DAVIS INTERNATIONAL SERIES INC, N-30B-2, 1997-12-03

DAVIS INTERNATIONAL SERIES INC
N-30B-2, 1997-12-03

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<PAGE>
DAVIS INTERNATIONAL
TOTAL RETURN FUND

ANNUAL REPORT
SEPTEMBER 30, 1997

DAVIS
FUNDS
<PAGE>

DAVIS INTERNATIONAL SERIES, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501

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

THE YEAR IN REVIEW
Focused on building long-term wealth. The Davis International Total Return
Fund seeks to build wealth for shareholders over time by investing in a
carefully selected portfolio of high-quality, non-U.S. companies that offer
the potential for above-average growth. We believe most international stock
markets remain attractive today. Over the past year, your Fund has completely
restructured its portfolio--eliminating almost all investments in Southeast
Asia and accumulating holdings in Europe and Latin America to position the
portfolio for strong returns going forward.

Fiscal year results. For the fiscal year ending September 30, 1997, the Fund
generated a total return of 2.71% on Class A shares at net asset value(1). This
compares with a total return of 12.49% for the Morgan Stanley International
EAFE Index over the same time frame.(2) For the nine-month period ending on
September 30, 1997, the Fund's Class A shares provided a total return of 7.77%
at net asset value(1) versus a return of 10.65% for the EAFE Index.

The Fund's performance has lagged because of an overconcentration of
investments in Southeast Asia, which had performed strongly for many years.
However, currency and stock markets in the region have been rocked by turmoil,
particularly following the devaluation of the Thai baht in early July, soon
followed by the devaluation of the Malaysian ringgit, the Indonesian rupiah
and the Philippine peso. It will take time for many of these countries to
recover from their current financial and economic difficulties.

AN ALMOST TOTAL SHIFT OUT OF SOUTHEAST ASIA
In the fall of 1996, your Fund began reducing positions in Southeast Asia,
which accounted for 76.9% of total assets on September 30, 1996. It has now
eliminated all holdings in Thailand, Taiwan, South Korea, Singapore, and
Malaysia, as well as in India. By late October 1997, the Fund held positions
in only three Southeast Asian markets, with just under 6.5% of assets invested
in Hong Kong, less than 1% invested in the Philippines and less than 1%
invested in Indonesia.

SUBSTANTIAL NEW INVESTMENTS IN EUROPE AND LATIN AMERICA
Your Fund's portfolio is now concentrated primarily in Western Europe,
Scandinavia and Latin America where it has found plentiful opportunities to
invest at value prices in substantial, well-managed, blue-chip companies. At
the end of September 1997, the Fund had increased exposure to Europe almost
two-and-a-half times to 51.5% of total assets, from 21.2% of assets on
September 30, 1996. The Fund, which had no holdings in Latin America a year
ago, had accumulated shares representing 26.7% of assets on September 30,
1997.

A RESEARCH-DRIVEN, VALUE-ORIENTED APPROACH
We manage the Davis International Total Return Fund according to a disciplined
process that emphasizes first-hand fundamental research and maintaining close
contact with company management. Our bottom-up, value-oriented investment
approach concentrates on identifying individual stocks with outstanding
performance potential. We look for high-quality companies with top-notch
management, predictable earnings and solid growth prospects whose shares are
preferably selling at a price/earnings (P/E) ratio well below the company's
growth rate and the average P/E for its industry.

BENEFITING FROM SUSTAINED ECONOMIC RECOVERY IN EUROPE
Western Europe's economic recovery continues, and privatizations,
restructurings and mergers remain major investment themes. Gross domestic
product (GDP) growth is accelerating in many European countries, which

<PAGE>

DAVIS INTERNATIONAL SERIES, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501

- -------------------------------------------------------------------------------
could bode well for the launching of the new Euro currency on January 1, 1999,
assuming economic trends remain generally positive as they are today. Looking
specifically at 1998, we expect stronger gross domestic product (GDP) growth
in smaller markets, such as those in Scandinavia, Southern Europe and Ireland,
than in major countries, such as France, Germany and the United Kingdom.

IRELAND. The fastest growing country in Europe next year is expected to be
Ireland, where GDP is projected to increase at a rate of 5.8%. Ireland, which
has voted to join the European Union, has received substantial loans from The
European Commission to modernize the country's infrastructure and that has
translated into significant economic growth. To capitalize on that potential,
your Fund recently invested in CRH, a well-managed, Irish-based manufacturer
of building materials operating in Ireland, the United Kingdom, Germany, the
Netherlands, Spain and the United States.

FINLAND. In addition, we have identified several attractive investments in
Finland, where GDP is projected to grow at a rate of 3% in 1998--slightly
above the average for Europe. The Fund has added shares of several Finnish
companies to its portfolio in recent months. These include investments in
Asko, a Finnish-based global supplier of plastic pipes, industrial and
household products; Nokia, a leading international telecommunications company,
which is the world's second largest manufacturer of mobile phones and a major
supplier of digital cellular networks; and Raisio, a Finnish company that
produces foodstuffs, animal feeds and chemicals for the paper industry.

SWEDEN. Sweden's GDP is also expected to grow at a 3% rate next year. One of
the Fund's largest holdings is Incentive, a highly regarded Swedish holding
company that is transforming itself into a global medical equipment technology
company. Incentive has been a strong performer for your Fund since we first
purchased shares in November 1996.

UNITED KINGDOM. In the United Kingdom, your Fund recently invested in GKN,
which is a world leader in designing and manufacturing automotive and
agritechnical components and aerospace and defense products, as well as in the
provision of industrial services. Other first-class U.K. companies that are
among your Fund's largest investments are Standard Chartered, one of England's
foremost financial institutions and a long-standing holding of the Fund, and
Lloyds TSB Group, the biggest and one of the most aggressive banking groups in
England with branches in more than 100 countries.

SWITZERLAND. Five Swiss holdings particularly typify our philosophy of
investing in leading companies with superior management, strong growth rates
and attractive valuations. These companies are Novartis, one of the world's
two largest pharmaceutical companies; Roche Holding, another major drug
company; Swiss Reinsurance, a leading global reinsurance company; the
Swiss-Swedish group ABB Ltd., one of the world's largest heavy electrical
equipment manufacturers; and Ciba Specialty Chemicals, a major producer of
high-performance specialty chemicals used in a wide range of industry sectors.

CAPITALIZING ON FASTER GROWTH IN LATIN AMERICA
A number of developments bolster the bright outlook for Latin America. All
South American countries now have democratic governments. Inflation, which was
traditionally the greatest economic ill confronting these countries, has all
but disappeared. For example, Brazil, which endured inflation rates in the
thousands of percent until the mid-1990s, is projected to have an inflation
rate of 5% in 1998. In Argentina, inflation has dropped

2
<PAGE>

DAVIS INTERNATIONAL SERIES, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501

- -------------------------------------------------------------------------------
from around the 80% level in the early 1990s to an anticipated rate of 1.5% in
1998. In addition, economic growth in the region generally remains
strong--with GDP forecast to increase 6.3% in Argentina, 7.0% in Chile, and
5.1% in Mexico in 1998.

MEXICO. Because of these favorable trends, your Fund has continued to build
holdings in Latin America. A new position recently added in Mexico is Desc, a
manufacturer of automotive parts and chemicals that is also involved in real
estate and commercial banking services. Other large holdings in Mexico include
Grupo Casa Autrey, one of the country's leading distributors of pharmaceutical
and consumer products, and Panamerican Beverages, one of the world's largest
bottlers of Coca-Cola soft drink products with operations in Mexico, Brazil,
Colombia and Costa Rica.

ARGENTINA. In Argentina, your Fund has a large holding in Telefonica de
Argentina, one of the country's two major telephone companies with operations
in southern Argentina and part of Buenos Aires. The company is noted for its
technological savvy and is well on its way to building a modern telephone
system in the areas it serves.

BRAZIL. In Brazil, privatization of government-owned companies continues to be
an important theme. Two of your Fund's largest holdings are Telebras, the
Brazilian telephone company, and Eletrobras, the Brazilian electricity holding
company. Both companies are in the process of privatizing their subsidiaries,
which should generate huge profits for the parent companies. The Fund also has
a large position in Petrobras, the Brazilian oil and gas company.

A STRONG CASE FOR INTERNATIONAL DIVERSIFICATION
Non-U.S. markets account for a growing share of the world's investment
opportunities, and many of the world's leading companies are located outside
of the U.S. By diversifying a portion of their holdings internationally,
investors can better balance their portfolios, potentially reduce overall
volatility and take advantage of the above-average growth potential offered by
many foreign corporations. Particularly today, we see excellent values in
international markets, such as those in Western Europe, Scandinavian and Latin
America, which are generally selling at substantially lower price/earnings
multiples than the U.S. market.

As always, we believe in maintaining a long-term perspective when investing
internationally. While stock prices can fluctuate dramatically over the short
term, stocks have historically offered the greatest potential for growth in
the long run. By accumulating core holdings in first-class companies around
the world, we believe the Fund is well-positioned to provide a relatively
conservative approach for investors seeking to diversify U.S. portfolios and
build wealth over time.

Sincerely,

/S/ Shelby M.C. Davis /s/ Edouard F. Iselin

Shelby M.C. Davis Edouard F. Iselin
Chief Investment Officer Portfolio Manager

November 11, 1997

3
<PAGE>

DAVIS INTERNATIONAL SERIES, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501

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(1) All performance figures cited in this letter are calculated without
considering sales commissions. The average annual total returns for the Fund's
Class A shares, including the maximum front-end sales charge of 4.75%, for the
nine-month and one-year periods ending September 30, 1997 and for the period
from February 1, 1995 through September 30, 1997 (life of Class A shares) were
2.65%, (2.17)% and 8.76%, respectively. Average annual returns for the Fund's
Class B shares, after subtracting applicable contingent deferred sales charges
(see prospectus), for the nine-month and one-year periods ending September 30,
1997 and for the period from February 1, 1995 through September 30, 1997 (life
of Class B shares) were 3.01%, (1.02)% and 8.91%, respectively.

(2) The Morgan Stanley Capital International EAFE Index is a recognized
international index that includes approximately 1,000 companies representing
the stock markets of 18 countries in Europe, Australia, New Zealand, and the
Far East. The average company has a market capitalization of over $3 billion.
This is a total return index calculated in U.S. dollars, with gross dividends
reinvested. Direct investments in this index are not permitted.

4
<PAGE>

DAVIS INTERNATIONAL TOTAL RETURN FUND - CLASS A SHARES
COMPARISON OF DAVIS INTERNATIONAL TOTAL RETURN FUND AND EUROPE AUSTRALIA FAR
EAST INDEX

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Average annual total return for the year ended September 30, 1997 and for the
period February 1, 1995 through September 30, 1997 (life of Fund) was (2.17)%
and 8.76%, respectively. (This calculation includes an initial sales charge of
4 3/4%.)

$10,000 INVESTED OVER THE LIFE OF CLASS A SHARES OF THE FUND. Let's say you
invested $10,000 in Class A shares of Davis International Total Return Fund on
February 1, 1995 (inception of Fund) and paid a 4 3/4% sales charge. As the
chart shows, by September 30, 1997 the value of your investment would have
grown to $12,505 - a 25.05% increase on your initial investment. For
comparison, the Europe Australia Far East Index is also presented on the chart
below.

[THE NARRATIVE AND/OR TABULAR INFORMATION BELOW IS A FAIR AND ACCURATE
DESCRIPTION OF GRAPHIC OR IMAGE MATERIAL OMITTED FOR THE PURPOSE OF EDGAR
FILING.]

<TABLE>
<CAPTION>
2/1/95 9/30/95 9/30/96 9/30/97
------ ------- ------- -------
<S> <C> <C> <C> <C>
Davis International Total Return Fund - Class A shares $9,525 $11,285 $12,174 $12,505
Europe Australia Far East Index $10,000 $11,138 $12,134 $13,649
</TABLE>

Europe Australia Far East Index is an unmanaged index and has no specific
investment objective. The index used does not take into account any sales
charges and has no expenses.

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

5
<PAGE>

DAVIS INTERNATIONAL TOTAL RETURN FUND - CLASS B SHARES
COMPARISON OF DAVIS INTERNATIONAL TOTAL RETURN FUND AND EUROPE AUSTRALIA FAR
EAST INDEX

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

Average annual total return for the year ended September 30, 1997 and for the
period February 1, 1995 through September 30, 1997 (life of Fund) was (1.02)%
and 8.91%, respectively. (This calculation includes applicable contingent
deferred sales charges.)

$10,000 INVESTED OVER THE LIFE OF CLASS B SHARES OF THE FUND. Let's say you
invested $10,000 in Class B shares of Davis International Total Return Fund on
February 1, 1995 (inception of Fund). As the chart shows, by September 30,
1997 the value of your investment, after deducting any applicable contingent
deferred sales charge, would have grown to $12,551 - a 25.51% increase on your
initial investment. For comparison, the Europe Australia Far East Index is
also presented on the chart below.

[THE NARRATIVE AND/OR TABULAR INFORMATION BELOW IS A FAIR AND ACCURATE
DESCRIPTION OF GRAPHIC OR IMAGE MATERIAL OMITTED FOR THE PURPOSE OF EDGAR
FILING.]

<TABLE>
<CAPTION>
2/1/95 9/30/95 9/30/96 9/30/97
------ ------- ------- -------
<S> <C> <C> <C> <C>
Davis International Total Return Fund - Class B shares $10,000 $11,790 $12,627 $12,551
Europe Australia Far East Index $10,000 $11,138 $12,134 $13,649
</TABLE>

Europe Australia Far East Index is an unmanaged index and has no specific
investment objective. The index used does not take into account any sales
charges and has no expenses.

6
<PAGE>

DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
PORTFOLIO HOLDINGS AS OF SEPTEMBER 30, 1997

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[THE NARRATIVE AND/OR TABULAR INFORMATION BELOW IS A FAIR AND ACCURATE
DESCRIPTION OF GRAPHIC OR IMAGE MATERIAL OMITTED FOR THE PURPOSE OF EDGAR
FILING.]

Portoflio Makeup (% of Fund Assets) Sector Weightings (% of Portfolio)
- ----------------------------------- ----------------------------------
Common Stocks 91.1% Food/Beverage 7.5%
Preferred Stocks 4.4% Other 8.9%
Cash & Eqivalents 4.5% Holding Company 4.6%
Retail 4.5%
Banking 8.7%
Utilities 11.5%
Finance 3.1%
Diversified Finnancial
Services 17.3%
Insurance 3.8%
Telecommunications 11.4%
Manufacturing 3.1%
Pharmaceuticals 15.6%

<TABLE>
<CAPTION>
TOP 10 HOLDINGS SECTOR % OF FUND ASSETS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Novartis Ltd., Registered Pharmaceuticals 9.90%
Hutchison Whampoa Ltd. Diversified 6.15%
Centrais Eletricas Brasileiras SA, ADR (ELETROBRAS) Utilities 4.10%
Panamerican Beverages Inc.-A Food & Beverage 4.07%
Telecomunicacoes Brasileiras SA, ADR (TELEBRAS) Telecommunications 4.02%
Incentive AB-B Holding Company 3.98%
ENI SpA Utilities 3.93%
Standard Chartered PLC Banking 3.13%
Swiss Reinsurance Co., Registered Insurance 3.12%
Lloyds TSB Group Finance 3.07%
</TABLE>

7
<PAGE>

DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
PORTFOLIO ACTIVITY -- OCTOBER 1, 1996 THROUGH SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
NEW POSITIONS ADDED (10/1/96-9/30/97)
(HIGHLIGHTED POSITIONS ARE THOSE GREATER THAN 0.99% OF 9/30/97 TOTAL NET
ASSETS.)
DATE OF 1ST % OF 9/30/97
SECURITY SECTOR PURCHASE FUND ASSETS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AMMB Holdings Bhd. Banking 1/14/97 -
Arab Malaysian Merchant Bank (warrants) Banking 1/14/97 -
Asko Oy Diversified 9/22/97 1.13%
Bank of the Philippine Islands Corp. Banking 10/28/96 -
Beijing North Star Co. Ltd. Real Estate 5/9/97 -
CCM Bioscience Bhd. Consumer Products 7/7/97 -
China Resources Enterprises LTD. Manufacturing 12/4/96 -
Cho Hung Bank Co. Ltd. Banking 10/1/96 -
Ciba Speciality Chemicals Ltd., Registered Pharmaceuticals 3/12/97 0.93%
CRH PLC Diversified 9/22/97 2.60%
Dah Sing Financial Group Ltd. Finance 11/15/96 -
Disco SA, ADR Food & Beverage 5/7/97 1.92%
Centrais Eletricas Brasileiras SA, ADR (ELETROBRAS) Utilities 1/8/97 4.10%
ENI SpA Utilities 10/28/96 3.93%
Equitable Banking Corp. Banking 3/10/97 -
GKN PLC Automotive 9/22/97 2.38%
Groupe AB SA, ADR Broadcast Services 12/12/96 -
Grupo Casa Autrey SA de CV, ADR Retail 3/19/97 2.38%
Halifax PLC Banking 6/2/97 -
Henderson Land Development Co. LTD Real Estate 11/7/96 -
PT Hero Supermarket Retail 2/24/97 -
HKR International Ltd. Real Estate 7/22/97 1.97%
HSBC Holdings PLC Banking 6/27/97 2.09%
Hyundai Motor Co. Ltd. Automotive 10/1/96 -
Incentive AB-A Holding Company 8/12/97 0.40%
Incentive AB-B Holding Company 11/4/96 3.98%
Jiangsu Expressway Real Estate 6/24/97 -
Korean Airlines, Inc. Aviation 10/1/96 -
Lloyds TSB Group Finance 9/22/97 3.07%
Nam Fong International Holdings Ltd. Real Estate 12/4/96 -
Nokia Oyj-A Telecommunications 9/24/97 1.39%
Norwich Union PLC Banking 6/16/97 -
Novartis Ltd., Registered Pharmaceuticals 12/17/96 9.90%
Panamerican Beverages Inc.-A Food & Beverage 4/29/97 4.07%
Peregrine Derivatives Utilities (expiring 3/30/98) Diversified 7/22/97 0.81%
Petroleo Brasileiro SA, (PETROBRAS) Pfd Utilities 6/26/97 2.96%
Raisio Yhtyma Oy Food & Beverage 9/22/97 1.19%
Repco Holdings BHD Retail 4/9/97 -
Roche Holding Ltd., Non-voting equity Pharmaceuticals 2/17/97 1.38%
Ryanair Holdings PLC Aviation 5/29/97 0.22%
</TABLE>

8
<PAGE>

POSITIONS CLOSED (10/1/96-9/30/97) (GAINS OR LOSSES GREATER THAN $250,000 ARE
HIGHLIGHTED.)

DATE OF FINAL
SECURITY SECTOR SALE GAIN/(LOSS)
- -------------------------------------------------------------------------------------------------------------------
Acer Inc., GDR Computer Products 11/14/96 (369,500)
AMMB Holdings Bhd. Banking 7/16/97 (325,133)
PT Astra International Automotive 8/5/97 839,582
Bank of Ayudhya Public Co. Ltd. Banking 12/17/96 (371,010)
Bank of East Asia Ltd. Banking 10/31/96 284,663
Bank of the Philippine Islands Corp. Banking 5/9/97 (30,919)
Beijing North Star Co. Ltd. Real Estate 5/14/97 197,345
BSES Ltd., GDR Utilities 2/26/97 509,500
CCM Bioscience Bhd. Consumer Products 8/7/97 981
Centennial City Inc. Property Development 6/24/97 (861,283)
Chemical Company of Malaysia Bhd. Chemicals 7/23/97 (16,935)
Chemical Company of Malaysia Bhd. (expiring 11/07/00) Chemicals 8/7/97 19,612
China Resources Enterprises LTD. Manufacturing 12/9/96 127,710
Cho Hung Bank Co. Ltd. Banking 5/9/97 (465,108)
Ciba - Geigy Ltd., Registered Pharmaceuticals 12/17/96 -
Clarins SA Consumer Products 6/5/97 (84,973)
Crompton Greaves Ltd., GDR Manufacturing 2/24/97 (1,019,600)
Dah Sing Financial Group Ltd. Finance 9/25/97 10,125
DCB Holdings Bhd. Banking 12/17/96 23,473
Empire East Land Holdings Inc. Property Development 2/11/97 (104,108)
Equitable Banking Corp. Banking 4/10/97 (8,609)
Groupe AB SA, ADR Broadcast Services 12/19/96 (114,014)
Halifax PLC Banking 7/16/97 89,753
Henderson Land Development Co. LTD Real Estate 12/6/96 91,015
</TABLE>

9
<PAGE>

DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
PORTFOLIO ACTIVITY -- OCTOBER 1, 1996 THROUGH SEPTEMBER 30, 1997
<TABLE>
<CAPTION>

- --------------------------------------------------------------------------------------------------------------
POSITIONS CLOSED (10/1/96-9/30/97) - CONTINUED (GAINS OR LOSSES GREATER THAN
$250,000 ARE HIGHLIGHTED.)

DATE OF FINAL
SECURITY SECTOR SALE GAIN/(LOSS)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PT Hero Supermarket Retail 9/5/97 (568,240)
Hong Kong Land Holdings Ltd. Real Estate 8/5/97 287,580
HSBC Holdings PLC (Robert Fleming warrants
expiring 6/27/97) Banking 6/27/97 1,264,806
Hutchison Whampoa Ltd. (Robert Fleming warrants
expiring 9/26/97) Diversified 9/25/97 -
Hyundai Motor Co. Ltd. Automotive 3/25/97 (27,412)
Jasmine International Public Co. Ltd. Telecommunications 3/21/97 (440,229)
JG Summit Inc. B Diversified 11/20/96 (427,782)
Jiangsu Expressway Real Estate 6/27/97 (712)
Jurong Shipyard Ltd. Shipping 10/25/96 (145,138)
Korea Electric Power Corp. Utilities 5/13/97 (216,523)
Korean Airlines, Inc. Aviation 12/17/96 (76,604)
Krung Thai Bank Public Co. Ltd. Banking 3/21/97 (1,217,440)
Kumpulan Jetson Bhd. Building Materials 6/27/97 (217,520)
Malaysia British Assurance Bhd. Insurance 2/4/97 28,393
Nam Fong International Holdings Ltd. Real Estate 12/9/96 80,350
National Petrochemical Public Co. Ltd. Chemicals 3/24/97 (272,431)
Norwich Union PLC Banking 7/16/97 64,926
Pilipino Telephone Corp. Telecommunications 1/31/97 (474,151)
Repco Holdings BHD Retail 5/19/97 (47,085)
Samsung Fire & Marine Insurance Inc. Insurance 5/9/97 (175,767)
Sandoz Ltd., Registered Pharmaceuticals 12/17/96 -
Sanofi Sa Pharmaceuticals 9/18/97 55,621
Securities One Public Co. Ltd. Finance 12/19/96 (1,057,922)
Seoul City Gas Co. Ltd Utilities 12/11/96 (178,440)
Shinhan Bank Banking 3/21/97 (17,552)
Solid Group Inc. Retail 10/4/96 (76,163)
Stet, Societa Finanziera Telefonica Spa Telecommunications 7/28/97 (1,246)
Swire Pacific Ltd. - A Aviation 8/6/97 72,105
United Communication Industry Public Co. Ltd. Telecommunications 10/24/96 (138,566)
United Overseas Land Ltd. (warrants expiring 06/09/97) Real Estate 10/25/96 (133,486)
Wharf (Holdings) Ltd. Retail 9/24/97 (97,767)
Wheelock & Co. Ltd. Real Estate 5/7/97 (243,552)
YTL Corp. Bhd. Utilities 10/31/96 20,308
</TABLE>

10
<PAGE>

DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
SCHEDULE OF INVESTMENTS
At September 30, 1997
<TABLE>
<CAPTION>

- --------------------------------------------------------------------------------------------------------------
VALUE
SHARES (NOTE 1)
COMMON STOCKS - (90.32%) ----------
<S> <C> <C>
ARGENTINA - (4.58%)
20,000 Disco SA, ADR ............................................................. $ 920,000
35,000 Telefonica de Argentina SA, ADR............................................ 1,281,875
---------------
2,201,875
---------------
BELGIUM - (2.78%)
100,000 Xeikon NV, ADR (c)......................................................... 1,334,375
---------------
BRAZIL - (8.12%)
70,000 Centrais Eletricas Brasileiras SA, ADR (ELETROBRAS) Preference B........... 1,968,750
15,000 Telecomunicacoes Brasileiras SA, ADR (TELEBRAS)............................ 1,931,250
---------------
3,900,000
---------------
CHILE - (1.94%)
40,000 Santa Isabel SA, ADR....................................................... 932,500
---------------
FINLAND - (2.32%)
30,000 Asko Oy.................................................................... 544,326
5,000 Raisio Yhtyma Oy.......................................................... 570,786
---------------
1,115,112
---------------
HONG KONG - (10.22%)
800,000 HKR International Ltd...................................................... 945,980
30,000 HSBC Holdings PLC.......................................................... 1,004,135
300,000 Hutchison Whampoa Ltd...................................................... 2,956,190
---------------
4,906,305
---------------
INDONESIA - (0.98%)
50,000 PT Unilever Indonesia...................................................... 471,125
---------------
IRELAND - (2.82%)
110,000 CRH PLC................................................................... 1,248,720
18,000 Ryanair Holdings PLC....................................................... 103,564
---------------
1,352,284
---------------
ITALY - (6.71%)
300,000 ENI SpA................................................................... 1,889,175
200,000 Telecom Italia SpA......................................................... 1,332,445
---------------
3,221,620
---------------
MEXICO - (9.06%)
30,000 Sociedad de Fomento Industrial SA de CV, ADR (DESC)....................... 1,252,500
50,000 Grupo Casa Autrey SA de CV, ADR............................................ 1,143,750
50,000 Panamerican Beverages Inc.-A............................................... 1,953,125
---------------
4,349,375
---------------

</TABLE>

11
<PAGE>

DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1997
<TABLE>
<CAPTION>

- --------------------------------------------------------------------------------------------------------------
VALUE
SHARES (NOTE 1)
COMMON STOCKS - CONTINUED ----------
<S> <C> <C>
PHILIPPINES - (1.38%)
4,948,000 Davao Union Cement Corp. - B............................................... $ 272,496
200,000 Far East Bank & Trust Co................................................... 298,551
2,013,000 Republic Glass Holdings Corp. ............................................. 93,357
---------------
664,404
---------------
SOUTH KOREA - (2.53%)
30,000 LG Electronics Inc. ....................................................... 590,164
2,724 Samsung Electronics Co. Ltd................................................ 197,974
7,972 Samsung Electronics Co. Ltd., GDR.......................................... 427,100
---------------
1,215,238
---------------
SWEDEN - (4.84%)
2,000 Incentive AB - A........................................................... 190,577
20,000 Incentive AB - B........................................................... 1,911,038
5,000 Skandia Forsakrings AB..................................................... 223,394
---------------
2,325,009
---------------
SWITZERLAND - (18.39%)
1,000 ABB Ltd., Bearer........................................................... 1,472,772
4,600 Ciba Specialty Chemicals Ltd., Registered (b) (c).......................... 444,376
3,100 Novartis Ltd., Registered.................................................. 4,753,163
75 Roche Holding Ltd., Non-voting equity...................................... 665,223
1,000 Swiss Reinsurance Co., Registered.......................................... 1,499,587
---------------
8,835,121
---------------
UNITED KINGDOM - (13.65%)
500,000 British Biotech PLC (c).................................................... 1,281,938
50,000 GKN PLC.................................................................... 1,143,021
110,000 Lloyds TSB Group........................................................... 1,476,647
103,539 Royal Bank of Scotland PLC................................................. 1,152,000
110,000 Standard Chartered PLC..................................................... 1,504,140
---------------
6,557,746
---------------
TOTAL COMMON STOCKS (identified cost $38,898,410)................... 43,382,089
---------------

PREFERRED - (4.35%)
7,000 Nokia Oyj - A.............................................................. 665,476
5,000,000 Petroleo Brasileiro SA, (Petrobras) Pfd.................................... 1,423,942
---------------
TOTAL PREFERRED (identified cost $2,081,963)......................... 2,089,418
---------------
</TABLE>

12
<PAGE>

DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1997
<TABLE>
<CAPTION>

- --------------------------------------------------------------------------------------------------------------
VALUE
UNITS/PRINCIPAL (NOTE 1)
----------
<S> <C> <C>
WARRANTS - (0.81%)
20,000,000 Peregrine Derivatives Utilities (expiring 03/30/98)
- (identified cost $731,032)......................................... $ 387,700
------------

RIGHTS - (0.02%)
45,000 Far East Bank & Trust Co., (expiring 12/01/97) (c)
- (identified cost $49,044).......................................... 7,904
------------

SHORT TERM - (8.46%)
$ 4,065,000 State Street Bank and Trust Company Repurchase Agreement ,5.80%,
10/01/97, dated 9/30/97, repurchase value of $4,065,655 (collateralized
by $4,120,000 par value U.S. Treasury Notes, 5.875%, 02/28/99,
market value $4,147,143) - (identified cost $4,065,000)................. 4,065,000
------------

TOTAL INVESTMENTS (identified cost $45,825,449) -
(103.96%) (a)................................................. 49,932,111
LIABILITIES LESS OTHER ASSETS - (3.96%)........................... (1,901,105)
------------
NET ASSETS - 100%................................................. $ 48,031,006
============

(a) Aggregate cost for Federal income tax purposes is $45,825,449.
(b) This security is subject to Rule 144A. The Board of Directors of the Fund
has determined that there is sufficient liquidity in this security to
realize its current valuation.
(c) Non income-producing security.

At September 30, 1997, unrealized appreciation (depreciation) of securities
for Federal income tax purposes was as follows:

Unrealized appreciation............................................... $ 8,988,879
Unrealized depreciation............................................... (4,882,217)
--------------
Net unrealized appreciation........................................ $ 4,106,662
==============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

13
<PAGE>

DAVIS INTERNATIONAL SERIES, INC.
STATEMENT OF ASSETS AND LIABILITIES - At September 30, 1997
INTERNATIONAL TOTAL RETURN FUND
<TABLE>
<CAPTION>

- --------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments in securities, at value (identified cost - $45,825,449) (Note 1)......... $ 49,932,111
Cash................................................................................. 671,218
Receivables:
Investments Sold................................................................. 494,461
Interest......................................................................... 655
Dividends........................................................................ 130,872
Capital stock sold............................................................... 38,464
Prepaid expenses..................................................................... 32,052
Due from Advisor..................................................................... 43,191
Other assets......................................................................... 33,044
-----------------
Total assets................................................................ 51,376,068
-----------------

LIABILITIES:
Payables:
Investment securities purchased.................................................. 3,185,574
Capital stock reacquired......................................................... 42,220
Accrued expenses................................................................. 107,388
Other liabilities.................................................................... 9,880
-----------------
Total liabilities........................................................... 3,345,062
-----------------

NET ASSETS ............................................................................... $ 48,031,006
=================

CLASS A SHARES
Net assets....................................................................... $ 39,739,996
Shares outstanding............................................................... 3,492,785
Net asset value and redemption price per share (net assets/shares outstanding)... $11.38
======
Maximum offering price per share (100/95.25 of $11.38)........................... $11.95
======
CLASS B SHARES
Net assets....................................................................... $ 8,230,017
Shares outstanding............................................................... 738,097
Net asset value and redemption price per share (net assets/shares outstanding)... $11.15
======
CLASS C SHARES
Net assets....................................................................... $ 60,993
Shares outstanding............................................................... 5,366
Net asset value and redemption price per share (net assets/shares outstanding)... $11.37
======

NET ASSETS CONSIST OF:
Deficit in undistributed net investment income....................................... $ (12,484)
Unrealized appreciation on investments and translation of assets and liabilities in
foreign currencies............................................................... 4,096,493
Accumulated net realized losses from investments and foreign currency transactions... (4,506,616)
Paid-in capital...................................................................... 48,453,613
-----------------
Net assets.................................................................. $ 48,031,006
=================
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

14
<PAGE>

DAVIS INTERNATIONAL SERIES, INC.
STATEMENT OF OPERATIONS - For the year ended September 30, 1997
INTERNATIONAL TOTAL RETURN FUND

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Income:
Dividends (net of foreign taxes withheld of $88,687)............................. $ 742,165
Interest......................................................................... 56,817
-----------------
Total Income................................................................ 798,982
-----------------

Expenses:
Management fees (Note 3)...................................... $ 471,571
Custodian fees................................................ 123,121
Transfer agent fees........................................... 52,289
Audit fees.................................................... 20,850
Legal fees.................................................... 15,614
Accounting fees (Note 3)...................................... 7,337
Reports to shareholders....................................... 26,742
Directors fees and expenses................................... 44,366
Registration and filing fees ................................. 73,305
Miscellaneous................................................. 24,594
Distribution plan payments (Note 3)
Class A..................................................... 57,960
Class B..................................................... 79,903
Class C..................................................... 59
---------------
Total expenses.............................................................. 997,711
Reimbursement of expenses by adviser (Note 3).................................... (143,100)
Fee Reduction (Note 7)........................................................... (3,162)
-----------------
Net expenses................................................................ 851,449
-----------------
Net investment income (loss)............................................ (52,467)
-----------------

REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY:

Net realized gain (loss) from:
Investment transactions.......................................................... ( 2,866,692)
Foreign currency transactions.................................................... (1,554,771)
Net increase (decrease) in unrealized appreciation/depreciation on:
Investments...................................................................... 5,423,142
Translation of assets and liabilities in foreign currencies...................... (7,260)
-----------------
Net realized and unrealized gain on investments and foreign currency........ 994,419
-----------------

Net increase in net assets resulting from operations.................... $ 941,952
=================
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

15
<PAGE>

DAVIS INTERNATIONAL SERIES, INC.
STATEMENT OF CHANGES IN NET ASSETS
INTERNATIONAL TOTAL RETURN FUND

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------

YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
----------------- -----------------
<S> <C> <C>
OPERATIONS:

Net investment income (loss)................................... $ (52,467) $ 48,882
Net realized gain (loss) from investments and foreign currency
transactions............................................... (4,421,463) 3,932,599
Increase (decrease) in unrealized appreciation on investments and
translation of assets and liabilities in foreign currencies 5,415,882 (1,434,473)
Foreign taxes on gains on investments.......................... - (16,733)
-------------- -----------
Net increase in net assets resulting from
operations............................................ 941,952 2,530,275

DISTRIBUTIONS TO SHAREHOLDERS FROM:

Net investment income
Class A ($0.03 per share).................................. - (67,993)
Realized gains from investment transactions
Class A ($0.99 and $0.58 per share, respectively).......... (3,209,934) (1,314,536)
Class B ($0.99 and $0.58 per share, respectively).......... (681,216) (115,147)

CAPITAL SHARE TRANSACTIONS (NOTE 5)................................. 1,151,873 33,366,163
-------------- -----------

Total increase (decrease) in net assets.................... (1,797,325) 34,398,762

NET ASSETS:

Beginning of period............................................ 49,828,331 15,429,569
------------- -----------

End of period (including undistributed net investment
income (deficit) of $(12,484) and $39,983 respectively) $ 48,031,006 $49,828,331
============= ===========

</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

16
<PAGE>

DAVIS INTERNATIONAL SERIES, INC.
NOTES TO FINANCIAL STATEMENTS
At September 30, 1997

- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company. The Company
currently offers one series, Davis International Total Return Fund ("Fund").
The Fund offers shares in four classes, Class A, Class B, Class C and Class Y.
The Class A shares are sold with a front-end sales charge, the Class B shares
are sold at net asset value and may be subject to a contingent deferred sales
charge upon redemption and Class C shares are sold at net asset value and may
be subject to a contingent deferred sales charge upon redemption. Class Y
shares are sold at net asset value and are not subject to any contingent
deferred sales charge. Class Y shares are only available to certain qualified
investors. All classes have identical rights with respect to voting (exclusive
of each Class' distribution arrangement), liquidation and distributions. The
following is a summary of significant accounting policies followed by the Fund
in the preparation of its financial statements.

SECURITY VALUATION - Portfolio securities are normally valued using current
market valuations: either the last reported sales price, or in the case of
securities for which there is no reported last sale, the closing bid price.
Debt securities maturing in 60 days or less are usually valued at amortized
cost and longer term debt securities may be valued by an independent pricing
service. Securities for which market quotations are not readily available and
other assets are appraised at fair value as determined in good faith in
accordance with methods that are authorized by the Board of Directors. Because
of the difference in times of closing of markets in which the Fund's
securities are traded, events affecting portfolio values that occur between
the time their prices are determined and the time the Fund's shares are priced
will generally not be reflected in the Fund's share price.

FOREIGN CURRENCY - Amounts denominated in or expected to settle in foreign
currencies (FC) are translated into United States dollars (US$) at current
exchange rates computed by State Street Bank & Trust Company, the Fund's
custodian bank. Investment securities, other assets, and liabilities are
valued at the closing rate of exchange at the balance sheet date. Purchases
and sales of investment securities, income and expenses are valued at the rate
of exchange prevailing on the respective dates of such transactions (or at an
average rate if significant rate fluctuations have not occurred). The Fund
does not isolate that portion of the results of operations resulting from
changes in foreign exchange rates on investments from the fluctuations arising
from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.

Reported net realized foreign exchange gains or losses arise from sales
and maturities of short-term securities, sales of FCs, currency gains or
losses realized between the trade and settlement dates on securities
transactions, the difference between the amounts of dividends, interest, and
foreign withholding taxes recorded on the Fund's books, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in the value of assets and
liabilities other than investments in securities at fiscal year end, resulting
from changes in the exchange rate.

FORWARD CURRENCY CONTRACTS - The Fund may enter into forward purchases or
sales of foreign currencies to hedge certain foreign currency denominated
assets and liabilities against declines in market value relative to the U.S.
dollar. Forward currency contracts are marked-to-market daily and the change
in market value is recorded as an unrealized gain or loss equal to the
difference between the value of the forward currency contract at the time it
was opened and value at the time it was closed. Investments in forward
currency contracts may expose the company to risks resulting from
unanticipated movements in foreign currency exchange rates or failure of the
counterparty to the agreement to perform in accordance with the terms of the
contract.

17
<PAGE>

DAVIS INTERNATIONAL SERIES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
At September 30, 1997

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

FEDERAL INCOME TAXES - It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of its taxable income to shareholders.
Therefore, no provision for federal income tax is required. At September 30,
1997, the Fund had approximately $4,438,000 of capital loss carryovers
available to offset future capital gains, if any, which expire in 2005.

SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME - Securities
transactions are accounted for on the trade date (date the order to buy or
sell is executed) with gain or loss on the sale of securities being determined
based upon identified cost. Dividend income is recorded on the ex-dividend
date and interest income is recorded on the accrual basis.

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - Dividends and distributions to
shareholders are recorded on the ex-dividend date.

NOTE 2 - PURCHASES AND SALES OF SECURITIES

Purchases and sales of investment securities (excluding short-term
securities) during the year ended September 30, 1997 were $45,155,122 and
$52,555,076, respectively.

NOTE 3 - INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES

Advisory fees are paid monthly to the investment adviser, Davis
Selected Advisers, L.P., at the annual rate of 1.00% of the first $250 million
of average net assets, 0.90% on the next $250 million of average net assets,
and 0.80% of average net assets in excess of $500 million.

Effective June 1, 1997, Davis Distributors, LLC (the "Distributor"),
and subsidary of the Adviser, became the Underwriter and Distributor of the
Fund. Until June 1, 1997, the Adviser also acted as Underwriter and
Distributor. The Distributor is paid for registering Fund shares for sale in
various states. The fee for the year ended September 30, 1997 amounted to
$12,000. The Distributor is also paid for certain transfer agent services. The
fee for the year ended September 30, 1997 amounted to $3,336.

The Adviser is paid for certain accounting services. The fee amounted
to $7,337 for the year ended September 30, 1997. Certain directors and the
officers of the Fund are also directors and officers of the general partner of
the Adviser.

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

Atlantic Advisers Limited (the "Sub-Adviser") acts as the Sub-Adviser
of the Fund. The Sub-Adviser manages the day-to-day investment operations for
the Fund. The Fund pays no fees directly to the Sub-Adviser. The Sub-Adviser
receives from the Adviser 50% of the total annual investment advisory fees
paid by the Fund to the Adviser.

18
<PAGE>

DAVIS INTERNATIONAL SERIES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
At September 30, 1997

- -------------------------------------------------------------------------------
NOTE 4 - DISTRIBUTION AND UNDERWRITING FEES

CLASS A SHARES

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

During the year ended September 30, 1997, Davis Distributors, LLC (or
its predecessor, Davis Selected Advisers, L.P.), the Fund's Underwriter (the
"Underwriter") received $67,467 from commissions earned on sales of Class A
shares of the Fund, of which $10,347 was retained by the underwriter and the
remaining $57,120 was reallowed to investment dealers. The Underwriter paid
the costs of prospectuses in excess of those required to be filed as part of
the Fund's registration statement, sales literature and other expenses assumed
or incurred by it in connection with such sales.

The Underwriter is reimbursed for amounts paid to dealers as a
maintenance fee with respect to Class A shares sold by dealers and remaining
outstanding during the period. The maintenance fee is paid at the annual rate
of 1/4 of 1% of the average net assets maintained by the responsible dealers.
The Underwriter is not reimbursed for accounts in which the Underwriter pays
no service fees to other firms. The maintenance fee for Class A shares of the
Fund for the six months ended September 30, 1997 was $57,960.

CLASS B SHARES

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

The Fund compensates the Distributor with a 4% commission on the
proceeds from the sale of the Fund's Class B shares (subject to the limits
described below) and the Distributor pays 4% to the qualified dealer
responsible for the sale of the shares. A rule implemented by the National
Association of Securities Dealers, Inc., ("NASD") limits the percentage of the
Fund's annual average net assets attributable to Class B shares which may be
paid to the Distributor in connection with the distribution of its shares. The
limit is 1%, of which 0.75% may be used to pay distribution expenses and 0.25%
may be used to pay shareholder service fees. The NASD rule also limits the
aggregate amount the Fund may pay for distribution-related services to 6.25%
of gross Fund sales since inception of the Rule 12b-1 plan plus interest at 1%
over the prime rate on unpaid amounts. The Distributor intends to seek full
payment (plus interest at prime plus 1%) of distribution charges that exceed
the 1% annual limit in some future period or periods when the plan limits have
not been reached.

During the year ended September 30, 1997, Class B shares of the Fund
made distribution plan payments which included commissions of $60,889 and
maintenance fees of $19,014.

Commissions earned by the Distributor during the year ended September
30, 1997 on the sale of Class B shares of the Fund amounted to $55,002, of
which $53,829 was reallowed to qualified selling dealers.

19
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
At September 30, 1997

- -------------------------------------------------------------------------------
NOTE 4 - DISTRIBUTION AND UNDERWRITING FEES - (CONTINUED)

CLASS B SHARES - (CONTINUED)

The Distributor intends to seek payment from Class B shares of the Fund
in the amount of $277,438, representing the cumulative commissions earned by
the Distributor on the sale of the Fund's Class B shares, plus interest,
reduced by cumulative commissions paid by the Fund and cumulative contingent
deferred sales charges paid by redeeming shareholders. The Fund has no
contractual obligation to pay any such distribution charges and the amount, if
any, timing and condition of such payment are solely within the discretion of
the Directors who are not interested persons of the Fund or the Distributor.

A contingent deferred sales charge is imposed upon redemption of
certain Class B shares of the Fund within six years of the original purchase.
The charge is a declining percentage starting at 4% of the lesser of net asset
value of the shares redeemed or the total cost of such shares. During the year
ended September 30, 1997 the Distributor received contingent deferred sales
charges from Class B shares of the Fund of $12,474.

CLASS C SHARES

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

During the year ended September 30, 1997, Class C shares of the
Fund made distribution payments of $59.

NOTE 5 - CAPITAL STOCK

At September 30, 1997, there were 5 billion shares of capital stock
($0.001 par value per share) authorized. Transactions in capital stock were as
follows:
<TABLE>
<CAPTION>

CLASS A YEAR ENDED
SEPTEMBER 30, 1997
--------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Shares subscribed.......................................................... 589,427 $ 6,637,805
Shares issued in reinvestment of distributions............................. 296,888 3,129,204
------------- --------------
886,315 9,767,009
Shares reacquired.......................................................... (820,492) (9,160,277)
------------- --------------
Net increase.......................................................... 65,823 $ 606,732
============= ==============
</TABLE>

20
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
At September 30, 1997
<TABLE>
<CAPTION>

- --------------------------------------------------------------------------------------------------------------
NOTE 5 - CAPITAL STOCK - (CONTINUED)
YEAR ENDED
CLASS A - (CONTINUED) SEPTEMBER 30, 1996
------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Shares subscribed.......................................................... 2,552,141 $ 30,265,971
Shares issued in reinvestment of distributions............................. 121,746 1,357,471
------------- --------------
2,673,887 31,623,442
Shares reacquired.......................................................... (379,953) (4,608,330)
------------- --------------
Net increase.......................................................... 2,293,934 $ 27,015,112
============= ==============

CLASS B
YEAR ENDED
SEPTEMBER 30, 1997
------------------
SHARES AMOUNT
------ ------
Shares subscribed.......................................................... 186,153 $ 2,044,442
Shares issued in reinvestment of distributions............................. 62,835 652,856
------------- --------------
248,988 2,697,298
Shares reacquired.......................................................... (201,315) (2,213,546)
------------- --------------
Net increase.......................................................... 47,673 $ 483,752
============= ==============

YEAR ENDED
SEPTEMBER 30, 1996
------------------
SHARES AMOUNT
------ ------
Shares subscribed.......................................................... 540,809 $ 6,608,287
Shares issued in reinvestment of distributions............................. 10,289 114,212
------------- --------------
551,098 6,722,499
Shares reacquired.......................................................... (30,461) (371,448)
Net increase.......................................................... 520,637 $ 6,351,051
============= ==============

CLASS C
AUGUST 19, 1997
(COMMENCEMENT
OF OPERATIONS)
THROUGH
SEPTEMBER 30, 1997
------------------
SHARES AMOUNT
------ ------
Shares subscribed.......................................................... 5,366 $ 61,389
Shares issued in reinvestment of distributions............................. - -
------------- --------------
5,366 61,389
Shares reacquired.......................................................... - -
------------- --------------
Net increase.......................................................... 5,366 $ 61,389
============= ==============
</TABLE>

21
<PAGE>

DAVIS INTERNATIONAL SERIES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
At September 30, 1997

- -------------------------------------------------------------------------------
NOTE 6 - MATTERS SUBMITTED TO A VOTE OF SHAREHOLDERS

An annual meeting of shareholders was held on March 25, 1997.
Matters submitted for approval included consideration of a Sub-Advisory
Agreement between Davis Selected Advisers, L.P., the Investment Adviser of the
Fund, and Davis Selected Advisers-NY, Inc., an affiliate of the Adviser and
election of G. Bernard Hamilton as director of the Fund. With respect to
consideration of the Sub-Advisory Agreement, 3,391,448 votes were cast in
favor, 24,638 votes were cast against and 13,627 votes abstained. With respect
to the election of Mr. Hamilton, 3,406,610 votes were cast in favor and 23,107
votes were withheld. The terms of office of Jeremy H. Biggs, Shelby M.C.
Davis, Keith R. Kroeger, The Very Reverend James R. Leo, Richard M. Murray and
Theodore B. Smith Jr. also continued after the meeting.

NOTE 7 - CUSTODY FEES

Under an agreement with the custodian bank, custody fees are
reduced by credits for cash balances. Such reductions amounted to $3,162
during the year ended September 30, 1997.

22
<PAGE>

DAVIS INTERNATIONAL SERIES, INC.
FINANCIAL HIGHLIGHTS
INTERNATIONAL TOTAL RETURN FUND

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------

The following represents financial highlights for a share of capital stock
outstanding throughout each period.

CLASS A
EIGHT
YEAR ENDED SEPTEMBER 30, MONTHS ENDED
----------------------------- SEPTEMBER 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period.................. $ 12.12 $ 11.85 $ 10.00
------- --------- ---------
Income From Investment Operations
Net Investment Income .............. - .03 .05
Net Gains on Securities
(both realized and unrealized)..... .25 .85 1.80
------- --------- ---------
Total From Investment Operations... .25 .88 1.85
------- --------- ---------
Less Distributions
Dividends (from net
investment income)................ - (.03) -
Distributions From
Realized Capital Gains............ (.99) (.58) -
------- --------- ---------
Total Distributions................ (.99) (.61) -
------- --------- ---------
Net Asset Value, End of Period.......... $ 11.38 $ 12.12 $ 11.85
======= ========= =========

Total Return (1)......................... 2.71% 7.87% 18.50%
Ratios/Supplemental Data
Net Assets, End of
Period (000 omitted)............... $39,740 $ 41,545 $ 13,427
Ratio of Expenses
to Average Net Assets............ 1.67%(2),(3) 1.70%(2),(3) 1.72%(2),(3)*
Ratio of Net Income
to Average Net Assets............. 0.03% .23% .95%*
Portfolio Turnover Rate............. 97% 78% 85%
Average commission rate per share... $ .0066 $ .0050 -
</TABLE>
(1) Sales charges are not reflected in calculation.

(2) Had the Adviser not absorbed certain expenses, the ratio of expenses for
the year ended September 30, 1997, the year ended September 30, 1996 and
the eight months ended September 30, 1995 would have been 1.93%, 2.24% and
2.88%, respectively.

(3) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement were 1.69% and 1.66% for September 30,
1996 and September 30, 1997, respectively. Prior to 1996, such reductions
were reflected in the expense ratios.

* Annualized.

23
<PAGE>

DAVIS INTERNATIONAL SERIES, INC.
FINANCIAL HIGHLIGHTS
INTERNATIONAL TOTAL RETURN FUND

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------

The following represents financial highlights for a share of capital stock
outstanding throughout each period.

CLASS B
EIGHT
YEAR ENDED SEPTEMBER 30, MONTHS ENDED
------------------------------ SEPTEMBER 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period.................. $ 12.00 $ 11.79 $ 10.00
-------- -------- ---------
Income From Investment Operations
Net Investment Income (Loss)......... (.10) (.03) (.01)
Net Gains on Securities
(both realized and unrealized)..... .24 .82 1.80
-------- -------- ---------
Total From Investment Operations... .14 .79 1.79
-------- -------- ---------
Less Distributions
Dividends (from net
investment income)................ - - -
Distributions From
Realized Capital Gains............ (.99) (.58) -
-------- -------- ---------
Total Distributions............... (.99) (.58) -
-------- -------- ---------
Net Asset Value, End of Period.......... $ 11.15 $ 12.00 $ 11.79
======== ======== =========

Total Return (1)......................... 1.77% 7.10% 17.90%
Ratios/Supplemental Data
Net Assets, End of
Period (000 omitted)............... $ 8,230 $ 8,283 $ 2,002
Ratio of Expenses
to Average Net Assets............ 2.51%(2),(3) 2.47%(2),(3) 2.46%(2),(3)*
Ratio of Net Income
to Average Net Assets............. (0.80)% (.54)% (.09)%*
Portfolio Turnover Rate.............. 97% 78% 85%
Average commission rate per share.... $ .0066 $ .0050 -
</TABLE>
(1) Sales charges are not reflected in calculation.

(3) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement were 2.46% and 2.50% for September 30,
1996 and September 30, 1997, respectively. Prior to 1996, such reductions
were reflected in the expense ratios.

* Annualized.

24
<PAGE>

DAVIS INTERNATIONAL SERIES, INC.
FINANCIAL HIGHLIGHTS
INTERNATIONAL TOTAL RETURN FUND

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------

The following represents financial highlights for a share of capital stock
outstanding throughout each period.

CLASS C

AUGUST 19,1997
(COMMENCEMENT
OF OPERATIONS)
THROUGH
SEPTEMBER 30,
1997
----
<S> <C>
Net Asset Value,
Beginning of Period............................................................. $ 11.50
--------
Income From Investment Operations
Net Investment Income (Loss).................................................... (.02)
Net Gains (Losses) on Securities
(both realized and unrealized)................................................ (.11)
--------
Total From Investment Operations.............................................. (.13)
--------
Less Distributions
Dividends (from net
investment income)........................................................... -
Distributions From
Realized Capital Gains....................................................... -
--------
Total Distributions.......................................................... -
--------
Net Asset Value, End of Period..................................................... $ 11.37
========

Total Return (1).................................................................... (1.13)%
Ratios/Supplemental Data
Net Assets, End of
Period (000 omitted).......................................................... $ 61
Ratio of Expenses
to Average Net Assets....................................................... 2.62%*
Ratio of Net Income
to Average Net Assets........................................................ (2.27)%*
Portfolio Turnover Rate........................................................ 97%
Average commission rate per share.............................................. $ .0066
</TABLE>

(1) Sales charges are not reflected in calculation.

(2) Had the Adviser not absorbed certain expenses, the ratio of expenses for
the year ended September 30, 1997, would have been 3.14%.

* Annualized.

25
<PAGE>

DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
OF DAVIS INTERNATIONAL SERIES, INC.

We have audited the accompanying statement of assets and liabilities of
Davis International Total Return Fund, a series of Davis International Series,
Inc., including the schedule of investments, as of September 30, 1997, the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended and
the financial highlights for each of the two years in the period then ended
and for the eight months ended September 30, 1995. These financial statements
and financial highlights are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial highlights based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of September 30, 1997, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Davis International Total Return Fund as of September 30, 1997,
and the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended and the
financial highlights for each of the two years in the period then ended and
for the eight months ended September 30, 1995, in conformity with generally
accepted accounting principles.

TAIT, WELLER & BAKER

Philadelphia, Pennsylvania
November 11, 1997

26
<PAGE>

DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
124 East Marcy Street Santa Fe, New Mexico 87501

DIRECTORS OFFICERS
Jeremy H. Biggs Jeremy H. Biggs
Andrew A. Davis Chairman
Christopher C. Davis Shelby M.C. Davis
G. Bernard Hamilton President
Keith R. Kroeger Kenneth C. Eich
The Very Reverend Vice President
James R. Leo Eileen R. Street
Richard M. Murray Vice President, Treasurer
Theodore B. Smith Jr. & Assistant Secretary
Carolyn H. Spolidoro
Vice President
Andrew A. Davis
Vice President

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

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

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

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

AUDITORS
Tait, Weller & Baker
Eight Penn Center Plaza, Suite 800
Philadelphia, Pennsylvania 19103

- -------------------------------------------------------------------------------
FOR MORE INFORMATION ABOUT DAVIS INTERNATIONAL SERIES, INC., DAVIS
INTERNATIONAL TOTAL RETURN FUND, INC. INCLUDING MANAGEMENT FEE, CHARGES AND
EXPENSES, SEE THE CURRENT PROSPECTUS WHICH MUST PRECEDE OR ACCOMPANY THIS
REPORT.
- -------------------------------------------------------------------------------

<PAGE>

DAVIS INTERNATIONAL
TOTAL RETURN FUND

ANNUAL REPORT
SEPTEMBER 30, 1997

DAVIS
FUNDS