fundamental, apply as of
the time of an investment without regard to any later fluctuations in the value
of portfolio securities or other assets.

12
<PAGE>

Section II: Key Persons

ORGANIZATION OF THE COMPANY

THE COMPANY. Davis Tax-Free High Income Fund, Inc. ("Company") is an
open-end, diversified, management investment company incorporated in Maryland
in 1981 and registered under the Investment Company Act of 1940. The Company is
a series investment company which may issue multiple series, each of which
would represent an interest in its separate portfolio. The Company currently
offers only one series, Davis Tax-Free High Income Fund (the "Fund").

FUND SHARES. The Fund may issue shares in different classes. The Fund
shares 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 of the Fund's shares
represent an interest in the assets of the fund issuing the share and have
identical voting, dividend, liquidation and other rights and the same terms and
conditions as any other shares except that (i) each dollar of net asset value
per share is entitled to one vote, (ii) the expenses related to a particular
class, such as those related to the distribution of each class and the transfer
agency expenses of each class are borne solely by each such class and (iii)
each class of shares votes separately with respect to provisions of the Rule
12b-1 Distribution Plan, which pertains to a particular class, and other
matters for which separate class voting is appropriate under applicable law.
Each fractional share has the same rights, in proportion, as a full share.
Shares do not have cumulative voting rights; therefore, the holders of more
than 50% of the voting power of the Company can elect all of the directors of
the Company. Due to the differing expenses of the classes, dividends of Class B
and Class C shares are likely to be lower than for Class A shares, and are
likely to be higher for Class Y shares than for any other class of shares. For
more information about Class Y shares, call the Distributor at 1-800-279-0279
to obtain the Class Y prospectus.

Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted under the provisions of the 1940 Act or applicable state law or
otherwise to the shareholders of the outstanding voting securities of an
investment company, such as the Company, will not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each series affected by such matter. Rule 18f-2 further
provides that a series shall be deemed to be affected by a matter unless it is
clear that the interests of each series in the matter are identical or that
that the matter does not affect any interest of such series. Rule 18f-2 exempts
the selection of independent accountants and the election of Board members from
the separate voting requirements of the Rule.

In accordance with Maryland law and the Company's By-laws, the Company
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 of at least 25% of the voting
power that could be cast at the meeting.

DIRECTORS AND OFFICERS

The Company's Board of Directors is responsible for the management and
supervision of the Company and the Fund. The Board approves all significant
agreements between the Company, on behalf of the Fund, and those companies that
furnish services to the Fund. The names and addresses of the directors and
officers of the Company are set forth below, together with their principal
business affiliations and occupations for the last five years. As indicated
below, certain directors and officers of the Company hold similar positions
with the following funds that are managed by the Adviser: Davis Intermediate
Investment Grade Bond Fund, Inc., Davis New York Venture 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);

13
<PAGE>

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. Director Van Eck
Funds; 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.

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), Walsh & Levine 40 Wall Street, 21st, Floor, New
York, NY 10005. 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).

MARSHA WILLIAMS (3/28/51), 725 Landwehr Rd. Northbrook, Il 60062. Director of
the Company and each of the Davis Funds except Davis International Series,
Inc.; Director of Selected American Shares, Inc., Selected Special Shares, Inc.
and Selected Capital Preservation Trust; Chief Administrative officer of Crate
& Barrel; former. Treasurer, Amoco Corporation. Director, Illinois Benedictine
College, The Conference Board Council of Corporate Treasurers, Illinois Council
on Economic Education, Chicagoland Chamber of Commerce; Formerly, Director,
Fertilizers of Trinidad and Tobago from 1989-1993, Ok Tedi Mining Limited from
1992-1993, Just Jobs from 1988-1992.

SHELBY M.C. DAVIS (3/20/37),** 4135 North Steers Head Road, Jackson Hole, WY
83001. President of the Company 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.; Director, Davis Selected Advisers-NY, Inc.; Employee of
Capital Ideas, Inc. (financial consulting firm); Consultant to Fiduciary Trust
Company International; Director, Shelby Cullom Davis Financial Consultants,
Inc.

14
<PAGE>

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

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

KENNETH C. EICH (8/14/53), 124 East Marcy Street, Santa Fe, NM 87501. Vice
President of the Company and each of the Davis Funds, Selected American Shares,
Inc., Selected Special Shares, Inc. and Selected Capital Preservation Trust;
Chief Operating Officer, Venture Advisers, Inc.; Vice President, Davis Selected
Advisers-NY, Inc.; President, Davis Distributors, L.L.C. 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 of
Selected American Shares, Inc., Selected Special Shares, Inc. and Selected
Capital Preservation Trust; Vice President, Venture Advisers, Inc.

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

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

SHELDON R. STEIN (11/29/28), 111 Wacker Drive, Suite 2800, Chicago, IL
60601-4205, 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), 111 Wacker Drive, Suite 2800, Chicago, IL 60601-4205,
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.

* Jeremy H. Biggs, Andrew A. Davis and Christopher C. Davis are considered to
be "interested persons" of the Company, as defined in the Investment Company
Act.

** Shelby M.C. Davis is the father of Andrew A. Davis and Christopher C. Davis.

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.

15
<PAGE>

DIRECTORS COMPENSATION SCHEDULE

During the fiscal year ended September 30, 1998, the compensation paid
to the directors who are not considered to be interested persons of the Company
was as follows:

<TABLE>
<CAPTION>
AGGREGATE COMPANY TOTAL
NAME COMPENSATION COMPLEX COMPENSATION*
---- ------------ ---------------------
<S> <C> <C>
Wesley E. Bass $7,490 $45,600
Marc P. Blum 6,950 42,000
Jerry D. Geist 6,950 42,000
D. James Guzy 6,950 42,000
G. Bernard Hamilton 6,950 42,000
LeRoy E. Hoffberger 6,950 42,000
Laurence W. Levine 6,950 42,000
Christian R. Sonne 6,950 42,000
Edwin R. Werner** 4,925 29,750
</TABLE>

* Complex compensation is the aggregate compensation paid, for services as
a Director, by all mutual funds with the same investment adviser. There
are eight registered investment companies in the complex.

** Mr. Werner has retired as a Director but still serves in a non-voting
emeritus status.

CERTAIN SHAREHOLDERS OF THE FUND

As of December 31, 1998, officers and directors owned the following
percentages of each Class of shares issued by the Fund:

<TABLE>
<CAPTION>
Class A Class B Class C Class Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Davis Tax-Free High Income Fund ** ** ** **
</TABLE>

** indicates that officers and directors owned less than 1% of the outstanding
shares of the indicated Class of shares.

The following table sets forth, as of December 31, 1998 the name and
holdings of each person known by the Company to be a record owner of more than
5% of the outstanding shares of any Class of either of its Funds. The Fund is
not aware of any shareholder that beneficially owns in excess of 25% of the
Fund's total outstanding shares.

<TABLE>
<CAPTION>
PERCENT OF CLASS
NAME AND ADDRESS OUTSTANDING
- ---------------- -----------
<S> <C>
DAVIS TAX-FREE HIGH INCOME FUND
Class A shares
Salomon Smith Barney, Inc. 8.98%
333 West 34th Street - 3rd Floor
New York, NY 10001-2483

Merrill Lynch Pierce Fenner & Smith 7.48%
Mutual Fund Operations
4800 Deerlake Drive East - 2nd Floor
Jacksonville, FL 32246

Class B shares
Merrill Lynch Pierce Fenner & Smith 22.40%
Mutual Fund Operations
4800 Deerlake Drive East - 2nd Floor
Jacksonville, FL 32246

16
<PAGE>

Class C shares
Merrill Lynch Pierce Fenner & Smith 37.18%
Mutual Fund Operations
4800 Deerlake Drive East - 2nd Floor
Jacksonville, FL 32246

Class Y shares
Merrill Lynch Pierce Fenner & Smith 99.99%
Mutual Fund Operations
4800 Deerlake Drive East - 2nd Floor
Jacksonville, FL 32246
</TABLE>

INVESTMENT ADVISORY SERVICES

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 Chief Investment Officer of the Adviser
and the controlling shareholder of the general partner. Subject to the
direction and supervision of the Board of Directors, the Adviser manages the
investment and business operations of the Fund. Davis Distributors, LLC ("the
Distributor"), a subsidiary of the Adviser, serves as the distributor or
principal underwriter of the Fund's shares. Davis Selected Advisers-NY, Inc.,
("DSA-NY") a wholly owned subsidiary of the Adviser, performs research and
other services for the Fund on behalf of the Adviser under a Sub-Advisory
Agreement with the Adviser. The Adviser also acts as investment adviser for
Davis New York Venture Fund, Inc., Davis Intermediate Investment Grade Bond
Fund, Inc., Davis International Series, Inc. Davis 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 Funds and the Selected Funds.

ADVISORY AGREEMENT. Pursuant to the Advisory Agreement, the Fund pays
the Adviser a fee according to a separate negotiated fee schedule. Advisory
fees are allocated among each Class of shares in proportion to each Classes'
relative total net assets.

The Fund pays the Adviser a fee at the annual rate based on average
net assets, 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, 1998, 1997, and 1996 were
$2,769,520, $1,065,546, and $1,149,436, respectively. These fees may be higher
than that of most other mutual Fund but is not necessarily higher than that
paid by Fund with similar objectives.

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

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

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

17
<PAGE>

In accordance with the provisions of the Investment Company Act of
1940, the Advisory Agreement will terminate automatically upon assignment and
is subject to cancellation upon 60 days' written notice by the Company's Board
of Directors, the vote of the holders of a majority of the Fund outstanding
shares, or the Adviser. The continuance of the Advisory Agreement must be
approved at least annually by the Fund 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.

Pursuant to the Advisory Agreement, the Adviser, subject to the
general supervision of the Fund's Board of Directors, provides management and
investment advice, and furnishes statistical, executive and clerical personnel,
bookkeeping, office space, and equipment necessary to carry out its investment
advisory functions and such corporate managerial duties as requested by the
Board of Directors of the Fund. The Fund bear all expenses other than those
specifically assumed by the Adviser under the Advisory Agreement, including
preparation of its tax returns, financial reports to regulatory authorities,
dividend determinations, transaction and accounting matters related to its
custodian bank, transfer agency, custodial and shareholder services, and
qualification of its shares under federal and state securities laws. The Fund
reimburses the Adviser for providing certain services including accounting and
administrative services, qualifying shares for sale with state agencies and
shareholder services. Such reimbursements are detailed below:

<TABLE>
<CAPTION>
Fiscal year ended September 30
1998 1997 1996
Davis Tax-Free High Income Fund
- -------------------------------
<S> <C> <C> <C>
Accounting and administrative services $15,996 $45,000 $37,998
Qualifying shares for sale with state agencies $12,996 $12,000 $10,002
Shareholder services $46,432 $12,245 $17,914
</TABLE>

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

DISTRIBUTION OF COMPANY SHARES

DISTRIBUTION PLANS. Class A, Class B, and Class C shares have each
adopted Distribution Plans under which the Fund reimburses the Distributor for
some of its distribution expenses. The Distribution Plans were approved by the
Fund's Board of Directors in accordance with Rule 12b-1 under the Investment
Company Act of 1940. Rule 12b-1 regulates the manner in which a mutual fund may
assume costs of distributing and promoting the sale of its shares. Payments
pursuant to a Distribution Plan are included in the operating expenses of the
Class.

CLASS A 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 the Fund's Class A
shares, servicing its shareholders and maintaining its 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.

18
<PAGE>

CLASS B 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 Company 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
its shareholder accounts.

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

CARRYOVER PAYMENTS. 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, or the 1% commission on new sales of Class C 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 Company, who are not interested persons of the Distributor or
the Company and have no direct or indirect financial interest in the Class B or
C Distribution Plans (the "Independent Directors"). If the Fund terminates its
Class B share or Class C share Distribution Plan, 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, 1998 the cumulative
totals of these carryover payments on Class B shares were $7,561.473,
representing 2.96% of Class B shares net assets.

ADDITIONAL INFORMATION CONCERNING THE DISTRIBUTION PLANS. In addition,
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 Company shares within the meaning of Rule 12b-1, the
Distribution Plans authorize the payment of such fees.

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 Independent Directors or a majority of a Fund's outstanding
Class of shares. The Distributor is required to furnish quarterly written
reports to the Board of Directors detailing the amounts expended under the
Distribution Plans. The Distribution Plans may be amended provided that all
such amendments comply with the applicable requirements then in effect under
Rule 12b-1. Currently, Rule 12b-1 provides that as long as the Distribution
Plans are in effect, the Company must commit the selection and nomination of
candidates for new Independent Directors to the sole discretion of the existing
Independent Directors.

DEALER COMPENSATION. 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 who 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.

19
<PAGE>

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.

FUND SUPERMARKETS. The Funds participate in various "Fund
Supermarkets" in which a broker-dealer offers many mutual funds to the
sponsor's clients without charging the clients a sales charge. The Funds pay
the supermarket sponsor a negotiated fee for distributing the Funds' shares and
for continuing services provided to their shareholders.

A portion of the supermarket sponsor's fee (that portion related to
sales, marketing, or distribution of Fund shares) is paid with fees authorized
under the Distribution Plans.

A portion of the supermarket sponsor's fee (that portion related to
shareholder services such as new account set-up, shareholder accounting,
shareholder inquires, transaction processing, and shareholder confirmations and
reporting) is paid as a shareholder servicing fee of the Funds. The Funds would
typically be paying these shareholder servicing fees directly, were it not that
the supermarket sponsor holds all customer accounts in a single omnibus account
with the Funds. The amount of shareholder servicing fees which the Funds may
pay to supermarket sponsors may not exceed the lesser of (a) 1/10 of 1 percent
of net assets held by such supermarket sponsors per year or (b) the shareholder
servicing costs saved by the Funds with the omnibus account (determined in the
reasonable judgement of the Adviser).

If the supermarket sponsor's fees exceed the sum available from the
Distribution Plans and shareholder servings fees, then the Adviser pays the
remainder out of its profits.

KRC INVESTMENT ADVISERS, LLC. KRC Investment Advisers, LLC ("KRC"), a
registered investment adviser owned and managed by members of the immediate and
extended family of LeRoy E. Hoffberger, a Director of the Company, has entered
into a service agreement (the "Services Agreement") with the Distributor which
provides payments to KRC under the Fund Rule 12b-1 Plan. Under the Services
Agreement, KRC will provide shareholder maintenance services to clients, in
respect of shares of the Company, and the Distributor will pay KRC a fee at the
annual rate of 0.25% of average net assets of the accounts of clients
maintained and serviced by KRC. Payments made by the Distributor under the
Services Agreement will be reimbursed by the Company under its Rule 12b-1 Plan.
Those payments will be made in connection with shareholder maintenance services
provided by that investment adviser to its clients who are shareholders of the
Company which include, among others, Mr. Hoffberger and members of his
immediate and extended family and trusts of which they are beneficiaries or
trustees. The cost of these services and advisory services provided by KRC are
borne by the clients. Mr. Hoffberger does not have any ownership interest in or
otherwise have any control of KRC.

THE DISTRIBUTOR. Davis Distributors, LLC, ("the Distributor"), 124
East Marcy, Santa Fe, New Mexico, 87501 is a wholly owned subsidiary of the
Adviser and pursuant to a Distributing Agreement acts as principal underwriter
of the Fund shares on a continuing basis pursuant to a Distributing Agreement.
Pursuant to the Distributing Agreement, the Distributor pays for all expenses
in connection with the preparation, printing, and distribution of advertising
and sales literature for use in offering the Fund shares to the public,
including reports to shareholders to the extent they are used as sales
literature. The Distributor also pays for the preparation and printing of
prospectuses other than those forwarded to existing shareholders. The
continuance and assignment provisions of the Distributing Agreement are the
same as those of the Advisory Agreement.

20
<PAGE>

The Distributor or the Adviser, in its capacity as distributor,
received total sales charges (which the Funds do not pay) on the sale of Class
A shares:

<TABLE>
<CAPTION>
Fiscal year ended September 30
1998 1997 1996
<S> <C> <C> <C>
Davis Tax-Free High Income Fund $4,936.465 $1,397,658 $37,029
Amount reallowed to dealers $4,191,179 $1,168,660 $31,258
</TABLE>

The Distributor or the Adviser, in its capacity as distributor,
received compensation on redemptions and repurchases of shares:

<TABLE>
<CAPTION>
Fiscal year ended September 30, 1998
<S> <C>
Davis Tax-Free High Income Fund
Class A shares $ 1,696
Class B shares $294,925
Class C shares $ 6,858
</TABLE>

The Distributor or the Adviser, in its capacity as distributor,
received the following amounts as reimbursements under the Distribution plans.

<TABLE>
<CAPTION>
Fiscal year ended
1998 1997 1996
<S> <C> <C> <C>
Davis Tax-Free High Income Fund
Class A shares $ 535,985 $ 129,433 $ 95,000
Class B shares $2,077,802 $1,099,299 $1,160,529
Class C shares $ 222,588 $ 992 $NA
</TABLE>

OTHER IMPORTANT SERVICE PROVIDERS

CUSTODIAN. State Street Bank and Trust Company ("State Street" or
"Custodian"), One Heritage Drive, North Quincy, Massachusetts 02171, serves as
custodian of the Company's assets. The Custodian maintains all of the
instruments representing the Company's investments and all cash. The Custodian
delivers securities against payment upon sale and pays for securities against
delivery upon purchase. The Custodian also remits the Company assets in payment
of the Fund's expenses, pursuant to instructions of officers or resolutions of
the Board of Directors. The Custodian also provides certain fund accounting and
transfer agent services.

AUDITORS. KPMG LLP ("KPMG"), 707 17th St. Suite 2300, Denver, Colorado
80202, serves as independent auditors for each of the funds. The auditors
consult on financial accounting and reporting matters, and meet with the Audit
Committee of the Board of Directors. In addition, KPMG reviews federal and
state income tax returns and related forms.

COUNSEL. D'Ancona & Pflaum, 111 E. Wackier Drive, Suite 2800, Chicago,
IL. 60601-4205, serves as counsel to the Company and also serves as counsel for
those members of the Board of Directors who are not affiliated with the
Adviser.

21
<PAGE>

Section III: Purchase, Redeem and Exchanging Shares

PURCHASE OF SHARES

CLASS A, B, AND C SHARES. 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. Class Y shares are offered only to certain qualified
purchasers, as described below.

There are three ways to make an initial investment of Class A, Class
B, or Class C shares in the Fund. One way is to fill out the Application Form
included in the Prospectus and mail it to State Street Bank and Trust Company
("State Street") at the address on the Form. The dealer must also sign the
Form. Your dealer or sales representative will help you fill out the Form. All
purchases made by check (minimum $1,000) 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.

The second way to make an initial investment is to have your dealer
order and remit payment for the shares on your behalf. The dealer can also
order the shares from the Distributor by telephone or wire. You can also use
this method for additional investments of at least $1,000.

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

State Street Bank and Trust Company,
Boston, MA 02210
Attn.: Mutual Fund Services
DAVIS TAX-FREE HIGH INCOME FUND;
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. For overnight delivery, please send your check to State Street Bank
and Trust Company, c/o the Davis Funds, 66 Brooks Drive, Braintree, MA. 02184.
THIRD PARTY CHECKS WILL NOT BE ACCEPTED. The check should be accompanied by a
form which State Street will provide after each purchase. If you do not have a
form, you should tell State Street that you want to invest the check in shares
of the applicable fund. If you know your account number, you should also
provide it to State Street.

CERTIFICATES. The Company 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. The Company does not issue certificates for
Class Y shares. Instead, shares purchased are automatically credited to an
account maintained for you on the books of the Company by State Street. You
will receive a statement showing the details of the transaction and any other
transactions you had during the current year each time you add to or withdraw
from your account.

22
<PAGE>

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 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 to (i) trust
companies, bank trusts, pension plans, endowments or foundations acting on
behalf of their own account or one or more clients for which such institution
acts in a fiduciary capacity and investing at least $5,000,000 at any one time
("Institutions"); (ii) any state, county, city, department, authority or
similar agency which invests at least $5,000,000 at any one time ("Governmental
Entities"); and (iii) any investor with an account established under a "wrap
account" or other similar fee-based program sponsored and maintained by a
registered broker-dealer approved by the Distributor ("Wrap Program
Investors"). Class Y shares are sold at net asset value without the imposition
of Rule 12b-1 charges.

Depending on the amount of the purchase and the anticipated length of
time of the investment, investors may choose to purchase one Class of shares
rather than another. Investors who would rather pay the entire cost of
distribution at the time of investment, rather than spreading such cost over
time, might consider Class A shares. Other investors might consider Class B or
Class C shares, in which case 100% of the purchase price is invested
immediately. The Company 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
Company will not accept any purchase of Class C shares when Class A shares may
be purchased at net asset value.

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

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

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

<TABLE>
<CAPTION>
Purchase Amount Commission
--------------- ----------
<S> <C>
First $3,000,000................. .75%
Next $2,000,000................. .50%
Over $5,000,000................. .25%
</TABLE>

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

REDUCTION OF CLASS A SALES CHARGE. There are a number of ways to
reduce the sales charge imposed on the purchase of the Fund's Class A shares,
as described below. These reductions are based upon the fact that there is less
sales effort and expense involved in respect to purchases by affiliated persons
and purchases made in large quantities. If you claim any reduction of sales
charges, you or your dealer must so notify the Distributor (or State

23
<PAGE>

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.

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

(2) STATEMENTS OF INTENTION. Another way to reduce the sales charge is
by signing a Statement of Intention ("Statement"). See Appendix B: "Terms and
Conditions of a Statement of Intention." 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 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 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 the total amount indicated at one time. For example, if you indicate
that you intend to invest $100,000, you will pay a sales charge of 3-1/2% on
each purchase.

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

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

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

(3) 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 does not have to 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 shares
(including Class A, B and C shares of all Davis Funds, except Davis Government
Money Market Fund) and invest $5,000 in additional shares, the sales charge on
that $5,000 investment would be 3-1/2%, not 4-3/4%.

(4) COMBINED PURCHASES WITH OTHER DAVIS FUNDS. Your ownership or
purchase of Class A shares of other 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 a Fund 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 Davis
Tax-Free High Income Fund's Class A shares and $150,000 in the Class A shares
of Davis New York Venture Fund and pay a sales charge of 2-1/2%, not 3-1/2%.

24
<PAGE>

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 Company's Class A
shares and the Class A shares of the other Davis Funds which you already own,
valued at the current offering price at the end of the period covered by your
Statement of Intention, may be included in the amount you have stated you
intend to invest pursuant to your Statement.

Lastly, the right of accumulation also applies 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 Intermediate Investment Grade Bond Fund 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 assert this right of
combining the shares you own of the other Davis Funds, you or your dealer must
notify the Distributor (or State Street, if the investment is mailed to State
Street) of the pertinent facts. Enough information must be given to permit
verification as to whether you are entitled to a reduction in sales charges.

(5) 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. A sales charge is not imposed on these
transactions either because of the purchaser deals directly with the Fund (as
in employee purchases) or because a responsible party (such as a financial
institution) is providing the necessary services usually provided by a
registered representative. 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.

(6) 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; (2) Class A shares purchased by directors, officers, and
employees of any fund for which the Adviser acts as investment adviser or
officers and employees of the Adviser, Sub-Adviser, or Distributor, including
former directors and officers and any spouse, child, parent, grandparent,
brother or sister ("immediate family members") of all of the foregoing, and any
employee benefit or payroll deduction plan established by or for such persons;
(3) Class A shares purchased by any registered representatives, principals, and
employees (and any immediate family member) of securities dealers having a
sales agreement with the Distributor; (4) initial purchases of Class A shares
totaling at least $250,000 but less than $5,000,000, made at any one time by
banks, trust companies, and other financial institutions on behalf of one or
more clients for which such institution acts in a fiduciary capacity; (5) Class
A shares purchased by any single account covering a minimum of 250 participants
(this 250 participant minimum may be waived for certain fee based mutual fund
marketplace programs) and representing a defined benefit plan, defined
contribution plan, cash or deferred plan qualified under 401(a) or 401(k) of
the Internal Revenue Code or a plan established under section 403(b), 457 or
501(c)(9) of such Code or "rabbi trusts"; (6) Class A shares purchased by
persons participating in a "wrap account" or similar fee-based program
sponsored and maintained by a registered broker-dealer approved by the Fund
Distributor or by investment advisors or financial planners who place trades
for their own accounts or the accounts of their clients and who charge a
management, consulting, or other fee for their services; and clients of such
investment advisors or financial planners who place trades for their own
accounts if the accounts, are linked to the master account of such investment
advisor or financial planner, on the books and records of the broker or agent;
and (7) Class A shares amounting to less than $5,000,000 purchased by any
state, county, city, department, authority or similar agency. Investors may be
charged a fee if they effect purchases in fund shares through a broker or
agent. The Fund may also issue Class A shares at net asset value incident to a
merger with or acquisition of assets of an investment company.

CLASS B SHARES. Class B shares are offered at net asset value, without
a front-end sales charge. The Distributor receives and usually reallows
commissions to firms responsible for the sale of such shares. With certain
exceptions described below, the Fund impose a deferred sales charge of 4% on
shares redeemed during the first year

25
<PAGE>

after purchase, 3% on shares redeemed during the second or third year after
purchase, 2% on shares redeemed during the fourth or fifth year after purchase
and 1% on shares redeemed during the sixth year after purchase. However, on
Class B shares of the Fund which are acquired in exchange from Class B shares
of other Davis Funds which were purchased prior to December 1, 1994, the Fund
will impose a deferred sales charge of 4% on shares redeemed during the first
calendar year after purchase; 3% on shares redeemed during the second calendar
year after purchase; 2% on shares redeemed during the third calendar year after
purchase; and 1% on shares redeemed during the fourth calendar year after
purchase; and, no deferred sales charge is imposed on amounts redeemed after
four calendar years from purchase. Class B shares will be subject to a maximum
Rule 12b-1 fee at the annual rate of 1% of the class's average daily net asset
value. The Fund will not accept any purchase of Class B shares in the amount of
$250,000 or more per investor.

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

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

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

CONTINGENT DEFERRED SALES CHARGES. Any contingent deferred sales
charge ("CDSC") imposed upon the redemption of Class A, Class B or Class C
shares is a percentage of the lesser of (i) the net asset value of the shares
redeemed or (ii) the original cost of such shares. No CDSC is imposed when you
redeem amounts derived from (a) increases in the value of shares redeemed above
the net cost of such shares or (b) certain shares with respect to which the
Fund did not pay a commission on issuance, including shares acquired through
reinvestment of dividend income and capital gains distributions. Upon request
for a 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) on redemptions of
shares sold to directors, officers, and employees of any fund for which the
Adviser acts as investment adviser, or officers and employees of the Adviser,
Sub-Adviser, or Distributor, including former directors and officers and
immediate family members of all of the foregoing, and any employee benefit or
payroll deduction plan established by or for such persons; and (e) on
redemptions pursuant to the right of the Company 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.

26
<PAGE>

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

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

SPECIAL SERVICES

PROTOTYPE RETIREMENT PLANS. Because Davis Tax-Free High Income Fund's
investment objective is to earn current income free from federal income tax, it
is not an appropriate investment for retirement accounts and does not offer
retirement plan accounts:

AUTOMATIC INVESTMENT PLAN. You may arrange for automatic monthly
investing whereby State Street will be authorized to initiate a debit to your
bank account of a specific amount (minimum $25) each month which will be used
to purchase the Fund shares. The account minimum of $1,000 for non-retirement
accounts (the Fund does not offer retirement accounts) will be waived, if
pursuant to the automatic investment plan, the account balance will meet the
minimum investment requirements within twelve months of the initial investment.
For institutions that are members of the Automated Clearing House system (ACH),
such purchases can be processed electronically on any day of the month between
the 4th and 28th day of each month. After each automatic investment, you will
receive a transaction confirmation, and the debit should be reflected on your
next bank statement. You may terminate the Automatic Investment Plan at any
time. If you desire to utilize this plan, you may use the appropriate
designation on the Application Form. Class Y shares are not eligible to
participate in the Automatic Investment Plan.

DIVIDEND DIVERSIFICATION PROGRAM. You may also establish a dividend
diversification program which allows you to have all dividends and any other
distributions automatically invested in shares of one or more of the Davis
Funds, subject to state securities law requirements and the minimum investment
requirements set forth below. You must receive a current prospectus for the
other fund or funds prior to investment. Shares will be purchased at the chosen
fund's net asset value on the dividend payment date. A dividend diversification
account must be in the same registration as the distributing fund account and
must be of the same class of shares. All accounts established or utilized under
this program must have a minimum initial value, and all subsequent investments
must be at least $25. This program can be amended or terminated at any time,
upon at least 60 days' notice. If you would like to participate in this
program, you may use the appropriate designation on the Application Form. Class
Y shares are not eligible to participate in the Dividend Diversification
Program.

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 DISTRIBUTOR 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 Company 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 might have difficulty in
accepting telephone requests, in which case you should contact us by mail.

27
<PAGE>

EXCHANGE OF SHARES

GENERAL. The exchange privilege is a convenient way to buy shares in
other Davis Funds in order to respond to changes in your goals or in market
conditions. If such goals or market conditions change, the Davis Funds offer a
variety of investment objectives that includes common stock funds, tax-exempt,
government and corporate bond funds, and a money market fund. However, the Fund
is intended as long-term investments and is not intended for short-term trades.
Shares of a particular class of a 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, Class C and
Class Y shares. The shares to be received upon exchange must be legally
available for sale in your state. For Class A, Class B or Class C shares the
net asset value of the initial shares being acquired must meet the required
minimum of $1,000 unless such exchange is under the Automatic Exchange Program
described below. For Class Y shares 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.

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, contact your broker/dealer, the Distributor, or send State Street a
written unconditional request for the exchange and follow the instructions
regarding delivery of share certificates contained in the section on
"Redemption of Shares." A medallion signature guarantee is not required for
such an exchange. However, if shares are also redeemed for cash in connection
with the exchange transaction, a medallion signature guarantee may be required.
A medallion signature guarantee is a written confirmation from an eligible
guarantor institution, such as a securities broker-dealer or a commercial bank,
that the signature(s) on the account is (are) valid. Unfortunately, no other
form of signature verification can be accepted. Your dealer may charge an
additional fee for handling an exercise of the exchange privilege.

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

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

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

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

28
<PAGE>

REDEMPTION OF SHARES

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

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

If shares to be redeemed are represented by a certificate, the
certificate must be signed by the owner or owners and 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 medallion signature
guaranteed by an eligible guarantor institution, such as a securities
broker-dealer, or a commercial bank. A medallion 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 medallion signature guarantee program. This provision also
applies to exchanges when there is also a redemption for cash. A medallion
signature guarantee on redemption requests where the proceeds would be $50,000
or less is not required, provided that such proceeds are being sent to the
address of record and, in order to ensure authenticity of an address change,
such address of record has not been changed within the last 30 days. All
notifications of address changes must be in writing.

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

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

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

EXPEDITED REDEMPTION PRIVILEGE. Expedited Redemption Privilege:
Investors may instruct State Street to establish banking instructions for the
purpose of a future expedited redemption. Class Y shareholders are not eligible
for the expedited redemption privilege. Expedited redemption privilege allows
the shareholder to instruct State Street to forward redemption proceeds to
their checking or savings account at the their commercial banking institution.

29
<PAGE>

Shareholders may establish expedited redemption privilege by (a)
completion of the expedited redemption privilege section at the time the
account is established, (b) written instruction signed by all shareholders with
their signature medallion guaranteed, or (c) completion of the Davis Funds
Account Service Form by all shareholders with their signature(s) medallion
guaranteed. In each case, the shareholders must submit a copy of a voided check
or encoded deposit slip. With the voided check or encoded deposit slip, State
Street can verify the correct banking instructions.

Once the expedited redemption privilege is established, proceeds may
be sent via expedited redemption privilege by notifying Davis Distributors by
(a) telephone request from the registered shareholder(s) (b) telephone request
from the registered representative of a Qualified Dealer, or (c) written
request signed by the registered shareholder.

Redemption proceeds may be delivered by federal funds wire or by
Automated Clearing House (ACH). Proceeds delivered by federal funds wire should
be received the business day following the redemption transaction. There is a
$5.00 charge by State Street for federal funds wire service and the receiving
bank may charge for this service. Proceeds delivered by ACH should be received
within two business days following the redemption transaction. State Street
does not charge for this service. Certain financial institutions may not accept
proceeds by either of these methods except by arrangement with its
correspondent bank or unless such institution is a member of the Federal
Reserve System.

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. On shares that are redeemed 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
Funds will remain subject to an escrow or segregated account to which any of
the exchanged shares were subject. If you utilize this program, any applicable
CDSCs will be imposed on such shares redeemed. Purchase of additional shares
concurrent with withdrawals may be disadvantageous to you because of tax and
sales load consequences. If the amount you withdraw exceeds the dividends on
your shares, your account will suffer depletion. You may terminate your
Automatic Withdrawals Plan at any time without charge or penalty. The Company
reserves the right to terminate or modify the Automatic Withdrawals Plan at any
time. Class Y shares are not eligible for the Automatic Withdrawal Plan.

INVOLUNTARY REDEMPTIONS. To relieve the Company of the cost of
maintaining uneconomical accounts, the Company 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 Company will mail a notice to the shareholder so
that an additional purchase may be effected to avoid such redemption.

SUBSEQUENT REPURCHASES. After some or all of your shares are redeemed
or repurchased, you may decide to put back all or part of your proceeds into
the same Class of a 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 the conversion period. This can be done by sending State Street or the
Distributor a letter, together with a check for the reinstatement amount. The
letter must be received, together with the payment, within 60 days after the
redemption or repurchase. You can only use this privilege once.

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<PAGE>

Section IV: General Information

DETERMINING THE PRICE OF SHARES

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

The price per share for purchases or redemptions made directly through
State Street is generally the 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."

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

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

VALUATION OF PORTFOLIO SECURITIES. Portfolio securities are normally
valued using current market valuations. Securities traded on a national
securities exchange are valued at the last published sales price on the
exchange, or in the absence of recorded sales, at the average of closing bid
and asked prices on such exchange. Over-the-counter securities are valued at
the average of closing bid and asked prices. Fixedincome securities may be
valued on the basis of prices provided by a pricing service.

Investments in shortterm securities (maturing in sixty days or less)
are valued at amortized cost unless the Board of Directors determines that such
cost is not a fair value. 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.

YEAR 2000 ISSUES

Like all financial service providers, the Adviser, Sub-Adviser,
Distributor, and third parties providing investment advisory, administrative,
transfer agent, custodial and other services (jointly the "Service Providers")
utilize systems that may be affected by Year 2000 transition issues.

YEAR 2000 ISSUES. The services provided to the Fund and the
shareholders by the Service Providers depend on the smooth functioning of their
computer systems and those of other parties they deal with. Many computer
software systems in use today cannot distinguish the year 2000 from the year
1900 because of the way dates are encoded and calculated.

Difficulties with Year 2000 issues could have a negative impact on
handling securities trades, payments of interest and dividends, pricing and
account services. Although, at this time, there can be no assurance that there
will be no adverse impact on the Fund, the Service Providers have advised the
Fund that they have been actively working

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<PAGE>

on necessary changes to their computer systems to prepare for the Year 2000 and
expect that their systems, and those of other parties they deal with, will be
adapted in time for these events. In addition, there can be no assurance that
the companies which the Fund invests in will not experience difficulties with
Year 2000 issues which may negatively effect the market value of issuers of
municipal obligations.

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 that 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 confirmation statements for dividends declared and
shares purchased through reinvestment of dividends. You will also receive
confirmations after each purchase and after each redemption. Different classes
of shares may be expected to have different expense ratios due to differing
distribution services fees and certain other expenses. Classes with higher
expense ratios will pay correspondingly lower dividends than Classes with lower
expense ratios. For tax purposes, information concerning distributions will be
mailed annually to shareholders.

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

For the protection of the shareholder, 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.

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 paid in cash and capital gain distributions
reinvested. The reinvestment of dividends and distributions is made at net
asset value (without any sales charge) on the dividend payment date. Upon
receipt of the second dividend check which has been returned to State Street as
undeliverable, undelivered dividends will be invested in additional shares at
the current net asset value and the account designated as a dividend
reinvestment account.

FEDERAL INCOME TAXES

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

The Fund intends to continue to qualify as a regulated investment
company under the Internal Revenue Code (the "Code"), and if so qualified, will
not be liable for federal income tax to the extent its earnings are

32
<PAGE>

distributed. If, for any calendar year, the distribution of earnings required
under the Code exceeds the amount distributed, an excise tax, equal to 4% of
the excess, will be imposed on the applicable 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.

PERFORMANCE DATA

From time to time, the Fund may advertise information regarding its
performance. Such information will be calculated separately for each class of
shares. These performance figures are based upon historical results and are not
intended to indicate future performance.

CUMULATIVE TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN

The cumulative total return and the average annual total return (each
is defined below) with respect to each class of shares for the periods
indicated below is as follows:

<TABLE>
<CAPTION>
Cumulative
Davis Tax-Free High Income Fund Total Return (1) Average Annual Total Return (2)
- ------------------------------- ---------------- -------------------------------
<S> <C> <C>
Class A Shares
One year ended September 30, 1998...............................................1.47% 1.47%
Period from December 1, 1994 through September 30, 1998 (life of class)........25.43% 6.09%

33
<PAGE>
Class B Shares
One year ended September 30, 1998...............................................1.75% 1.75%
Five years ended September 30, 1998............................................28.87% 5.20%
Ten years ended September 30, 1998.............................................95.81% 6.95%
Period from March 21, 1985 through September 30, 1998 (life of class).........153.38% 7.11%

Class C Shares
One year ended September 30, 1998...............................................4.74% 4.74%
Period from August 18, 1997 through September 30, 1998 (life of class) .........6.55% 5.84%

Class Y Shares
Period from October 6, 1997 through September 30, 1998 (life of class)..........6.34% NA
</TABLE>

(1) "Cumulative Total return" is a measure of a fund's performance encompassing
all elements of return. Total return reflects the change in share price
over a given period and assumes all distributions are taken in additional
fund shares. Total return is determined by assuming a hypothetical
investment at the beginning of the period, deducting a maximum front-end or
applicable contingent deferred sales charge, adding in the reinvestment of
all income dividends and capital gains, calculating the ending value of the
investment at the net asset value as of the end of the specified time
period and subtracting the amount of the original investment, and by
dividing the original investment. This calculated amount is then expressed
as a percentage by multiplying by 100. Periods of less than one year are
not annualized.

(2) "Average annual total return" represents the average annual compounded rate
of return for the periods presented. Periods of less than one year are not
annualized. Average annual 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. Average annual total return is calculated separately for each
class in accordance with the standardized method prescribed by the
Securities and Exchange Commission by determining the average annual
compounded rates of return over the periods indicated, that would equate
the initial amount invested to the ending redeemable value, according to
the following formula:

P(1+T)n = ERV

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

T = average annual total return

n = number of years

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

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

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<PAGE>

30-DAY SEC YIELD

The 30-Day SEC Yield (defined below) with respect to each class of
shares of Davis Tax-Free High Income Fund for the period ended September 30,
1998, is as follows:

Class A shares 5.08%
Class B shares 4.59%
Class C shares 4.58%
Class Y shares 5.54%

"30 Day SEC 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. 30 Day SEC 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 Funds shares at
the end of the period. Such yield figure was determined by dividing the net
investment income per share on the last day of the period, according to the
following formula:

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

Where: a = dividends and interest earned during the period.

b = expenses accrued for the period.

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

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

Davis Tax-Free High Income Fund's 30-Day SEC Yield will fluctuate
depending upon prevailing interest rates, quality, maturities, types of
instruments held, and operating expenses. Thus, any yield quotation should not
be considered representative of future results. If a broker-dealer charges
investors for services related to the purchase or redemption of Fund shares,
the yield will effectively be reduced.

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.

NON-STANDARD DISTRIBUTION RATES

DISTRIBUTION RATES. Distribution rates are computed by dividing the
income dividends for the preceding 12 months by the maximum offering price on
the last day of such period. The distribution rate with respect to each class
of shares of Davis Tax-Free High Income Fund for the period ended September 30,
1998, is as follows:

Class A shares 5.85%
Class B shares 5.40%
Class C shares 5.40%
Class Y shares 5.75%

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<PAGE>

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 each class of shares of Davis Tax-Free High Income Fund for the
period ended September 30, 1998, is as follows:

Class A shares 4.97%
Class B shares 4.47%
Class C shares 4.50%
Class Y shares 5.44%

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, 1998, the tax equivalent
distribution rate with respect to each class of shares of Davis Tax-Free High
Income Fund for the period ended September 30, 1998, is as follows:

Class A shares 8.23%
Class B shares 7.40%
Class C shares 7.45%
Class Y shares 9.01%

OTHER FUND STATISTICS

In reports or other communications to shareholders and in advertising
material, the performance of the Fund may be compared to recognized unmanaged
indices or averages of the performance of similar securities. Also, the
performance of the Fund may be compared to that of other funds of comparable
size and objectives as listed in the rankings prepared by Lipper Analytical
Services, Inc., Morningstar, Inc. or similar independent mutual fund rating
services, and the Funds may use evaluations published by nationally recognized
independent ranking services and publications. Any given performance comparison
should not be considered representative of the Fund's performance for any
future period.

In advertising and sales literature the Funds may publish various
statistics describing its investment portfolio such as the Funds' weighted
average maturity , weighted average duration, etc.

The Funds' 1998 Annual Report contains additional performance
information and will be made available upon request and without charge by
calling Davis Funds toll-free at 1-800-279-0279, Monday-Friday, 7 a.m. to
4 p.m. Mountain Time.

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<PAGE>

APPENDIX A

QUALITY RATINGS OF DEBT SECURITIES

MOODY'S 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 as their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments, or of maintenance of
other terms of the contract over any longer period of time, may be small.

Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.

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

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.

37
<PAGE>

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 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.

38
<PAGE>

APPENDIX B

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

TERMS OF ESCROW:

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

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

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

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

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

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

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

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

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<PAGE>

FORM N-1A

DAVIS TAX-FREE HIGH INCOME FUND, INC.

POST-EFFECTIVE AMENDMENT NO. 27 UNDER THE SECURITIES
ACT OF 1933
REGISTRATION STATEMENT NO. 2-74216

AND

AMENDMENT NO. 28 UNDER THE INVESTMENT COMPANY ACT OF 1940
REGISTRATION NO. 811-3270

PART C

OTHER INFORMATION

Item 23. Exhibits:

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

(a)(2) 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.

(b)* By-laws. Amended and Restated Bylaws (as of 10/06/98).

(d)(1) Investment Advisory Contracts. Investment Advisory Agreement,
incorporated by reference to Exhibit (5) to Registrant's
Post-Effective Amendment No. 21, File No. 2-74216.

(d)(2) 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.

(d)(3) 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.

1
<PAGE>

(e)(1) Underwriting Contracts. Distributor's Agreement, incorporated
by reference to Exhibit (6) to Registrant's Post-Effective
Amendment No. 21, File No. 2-74216.

(e)(2) Transfer and Assumption Agreement, incorporated by reference
to Exhibit (6)(b) to Registrant's Post Effective Amendment
No. 24, File No. 2-74216.

(f) Bonus or Profit Sharing Contracts. Not applicable.

(g)(1) Custodian Agreements Custodian Contract incorporated by
reference to Exhibit No. (8) of Registrant's Pre-Effective
Amendment No. 1, File No. 2-74216.

(h)(1) Other Material Contracts. 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.

(i)* Legal Opinion. Opinion and Consent of Counsel, (D'Ancona &
Pflaum).

(j)(1)* Other Opinions. Consent of Current Auditors. KPMG, LLP

(j)(2)* Consent of Former Auditors. Tait, Weller & Baker

(k) Omitted Financial Statements, incorporated from the Annual
Report.

(l) Initial Capital Agreements. Not Applicable

(m)(1) Rule 12b-1 Plan. Distribution Plan for Class A shares, as
amended, incorporated by reference to Exhibit (15)(a) to
Registrant's Post Effective Amendment No. 24, File No.
2-74216.

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

(m)(3) Distribution Plan for Class C shares, incorporated by
reference to Exhibit 15 (c) to Registrant's Post-Effective
Amendment No. 24, File No. 2-74216.

2
<PAGE>

(n) Financial Data Schedule. Not applicable

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

(p) Other Exhibits. Powers of Attorney of the Registrant,
Officers and Board of Directors of Davis Tax-Free High Income
Fund, appointing Sheldon Stein and Arthur Don as
attorneys-in-fact, incorporated by reference to Exhibit (p)
to Registrant's Post Effective Amendment No. 26, File No.
2-74216.

* Filed Herein

Item 24. Persons Controlled by or Under Common Control With Registrant

Not applicable

Item 25. Indemnification

Registrant's Articles of Incorporation indemnifies its directors,
officers and employees to the full extent permitted by Section 2-418 of the
Maryland General Corporation Law, subject only to the provisions of the
Investment Company Act of 1940. The indemnification provisions of the Maryland
General Corporation Law (the "Law") permit, among other things, corporations to
indemnify directors and officers unless it is proved that the individual (1)
acted in bad faith or with active and deliberate dishonesty, (2) actually
received an improper personal benefit in money, property or services, or (3) in
the case of a criminal proceeding, had reasonable cause to believe that his act
or omission was unlawful. The Law was also amended to permit corporations to
indemnify directors and officers for amounts paid in settlement of
stockholders' derivative suits.

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

In addition to the foregoing indemnification, Registrant's Articles of
Incorporation exculpate directors and officers with respect to monetary damages
except to the extent that an individual actually received an improper benefit
in money property or services or to the extent that a final adjudication finds
that the individual acted with active and deliberate dishonesty.

3
<PAGE>
Item 26. Business and Other Connections of Investment Adviser

Davis Selected Advisers, L.P. ("DSA ") and subsidiary companies
comprise a financial services organization whose business consists primarily of
providing investment management services as the investment adviser and manager
for investment companies registered under the Investment Company Act of 1940,
unregistered off-shore investment companies, and as an investment adviser to
institutional and individual accounts. DSA also serves as sub-investment
adviser to other investment companies. Davis Distributors, L.L.C., a
wholly-owned subsidiary of DSA, is a registered broker-dealer. Davis Selected
Advisers - NY, Inc., another wholly-owned subsidiary, provides investment
management services to various registered and unregistered investment
companies, pension plans, institutions and individuals.

Other business of a substantial nature that directors or officers of DSA are or
have been engaged in the last two years:

SHELBY M.C. DAVIS, 4135 North Steers Head Road, Jackson Hole, WY 83001.
Director, Chairman and Chief Executive Officer, Venture Advisers, Inc.;
Director, Davis Selected Advisers-NY, Inc.; Employee of Capital Ideas, Inc.
(financial consulting firm); Consultant to Fiduciary Trust Company
International; Director, Shelby Cullom Davis Financial Consultants, Inc.

ANDREW A. DAVIS, 124 East Marcy Street, Santa Fe, NM 87501. Director and
President, Venture Advisers, Inc.; Director and Vice President, Davis Selected
Advisers-NY, Inc.; Consultant to Capital Ideas, a private financial consultant.

CHRISTOPHER C. DAVIS, 609 Fifth Ave, New York, NY 10017. Vice Chairman, Venture
Advisers, Inc.; Director, Chairman, Chief Executive Officer, Davis Selected
Advisers-NY, Inc.; Chairman and Director, Shelby Cullom Davis Financial
Consultants, Inc.; employee of Shelby Cullom Davis & Co., a registered
broker/dealer; Director, Rosenwald, Roditi and Company, Ltd., an offshore
investment management company.

KENNETH C. EICH , 124 East Marcy Street, Santa Fe, NM 87501. Chief Operating
Officer, Venture Advisers, Inc.; Vice President, Davis Selected Advisers-NY,
Inc.; President, Davis Distributors, L.L.C. Former President and Chief
Executive Officer of First of Michigan Corporation. Former Executive Vice
President and Chief Financial Officer of Oppenheimer Management Corporation.

GARY TYC, 124 East Marcy Street, Santa Fe NM 87501. Vice President, Chief
Financial Officer Treasurer, and Assistant Secretary of Venture Advisers, Inc.;
Vice President, Treasurer, & Assistant Secretary of Davis Selected Advisers -
NY, Inc.; Vice President, Treasurer, & Assistant Secretary of Davis
Distributors, L.L.C. Former Vice President of Oppenheimer Management
Corporation.

THOMAS D. TAYS, 124 East Marcy Street, Santa Fe NM 87501. Vice President and
Secretary, Venture Advisers, Inc., Davis Selected Advisers-NY, Inc., and Davis
Distributors, L.L.C. Former Vice President and Special Counsel of U.S. Global
Investors, Inc.

4
<PAGE>

Item 27. 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 Intermediate Investment Grade Bond
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:

NAME AND PRINCIPAL POSITIONS AND OFFICES WITH POSITIONS AND OFFICES
BUSINESS ADDRESS UNDERWRITER WITH REGISTRANT
- ---------------- ----------- ---------------

Kenneth C. Eich President Vice President
124 East Marcy Street
Santa Fe, NM 87501

Gary P. Tyc Vice President, Treasurer None
124 East Marcy Street and Assistant Secretary
Santa Fe, NM 87501

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

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

Sharra Reed Assistant Treasurer Vice President, Treasurer
124 East Marcy Street and Assistant Secretary.
Santa Fe, NM 87501

Item 28. Location of Accounts and Records

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

Item 29. Management Services

Not applicable

5
<PAGE>

Item 30. 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.

6
<PAGE>

DAVIS TAX-FREE HIGH INCOME FUND, INC.

SIGNATURES

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 28th day of
January, 1999.

DAVIS TAX-FREE HIGH INCOME FUND, INC.

*By: /s/ Sheldon Stein
------------------------
Sheldon Stein
Attorney-in-Fact

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

Signature Title Date
--------- ----- ----

Shelby M.C. Davis* President, Chief Executive Officer January 28, 1999
- -------------------
Shelby M.C. Davis

Sharra L. Reed* Principal Financial Officer
- ------------------- and Treasurer January 28, 1999
Sharra L. Reed

*By: /s/ Sheldon Stein
------------------------
Sheldon Stein
Attorney-in-Fact

*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 (p) to
Registrant's Post-Effective Amendment number 26 to Registrant's Registration
Statement.

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

7
<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 28, 1999 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

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

*Sheldon Stein signs this document on behalf of each of the foregoing persons
pursuant to the powers of attorney filed as Exhibit (p) to Registrant's
Post-Effective Amendment No 26 to Registrant's Registration Statement.

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

<PAGE>

EXHIBIT
ITEM 23 (i)

[LETTERHEAD OF D'ANCONA & PFLAUM]

January 28, 1999

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 "Company") in connection with the registration under the Securities Act of
1933 (the "Act") of an indefinite number of shares of beneficial interest in
the series of the Company designated as Davis Tax Free High Income Fund (the
"Shares") in registration statement No. 2-74216 on Form N1A (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 Company, actions of the Board of Directors
authorizing the issuance of Shares and the Registration Statement.

Based on the foregoing examination, we are of the opinion that upon
the issuance and delivery of the Shares 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 Company 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,

D'Ancona & Pflaum

By
---------------------------------
Sheldon R. Stein, Partner

<PAGE>

EXHIBIT
ITEM 23 (j)(1)

CONSENT OF INDEPENDENT ACCOUNTANTS

The Shareholders and Board of Directors

We consent to the use of our reports dated January 29, 1999, on the financial
statements of Davis Tax Free High Income Fund, Inc., incorporated herein by
reference and to the references to our firm under the headings "Financial
Highlights" in the prospectus and "Independent Auditors" in the statement of
additional information.

-----------------------------------
/s/ KPMG, LLP

<PAGE>

EXHIBIT
ITEM 23(j)(2)

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We have issued our report dated November 11, 1997 accompanying the financial
statements of Davis Tax Free High Income Fund, Inc. which are incorporated by
reference in Part B of the Post-Effective Amendment to this Registration
Statement and Prospectus. We consent to the use of the aforementioned report in
this Registration Statement and Prospectus.

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

Philadelphia, Pennsylvania
January 22, 1999

<PAGE>

EXHIBIT
ITEM 23 (b)

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

AMENDED AND RESTATED BYLAWS OF

DAVIS SERIES, INC.
DAVIS NEW YORK VENTURE FUND, INC.
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
DAVIS TAX-FREE HIGH INCOME FUND, INC.

(REVISED OCTOBER 6, 1998)

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

<PAGE>

AMENDED AND RESTATED BYLAWS OF

DAVIS SERIES, INC.
DAVIS NEW YORK VENTURE FUND, INC.
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
DAVIS TAX-FREE HIGH INCOME FUND, INC.

(REVISED OCTOBER 6, 1998)

ARTICLE I
STOCKHOLDERS

SECTION 1. Place of Meeting. All meetings of the stockholders shall be
held at the principal office of the Corporation in the State of Maryland or at
such other place within or without the State of Maryland as may from time to
time be designated by the Board of Directors and stated in the notice of
meeting.

SECTION 2. Annual Meetings. Annual meetings shall not be required to be
held in any year unless the election of Directors is required to be acted upon
under the Investment Company Act of 1940 (hereinafter, the " 1940 Act"). An
annual meeting shall be held in accordance with the 1940 Act in the event that
less than a majority of the Directors then in office were elected by the vote
of stockholders. Any annual meeting may be called (i) by the Board of
Directors, or (ii) if required by the 1940 Act, by the President solely for the
purposes of electing Directors and considering the ratification of the
independent public accountant selected by the Board of Directors to audit the
financial statements of the Corporation. Annual meetings called by the
President may consider other business which is proposed by the President and
properly brought before such meetings; provided, however, that specific matters
other than election of Directors and ratification of selection of accountants
may be placed on the agenda of the meeting solely with the approval of a
majority of the entire Board of Directors.

SECTION 3. Special Meetings. Special meetings of stockholders may be
called by the President or the Board of Directors, and shall be called upon the
written request of stockholders holding at least twenty-five percent (25%) of
the votes entitled to be cast at the meeting. A request by stockholders for a
meeting shall state the purpose of the meeting and the matters proposed to be

<PAGE>

acted upon. Unless requested by stockholders entitled to cast a majority of all
the votes entitled to be cast at the meeting, a special meeting need not be
called to consider any matter which is substantially the same as a matter voted
on at any special meeting of the stockholders held during the preceding 12
months. Upon receipt of such written request, the secretary shall inform the
stockholders who make the request of the reasonably estimated cost of preparing
and mailing a notice of the meeting, and on payment of these costs to the
corporation, shall notify each stockholder entitled to notice of the meeting.

SECTION 4. Notice of Meetings of Stockholders. Not less than ten days'
and not more than ninety days' written or printed notice of every meeting of
stockholders, stating the time and place thereof (and the general nature of the
business proposed to be transacted at any special meeting), shall be given to
each stockholder entitled to vote thereat and each other stockholder entitled
to notice of the meeting by leaving the same with him or at his residence or
usual place of business or by mailing it, postage prepaid, and addressed to him
or at his address as it appears upon the books of the Corporation.

No notice of the time, place or purpose of any meeting of stockholders
need be given to any stockholder who attends in person or by proxy or to any
stockholder who, in writing executed and filed with records of the meeting,
either before or after the holding thereof, waives such notice.

SECTION 5. Closing of Transfer Books and Record Dates. The Board of
Directors may fix the time, not exceeding twenty days preceding the date of any
meeting of stockholders, any vote at a meeting, any dividend payment date or
any date for the allotment of rights, during which the books of the Corporation
shall be closed against transfers of stock. If such books are closed for the
purpose of determining stockholders entitled to notice of or to vote at a
meeting of stockholders, such books shall be closed for at least ten days
immediately preceding such meeting. In lieu of providing for the closing of the
books against transfers of stock as aforesaid, the Board of Directors may fix,
in advance, a date, not exceeding ninety days and not less than ten days
preceding the date of any meeting of stockholders, and not exceeding ninety
days preceding any dividend payment date or any date for the allotment of
rights, as a record date for the determination of the stockholders entitled to

<PAGE>

notice of or to vote at such meeting, or entitled to receive such dividends or
rights, as the case may be; and only stockholders of record on such date shall
be entitled to notice of and to vote at such meeting or to receive such
dividends or rights, as the case may be.

SECTION 6. Quorum and Adjournment of Meetings. The presence in person
or by proxy of the holders of record of a majority of all of the votes entitled
to be cast thereat shall constitute a quorum at all meetings of the
stockholders. If at any meeting of the stockholders there shall be less than a
quorum present, the stockholders present at such meeting may, without further
notice, adjourn the same from time to time until a quorum shall attend, but no
business shall be transacted at any such adjourned meeting except such as might
have been lawfully transacted had the meeting not been adjourned.

SECTION 7. Voting and Inspectors. At all meetings of stockholders
every stockholder of record entitled to vote shall be entitled to one vote for
each dollar of net asset value per share standing in his or her name on the
books of the Corporation irrespective of the Series or Class thereof, (and such
stockholders of record holding fractional shares, if any, shall have
proportionate voting rights.)

All elections shall be had and all questions decided by a majority of
the votes cast at a duly constituted meeting, except as otherwise provided in
the Articles of Incorporation or in these Bylaws or by specific statutory
provision, including requirements for approval of any matters by the provisions
of the 1940 Act.

At any election of Directors, the Board of Directors prior thereto
may, or if they have not so acted, the Chairman of the meeting may, and upon
the request of the holders of ten percent (10%) of the votes entitled to be
cast at such election shall, appoint at least one inspector of election who
shall first subscribe an oath or affirmation to execute faithfully the duties
of inspector at such election with strict impartiality and according to the
best of his or her ability, and shall after the election make a certificate of
the result of the vote taken. No candidate for the office of Director shall be
appointed such Inspector.

<PAGE>

The Chairman of the meeting may cause a vote by ballot to be taken
upon any election or matter, and such vote shall be taken upon the request of
the holders of ten percent (10%) of the votes entitled to be cast at such
election or on such matter.

SECTION 8. Conduct of Stockholders' Meetings. The meetings of the
stockholders shall be presided over by the President or, if the President shall
not be present, by a Vice President or, if neither the President nor any Vice
President is present, by a chairman to be elected at the meeting. The Secretary
of the Corporation, if present, shall act as Secretary of such meeting or, if
the Secretary is not present, an Assistant Secretary shall so act; if neither
the Secretary nor an Assistant Secretary is present, then the meeting shall
elect its Secretary.

SECTION 9. Concerning Validity of Proxies, Ballots, Etc. At every
meeting of the stockholders, all proxies shall be received and taken in charge
of and all ballots shall be received and canvassed by the secretary of the
meeting, who shall decide all questions touching the qualification of voters,
the validity of the proxies, and the acceptance or rejection of votes, unless
inspectors of election shall have been appointed as provided in Section 7, in
which event such inspectors of election shall decide all such questions.

SECTION 10. Consents. Whenever stockholders are required or permitted
to take any action by vote, such action may be taken without a meeting if the
following are filed with the records of stockholders meetings: (a) a unanimous
written consent which sets forth the action and is signed by each stockholder
entitled to vote on the matter, and (b) a written waiver of any right to
dissent signed by each stockholder entitled to notice of the meeting but not
entitled to vote at it.

ARTICLE 11
BOARD OF DIRECTORS

SECTION 1. Number, Vacancies and Tenure. The Directors may, at any
time when the stockholders are not assembled in meeting, establish, increase or
decrease the number of seats on the Board of Directors by majority vote of the
entire Board of Directors; provided, that after the first annual meeting the
number of Directors shall never be less than three (3) nor more than fifteen
(15).

<PAGE>

The number of Directors may not be decreased so as to affect the term of
any incumbent Director. Except as hereinafter provided, (i) if the number of
Directors is increased, the additional Directors to fill the vacancies thus
created may be elected by majority vote of the entire Board of Directors, and
(ii) any vacancy occurring for any other cause may be filled by a majority of
the remaining Directors, even if such majority is less than a quorum. No
vacancy may be filled for any cause whatsoever unless, immediately after the
filling of such vacancy, at least two-thirds of the entire Board of Directors
shall have been elected by the stockholders of the Corporation. A Director
shall hold office until his successor is elected and qualified, or until such
Director's earlier death, resignation, retirement or removal; provided,
however, that if a Director was not elected to office by a vote of
stockholders, the term of such Director shall, in any event, end as of the date
of the next annual meeting of stockholders which is required to be held
pursuant to Article I, Section 1 of these Bylaws following such Director's
election to office. Such a Director may be a candidate for election to office
at such annual meeting and, if elected at such meeting, shall serve for the
indefinite term specified above.

SECTION 2. Mandatory Retirement of Directors. A Director shall retire
from the Board of Directors and cease being a Director at the close of business
on the last day of the calendar year in which the Director attains age
seventy-two (72), except that any person who was a Director on July 1, 1994,
and that date was seventy-three (73) years of age or less shall retire from the
Board of Directors and cease being a Director at the close of business on the
last day of the year in which the Director attains age seventy-four (74).

SECTION 3. Removal. At any meeting of stockholders, duly called and at
which a quorum is present, the stockholders may, by the affirmative vote of the
holders of a majority of the votes entitled to be cast thereon, remove any
director or directors from office and may elect a successor or successors to
fill any resulting vacancies for the unexpired terms of removed directors.

SECTION 4. Place of Meeting. The Directors may hold their meetings,
have one or more offices, and keep the books of the Corporation outside the
State of Maryland, at any office or offices of the Corporation or at any other
place as they may from time to time by resolution determine, or

<PAGE>

in the case of meetings, as they may from time to time by resolution determine
or as shall be specified or fixed in the respective notices or waivers of
notice thereof.

SECTION 5. Regular Meetings. Regular meetings of the Board of
Directors shall be held at such time and on such notice, if any, as the
Directors may from time to time determine.

SECTION 6. Special Meetings. Special meetings of the Board of
Directors may be held from time to time upon call of the President or two or
more of the Directors, by oral or telegraphic or written notice (including
written notice transmitted electronically) duly served on or sent or mailed to
each Director not less than one day before such meeting. No notice need be
given to any Director who attends in person or to any Director who, in writing
executed and filed with the records of the meeting either before or after the
holding thereof, waives such notice. Such notice or waiver of notice need not
state the purpose or purposes of such meeting.

SECTION 7. Quorum. One-third of the Directors then in office shall
constitute a quorum for the transaction of business, provided that a quorum
shall in no case be less than two Directors. If at any meeting of the Board
there shall be less than a quorum present, a majority of those present may
adjourn the meeting from time to time until a quorum shall have been obtained.
The act of the majority of the Directors present at any meeting at which there
is a quorum shall be the act of the Directors, except as may be otherwise
specifically provided by statute, by the Articles of Incorporation or by these
Bylaws.

SECTION 8. Executive Committee. The Board of Directors may, by the
affirmative vote of a majority of the entire Board, elect from the Directors an
Executive Committee to consist of such number of Directors, but not less than
two, as the Board may from time to time determine. The Board of Directors by
such affirmative vote shall have power at any time to change the members of
such Committee and may fill vacancies in the Committee by election from the
Directors. When the Board of Directors is not in session, the Executive
Committee shall have and may exercise any or all of the powers of the Board of
Directors in the management of the business and affairs of the Corporation
(including the power to authorize the seal of the Corporation to be affixed to
all papers

<PAGE>

which may require it) except as provided by law and except the power to
increase or decrease the size of, or fill vacancies on, the Board, to remove or
appoint executive officers or to dissolve or change the permanent membership of
the Executive Committee, and the power to make or amend the Bylaws of the
Corporation. The Executive Committee may fix its own rules of procedure, and
may meet, when and as provided by such rules or by resolution of the Board of
Directors, but in every case the presence of a majority shall be necessary to
constitute a quorum. In the absence of any member of the Executive Committee,
the members thereof present at any meeting, whether or not they constitute a
quorum, may appoint a member of the Board of Directors to act in the place of
such absent member.

SECTION 9. Other Committees. The Board of Directors, by the
affirmative vote of a majority of the entire Board, may appoint other
committees which shall in each case consist of such number of members, and
shall have and may exercise such powers as the Board may determine in the
resolution appointing them. A majority of all members of any such committee may
determine its action, and fix the time and place of its meetings, unless the
Board of Directors shall otherwise provide. The Board of Directors shall have
power at any time to change the members and powers of any such committee, to
fill vacancies, and to discharge any such committee.

SECTION 10. Informal Action by Directors and Committees. Any action
required or permitted to be taken at any meeting of the Board of Directors or
any committee thereof may be taken without a meeting, if a written consent to
such action is signed by all members of the Board, or of such committee, as the
case may be, and if such consent is filed with the minutes of proceedings of
the Board, or of such committee, as the case may be.

SECTION 11. Compensation of Directors. Directors shall be entitled to
receive such compensation from the Corporation for their services as may from
time to time be voted by the Board of Directors.

<PAGE>

ARTICLE III
OFFICERS

SECTION 1. Executive Officers. The executive officers of the
Corporation shall be chosen by the Board of Directors. These shall include a
President, one or more Vice Presidents (the number thereof to be determined by
the Board of Directors), a Secretary and a Treasurer. The Board of Directors or
the Executive Committee may also in its discretion appoint a Chairman of the
Board of Directors, Assistant Secretaries, Assistant Treasurers, and other
officers, agents and employees, who shall have such authority and perform such
duties as the Board or the Executive Committee may determine. The Board of
Directors may fill any vacancy which may occur in any office. Two or more
offices, except those of President and Vice President, may be held by the same
person, but no officer shall execute, acknowledge or verify any instrument in
more than one capacity, if such instrument is required to be executed,
acknowledged or verified by two or more officers.

SECTION 2. Term of Office. Unless a longer, shorter or indefinite term
of office is provided by the Board of Directors for any officer or all
officers, the term of office of all officers shall be one year and until their
respective successors are chosen and qualify. Any officer may be removed from
office at any time with or without cause by the vote of a majority of the
entire Board of Directors, if the Board of Directors in its judgment finds that
the best interests of the Corporation are served thereby.

SECTION 3. Powers and Duties. The officers of the Corporation shall
have such powers and duties as generally pertain to their respective offices,
as well as such powers and duties as may from time to time be conferred by the
Board of Directors or the Executive Committee.

ARTICLE IV
CAPITAL STOCK

SECTION 1. Certificate of Shares. A stockholder of Class A Shares of
any series shall, upon request, be entitled to a certificate for full shares of
stock in such form not inconsistent with law as the Board of Directors shall
determine. No certificate will be issued to evidence ownership of any other
class of shares.

SECTION 2. Transfer of Shares. Shares of the Corporation shall be
transferable on the books of the Corporation by the holder thereof in person or
by the holder's duly authorized attorney-

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in-fact or legal representative upon presentation of proper instruments of
assignment and transfer, with such proof of the authenticity of the signature
and the capacity of the signator as the Corporation or its transfer agent may
reasonably require. If certificates have been issued evidencing the ownership
of the Shares to be transferred, such certificates must be surrendered and
canceled before the transfer may be effected.

SECTION 3. Stock Ledgers. The stock ledgers of the Corporation,
containing the names and addresses of the stockholders and the number of shares
held by them respectively, shall be kept at the principal offices of the
Corporation or, if the Corporation employs a transfer agent, at the offices of
the Transfer Agent of the Corporation.

SECTION 4. Lost, Stolen or Destroyed Certificates. The Corporation may
determine the conditions upon which a new certificate of stock of the
Corporation of any class may be issued in place of a certificate which is
alleged to have been lost, stolen or destroyed; and may require the owner of
such certificate or his legal representative to give bond, with sufficient
surety to the Corporation and each Transfer Agent, if any, to indemnify it and
each Transfer Agent against any and all loss or claims which may arise by
reason of the issue of a new certificate in the place of the one so lost,
stolen or destroyed.

ARTICLE V
FISCAL YEAR

The fiscal year of the Corporation shall be fixed by the Board of
Directors.

ARTICLE VI
INDEMNIFICATION

Each Director and officer (and his heirs, executors and
administrators) shall be indemnified by the Corporation to the extent set forth
in the Articles of Incorporation.

ARTICLE VII
AMENDMENT OF BYLAWS

The Bylaws of the Corporation may be altered, amended, added to or
repealed by majority vote of the entire Board of Directors.