PREFERRED INCOME FUND INC, N-30B-2, 1996-01-29

PREFERRED INCOME FUND INC
N-30B-2, 1996-01-29

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<PAGE>

PREFERRED INCOME FUND
INCORPORATED

Dear Shareholder:

The Fund's portfolio performed extremely well in the fiscal year ended
November 30, 1995, but the market for our shares was a tough audience. I will
hit the highlights here and expand upon performance, market discounts and income
in the question and answer section that follows.

The Fund earned 25.1% on the net asset value ("NAV") of its shares in
fiscal 1995. Our preferred stock holdings did very well across the board.
Furthermore, we gave very little back through hedging losses, which we consider
a major accomplishment in this environment.

The primary forces driving portfolio returns were the sharp decline in long
term interest rates and a creeping scarcity of traditional preferreds. There was
little difference between fixed rate preferreds and adjustable rate preferreds
("ARPs"). The dividends of most ARPs are fixed at their minimum rates now, which
makes them look and act more like fixed rate preferreds than ARPs.

Even though the portfolio had a great year, the discount of the market
price from NAV widened. That caused the return on market value of 22.1% for the
fiscal year to fall short of what we earned on the actual dollars we are
managing (the NAV). Beyond that, the discount increased in early December due to
some tax proposals discussed below. The market's failure to give better
recognition to the Fund's success must be as frustrating to you as it is to us.

The Fund's income strategy has worked well. That may be tough to see when
the dividend has just been reduced, but it really does make sense as explained
in the Q & A section. For the record, the new regular monthly dividend rate
effective on December 29, 1995 is 8.7 cents per share, which represents a
reduction of approximately 6.0%. This reduction may also have contributed to the
widening of the discount of market price from NAV, although we do not think it
should have.

The Fund did not make a special year-end distribution this year. Obviously,
we made plenty of money, but most of it was unrealized appreciation on preferred
stocks that the Fund still holds.

In early December, following the end of our fiscal year, the Clinton
Administration confused the outlook for the Fund by proposing a laundry list of
corporate tax increases. Several of these would clearly have an adverse effect
on the Fund while a few could possibly benefit it indirectly over time. The
proposals are a product of the bizarre political situation that has developed
over balancing the federal budget, and we cannot predict the outcome yet.

The electric utility industry, which is the largest position in the Fund's
portfolio, is continuing to move toward deregulation and competition. We sense
that the pace of this evolution may accelerate as the stronger utilities press
their advantage. So far, we have been very successful in separating the
potential winners from the casualties that are bound to occur.

Please read the following Q & A section. We hope it will clear up important
questions that we hear frequently.

Sincerely,

/s/ Robert T. Flaherty

Robert T. Flaherty
Chairman of the Board
December 26, 1995

<PAGE>

QUESTIONS AND ANSWERS CONCERNING THE FUND

HOW HAS THE FUND'S PORTFOLIO PERFORMED?

The last year was not just a flash in the pan. Over the life of the Fund,
the returns on the portfolio have been very good. The chart below shows the
cumulative return on NAV assuming that all monthly dividends and year-end
distributions were reinvested at NAV. From the start of the Fund on January 31,
1991 through November 30, 1995, $1,000 would have grown to $2,208. That works
out to a return of 17.5% per year on NAV over a span of good and bad years (such
as 1994!).

<TABLE>

Description of the plot points for the graphs in the report.

Preferred Income Fund Incorporated
Increase in $1,000 of PFD Fund Assets Through November 30, 1995

<CAPTION>
Not Adjusted
Month Ended for MMP Fees
- ----------- ------------
<S> <C>
Jan-91 $1,000
Feb-91 $1,039
Mar-91 $1,077
Apr-91 $1,127
May-91 $1,145
Jun-91 $1,136
Jul-91 $1,171
Aug-91 $1,210
Sep-91 $1,238
Oct-91 $1,254
Nov-91 $1,262
Dec-91 $1,307
Jan-92 $1,369
Feb-92 $1,423
Mar-92 $1,446
Apr-92 $1,472
May-92 $1,520
Jun-92 $1,527
Jul-92 $1,573
Aug-92 $1,602
Sep-92 $1,613
Oct-92 $1,615
Nov-92 $1,618
Dec-92 $1,630
Jan-93 $1,659
Feb-93 $1,713
Mar-93 $1,739
Apr-93 $1,761
May-93 $1,774
Jun-93 $1,810
Jul-93 $1,830
Aug-93 $1,850
Sep-93 $1,870
Oct-93 $1,888
Nov-93 $1,874
Dec-93 $1,876
Jan-94 $1,892
Feb-94 $1,901
Mar-94 $1,885
Apr-94 $1,868
May-94 $1,854
Jun-94 $1,860

</TABLE>
<TABLE>

Preferred Income Fund Incorporated
Increase in $1,000 of PFD Fund Assets Through November 30, 1995 (continued)

<CAPTION>
Not Adjusted
Month Ended for MMP Fees
- ----------- ------------
<S> <C>
Jul-94 $1,858
Aug-94 $1,868
Sep-94 $1,837
Oct-94 $1,815
Nov-94 $1,771
Dec-94 $1,777
Jan-95 $1,829
Feb-95 $1,872
Mar-95 $1,884
Apr-95 $1,928
May-95 $2,040
Jun-95 $2,054
Jul-95 $2,057
Aug-95 $2,084
Sep-95 $2,124
Oct-95 $2,165
Nov-95 $2,208

</TABLE>

The Fund's returns on NAV also compare well to the results of its peers as
tracked by Lipper Analytical Services, Inc. ("Lipper"). For the last fiscal
year, the Fund ranked #9 out of 15 specialty income oriented funds, just behind
its two "sister funds." For the four full fiscal years completed so far,
however, the Fund ranked #1 out of 5 such funds then in existence. Lipper's peer
group includes some funds that are different from ours, but it is still a lot
more fun being at the top of the class than the bottom.

The Preferred Income Fund's strong performance throughout both good and bad
markets has been recognized by Morningstar, Inc. with a rating of 4-Stars (out
of a possible 5) for the three year period ended November 30, 1995. Morningstar
evaluates closed-end funds based upon the historical risk

<PAGE>

adjusted performance of a fund versus the returns on U.S. Treasury Bills. Each
fund is then ranked against a combined universe of 212 equity, fixed-income and
hybrid funds. Ten percent of the funds receive five stars, while 22.5% receive
four stars. The ratings are subject to change every month.

IF THE PORTFOLIO HAS DONE SO WELL, WHY ISN'T THE MARKET PRICE OF THE SHARES
HIGHER?

Unlike open-end mutual funds, closed-end funds have two prices, market and
NAV. The market price at which the shares are traded each day on the New York
Stock Exchange is by far the most visible of the two prices. NAV is the actual
value per share of the assets that the Fund holds for its shareholders. It is
published once per week in such places as The Wall Street Journal each Monday
and Barron's. The NAV can also be obtained by calling the Fund's shareholder
servicing agent, First Data Investor Services Group, Inc., at 1-800-331-1710.

When you cut through it all, the market price of the Fund's shares simply
hasn't kept up with their NAV. The following chart shows how the market price
has moved over time from a premium above the NAV to a discount now. As a result,
the strong performance of the Fund's portfolio is not fully reflected in the
market price of the shares. It is a disappointment after a banner year for the
portfolio like 1995.

<TABLE>

Preferred Income Fund Incorporated
Premium/Discount of Market Price to NAV through December 1995

<CAPTION>
Market Premium/
Date NAV Price Discount
<S> <C> <C> <C>
02/08/91 13.95 15.125 8.42%
02/22/91 14.43 15.000 3.95%
02/28/92 17.34 18.000 3.81%
02/26/93 17.76 18.875 6.28%
02/25/94 16.78 15.875 -5.39%
02/24/95 14.13 14.000 -0.92%
12/22/95 15.44 13.500 -12.56%

</TABLE>

<PAGE>

Another part of the explanation is that much of the return earned has been
paid out to shareholders through monthly dividends and special distributions.
The special year-end distributions paid in each previous year frequently seem to
slip shareholders' minds. Since the Fund started, those special distributions
have totaled $5.01 per share above and beyond the regular dividends that would
otherwise have been paid each December.

WHY IS THE MARKET PRICE OF THE FUND'S SHARES AT A DISCOUNT TO NET ASSET VALUE?

These things seem to run in cycles, and closed-end funds are clearly out of
style today. Most such funds, even those that have performed well, are selling
at discounts. Some pessimists say this is the natural fate of closed-end funds,
but we don't buy it. We have yet to see the stone tablet that says assets should
sell at a discount from their actual value because of their packaging.

Most likely, the discounts are a sign that funds that are performing well
aren't getting that message to a large enough audience. Many of the players on
Wall Street have shifted most of their attention to products that are more
fashionable now. That leaves it up to us to spread the word about what we have
accomplished. We hope this is a step toward making that happen. Read on.

WHAT ARE THE BENEFITS OF BEING A CLOSED-END FUND?

We believe we can manage the portfolio better because this is a closed-end
fund. The preferred stock market can be relatively illiquid at times, which
creates many opportunities. Our ability to take advantage of those opportunities
is greatly improved because the Fund is shielded from unpredictable cash flows
in and out of the portfolio that can occur in an open-end fund. Otherwise,
someone else might be able to take advantage of us, which is clearly not what we
want for our shareholders.

Because the Preferred Income Fund is a closed-end fund, it can also use
leverage. It does that by issuing its own Money Market Cumulative Preferred(TM)
Stock. There are risks in leverage, of course; but it has been a very successful
way of increasing income for the common stock of the Fund. Leverage is a key
ingredient in the Fund's unique income strategy.

WHAT MAKES THE FUND'S INCOME STRATEGY UNIQUE?

In plain English, this is what it is all about. We expect the Fund's income
to rise and fall with interest rates. We just want it to go up more when rates
are on the upswing and fall less when rates go down. The Fund and its two sister
funds, the Preferred Income Opportunity Fund and the Preferred Income Management
Fund, are the only funds that follow this approach.

<PAGE>

HOW HAS THE INCOME STRATEGY WORKED?

It has worked even better than we might have hoped. The following chart
shows the history of the Fund's monthly income (on the left hand scale) against
the backdrop of long term interest rates (on the right hand scale). Income has
increased when interest rates were rising, and it has given ground only
begrudgingly when rates were falling. Over the life of the Fund, income is down
only 4.0% while the yield on long term Treasury bonds has fallen from 8.2% to
6.1%, a decline of 25.6%.

<TABLE>

Preferred Income Fund Incorporated
Monthly Dividend Income Through December 31, 1995

<CAPTION>
UST 30
Date Income YTM
<S> <C> <C>
Jan-91 8.16%
Mar-91 8.22%
May-91 $122.50 8.26%
Jul-91 $122.50 8.34%
Sep-91 $125.00 7.81%
Nov-91 $125.00 7.94%
Jan-92 $126.46 7.76%
Mar-92 $126.46 7.96%
May-92 $126.46 7.84%
Jul-92 $126.46 7.46%
Sep-92 $126.46 7.38%
Nov-92 $126.46 7.60%
Jan-93 $127.87 7.19%
Mar-93 $127.87 6.92%
May-93 $127.87 6.98%
Jul-93 $127.87 6.56%
Sep-93 $127.87 6.02%
Nov-93 $127.87 6.30%
Jan-94 $121.76 6.24%
Mar-94 $121.76 7.09%
May-94 $128.67 7.43%
Jul-94 $128.67 7.39%
Sep-94 $128.67 7.82%
Nov-94 $133.06 7.94%
Jan-95 $132.51 7.73%
Mar-95 $132.51 7.43%
May-95 $132.51 6.63%
Jul-95 $125.21 6.90%
Sep-95 $125.21 6.50%
Nov-95 $125.21 6.08%
Dec-95 $117.63 6.08%

</TABLE>

The chart is based on a hypothetical investment in 1,000 shares of the
Fund's common stock at the inception of the Fund. We have assumed that the
shareholder took the regular dividend in cash each month and used only the
amount by which the year-end distributions were above and beyond the regular
dividends to buy additional shares at net asset value.

WHY NOT JUST AIM FOR A HIGH AND STABLE LEVEL OF INCOME?

The real problem with stable income comes when interest rates rise.
Remember the agony that fixed income investors have felt in the past when
inflation and interest rates soared, the market value of their investments fell
and income was left in the dust. With our strategy, we hope that income will
benefit to at least some extent from a rise in interest rates.

<PAGE>

High and stable income is also very hard to get in the real world. Most
issuers of bonds and preferred stocks have the right, sooner or later, to redeem
those securities and to refinance them at lower rates when interest rates fall.
The Preferred Income Fund is not immune to this either. Hopefully, some of the
other things we do will make up for it.

ARE THE FUND'S HEDGES PART OF ITS INCOME STRATEGY?

You bet they are! One good way to increase income when interest rates rise
is to have additional cash to invest at the higher rates. That can happen if the
Fund makes money on its hedges. Hedging has played an important role in the
success of the Fund so far.

Our hedging strategies are actually rather cowardly. We hedge by purchasing
put options on Treasury bond futures contracts. The market value of these put
options should rise if interest rates go up significantly within a relatively
short period of time. On the other hand, the Fund's risk on the put options is
limited to what we pay for them. To keep the cost down, we often buy put options
that are "out-of-the-money." This is something like buying an insurance policy
with a big deductible to keep the premium down.

Hedging also can help cushion a decline in the Fund's NAV. We expect the
market value of the Fund's preferred stock holdings to fall when interest rates
rise. A portion of that decline would be offset if the Fund's hedges also paid
off in that situation. If the Fund were not hedged, we would probably lose more
sleep over being leveraged.

<TABLE>

- ----------------------------------------------------------------------------------------------------------
Preferred Income Fund Incorporated
FINANCIAL DATA
PER SHARE OF COMMON STOCK (UNAUDITED)
- -------------------------------------

<CAPTION>
DIVIDEND
DIVIDEND NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE(1)
-------- --------- ------------- ------------
<S> <C> <C> <C> <C>
December 31, 1994............................ $1.1500 $13.64 $12.500 $13.72
January 31, 1995............................. 0.0980 13.94 13.000 13.63
February 28, 1995............................ 0.0980 14.17 14.000 14.16
March 31, 1995............................... 0.0980 14.16 13.750 13.90
April 30, 1995............................... 0.0980 14.39 14.000 14.19
May 31, 1995................................. 0.0980 15.13 14.250 14.48
June 30, 1995................................ 0.0926 15.14 14.000 14.06
July 31, 1995................................ 0.0926 15.07 13.625 13.71
August 31, 1995.............................. 0.0926 15.25 14.125 14.17
September 30, 1995........................... 0.0926 15.38 14.000 14.06
October 31, 1995............................. 0.0926 15.58 13.625 13.76
November 30, 1995............................ 0.0926 15.80 14.125 14.27
<FN>
- ---------------

(1) See ADDITIONAL INFORMATION; Dividend Reinvestment and Cash Purchase Plan on pages 24 and 25 of this report.

</TABLE>

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1995
----------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ----------- ------------
<C> <S> <C>
PREFERRED STOCK -- 98.7%
ADJUSTABLE RATE PREFERRED STOCK -- 28.2%
UTILITIES -- 8.2%
10,000 Arizona Public Service Company,
Series Q, Adj. Rate Pfd. ..... $ 860,000
50 Delmarva Power & Light Company,
Series A, Adj. Rate Pfd. ..... 4,775
ENSERCH Corporation:
5,200 Series E, Adj. Rate Pfd. ..... 501,800
42,600 Series F, Adj. Rate Pfd. ..... 891,938
47,875 Georgia Power Company,
Series 1993-2 L, Adj. Rate
Pfd. ......................... 1,095,141
14,514 Gulf States Utilities Company,
Series A, Adj. Rate Pfd. ..... 1,393,344
52,000 Illinois Power Company,
Series A, Adj. Rate Pfd. ..... 2,366,000
Niagara Mohawk Power
Corporation:
154,879 Series A, Adj. Rate Pfd. ..... 2,652,303
32,455 Series B, Adj. Rate Pfd. ..... 628,816
88,745 Series C, Adj. Rate Pfd. ..... 1,697,248
Northern States Power Company:
4,150 Series A, Adj. Rate Pfd. ..... 400,475
6,000 Series B, Adj. Rate Pfd. ..... 579,000
14,600 Puget Sound Power & Light
Company,
Series B, Adj. Rate Pfd. ..... 324,850
43,000 Texas Utilities Electric
Company,
Series A, Adj. Rate Pfd. ..... 4,203,250
-----------
TOTAL UTILITY ADJUSTABLE RATE
PREFERRED STOCK............... 17,598,940
-----------
BANKING -- 20.0%
Bank of Boston Corporation:
62,800 Series B, Adj. Rate Pfd. ..... 2,873,100
30,400 Series C, Adj. Rate Pfd. ..... 2,523,200
54,300 BankAmerica Corporation,
Series B, Adj. Rate Pfd. ..... 5,029,538
Bankers Trust New York
Corporation:
25,000 Series Q, Adj. Rate Pfd. ..... 542,187
43,050 Series R, Adj. Rate Pfd. ..... 922,884
89,850 Citicorp,
Second Series, Adj. Rate
Pfd. ......................... 8,333,588

</TABLE>

<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ----------- ------------
<C> <S> <C>
PREFERRED STOCK (CONTINUED)
ADJUSTABLE RATE PREFERRED STOCK (CONTINUED)
BANKING (CONTINUED)
First Chicago Corporation:
92,925 Series B, Adj. Rate Pfd. ..... $ 8,502,637
8,300 Series C, Adj. Rate Pfd. ..... 825,311
59,285 First Fidelity Bancorporation,
Series D, Adj. Rate Pfd. ..... 5,884,036
21,100 Fleet Financial Group, Inc.
Adj. Rate Pfd. ............... 1,002,250
72,200 Marine Midland Banks, Inc.,
Series A, Adj. Rate Pfd. ..... 3,402,425
34,200 Morgan (J.P.) & Company Inc.,
Series A, Adj. Rate Pfd. ..... 2,761,650
-----------
TOTAL BANKING ADJUSTABLE RATE
PREFERRED STOCK............... 42,602,806
-----------
TOTAL ADJUSTABLE RATE
PREFERRED STOCK............... 60,201,746
-----------
FIXED RATE PREFERRED STOCK -- 70.5%
UTILITIES -- 43.1%
Alabama Power Company:
129,000 Class A, 6.40% Pfd............ 3,234,675
58,000 Series 1992 A, 7.60% Pfd. .... 1,508,000
48,700 Arizona Public Service Company,
Series W, $1.8125 Pfd. ....... 1,235,762
Baltimore Gas & Electric
Company:
43,250 6.99% Pfd. ................... 4,725,062
31,000 Series 1993, 6.70% Pfd. ...... 3,266,625
5,000 Central Hudson Gas & Electric
Corporation,
Series D, 4.35% Pfd. ......... 331,875
Consolidated Edison Company of
New York, Inc.:
23,699 Series A, $5.75 PVT Pfd. ..... 2,047,001
8,000 Series B, 5.25% Pfd. ......... 632,000
26,143 Series E, 5.75% Pfd. ......... 2,405,156
128,747 Consumers Power Company, Class
A, 8.32% Pfd. ................ 3,315,235
3,400 Delmarva Power & Light Company,
6.75% Pfd. ................... 358,275
</TABLE>

See Notes to Financial Statements.

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1995
- ------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ----------- ------------
<C> <S> <C>
PREFERRED STOCK (CONTINUED)
FIXED RATE PREFERRED STOCK (CONTINUED)
UTILITIES (CONTINUED)
Detroit Edison Company:
7,300 7.36% Pfd. ................... $ 751,900
8,880 7.45% Pfd. ................... 914,640
4,700 7.68% Pfd. ................... 484,100
80,400 7.75% Pfd. ................... 2,070,300
Duke Power Company:
13,100 Series 1993 A, 6.375% Pfd. ... 329,138
5,000 Series S, 7.85% Pfd. ......... 556,250
13,375 Series W, 7.00% Pfd. ......... 1,449,516
24,000 Series Y, 7.04% Pfd. ......... 2,607,000
Florida Power & Light Company:
29,250 Series S, 6.98% Pfd. ......... 3,133,406
38,350 Series T, 7.05% Pfd. ......... 4,122,625
22,000 Series U, 6.75% Pfd. ......... 2,304,500
8,000 Gulf Power Company,
Series A, 7.00% Pfd. ......... 213,000
6,805 Gulf States Utilities Company,
$9.96 Pfd. ................... 702,616
Illinois Power Company:
7,250 4.42% Pfd. ................... 236,531
9,000 8.24% Pfd. ................... 472,500
26,220 Series E, 4.70% Pfd. ......... 907,868
8,570 Indiana-Michigan Power Company,
7.08% Pfd. ................... 877,354
Louisiana Power & Light Company:
40,610 8.00% Pfd. ................... 1,035,555
46,900 9.68% Pfd. ................... 1,219,400
Mississippi Power Company:
10,500 6.32% Pfd. ................... 263,812
20,000 7.25% Pfd. ................... 520,000
Mississippi Power & Light
Company:
12,436 4.92% Pfd. ................... 845,648
6,000 8.36% Pfd. ................... 632,250
8,500 Monongahela Power Company,
Series L, $7.73 Pfd. ......... 946,687
7,900 Montana Power Company,
$6.875 Pfd. .................. 820,613
12,700 Nevada Power Company,
9.90% Sinking Fund Pfd. ...... 1,412,081

</TABLE>

<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ----------- ------------
<C> <S> <C>
PREFERRED STOCK (CONTINUED)
FIXED RATE PREFERRED STOCK (CONTINUED)
UTILITIES (CONTINUED)
5,000 New York State Electric & Gas
Corporation,
6.30% Sinking Fund Pfd. ...... $ 512,500
Niagara Mohawk Power
Corporation:
37,600 7.85% Sinking Fund Pfd. ...... 897,700
58,135 9.50% Pfd. ................... 1,390,880
3,500 Northern Indiana Public Service
Company,
7.44% Pfd. ................... 360,937
5,000 Northern States Power Company,
$7.00 Pfd. ................... 520,625
6,170 Ohio Edison Company,
4.44% Pfd. ................... 370,971
PSI Energy, Inc.:
4,850 6.875% Pfd. .................. 501,369
167,182 7.44% Pfd. ................... 4,284,039
18,400 Pennsylvania Power Company,
7.75% Pfd. ................... 1,819,300
38,000 Pennsylvania Power & Light
Company, $6.75 Pfd. .......... 3,899,750
10,000 Public Service Company of New
Mexico,
4.58% PVT Pfd. ............... 561,250
Public Service Electric & Gas
Company:
7,000 4.08% Pfd. ................... 429,625
18,457 5.05% Pfd. ................... 1,400,425
9,300 5.28% Pfd. ................... 737,025
71,500 Puget Sound Power & Light
Company, 7.875% Pfd. ......... 1,823,250
San Diego Gas & Electric
Company:
5,000 $7.20 Pfd. ................... 515,625
140,000 6.80% Pfd. ................... 3,657,500
Texas Utilities Electric
Company:
8,000 $2.05 Pfd. ................... 215,500
8,000 $4.64 Pfd. ................... 566,000
8,300 $7.98 Pfd. ................... 919,225
53,600 7.22% Pfd. ................... 1,470,650
35,450 7.50% Pfd. ................... 981,522
</TABLE>

See Notes to Financial Statements.

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1995
------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ----------- ------------
<C> <S> <C>
PREFERRED STOCK (CONTINUED)
FIXED RATE PREFERRED STOCK (CONTINUED)
UTILITIES (CONTINUED)
4,000 Union Electric Company,
$7.64 Pfd. ................... $ 444,500
12,500 United Water Resource Inc.,
Series B, 7.625% Sinking Fund
Pfd. ......................... 1,293,750
Virginia Electric & Power
Company:
17,700 $6.98 Pfd. ................... 1,891,687
39,060 $7.05 Pfd. ................... 4,198,950
98,200 Washington Natural Gas Company,
Series II, 7.45% Pfd. ........ 2,565,475
7,500 Wisconsin Power & Light Company,
6.20% Pfd. ................... 758,438
-----------
TOTAL UTILITY FIXED RATE
PREFERRED STOCK............... 91,877,424
-----------
BANKING -- 18.2%
50,000 Ahmanson (H.F.) & Company,
Series C, 8.40% Pfd. ......... 1,300,000
67,900 Bank of Boston Corporation,
Series E, 8.60% Pfd. ......... 1,748,425
67,300 Bank of New York Company, Inc.,
Series B, 8.60% Pfd. ......... 1,754,006
BankAmerica Corporation:
35,400 Series L, 8.16% Pfd. ......... 909,338
23,000 Series M, 7.875% Pfd. ........ 585,062
28,200 Series N, 8.50% Pfd. ......... 736,725
Chase Manhattan Corporation:
5,000 Series G, 10.50% Pfd. ........ 144,375
25,600 Series H, 9.76% Pfd. ......... 731,200
142,089 Series I, 10.84% Pfd. ........ 4,386,998
40,000 Series J, 9.08% Pfd. ......... 1,060,000
138,557 Series M, 8.40% Pfd. ......... 3,663,101
Chemical Banking Corporation:
5,000 Series G, 10.96% Pfd. ........ 153,125
26,400 Series H, 8.375% Pfd. ........ 688,050
111,800 Series I, 7.92% Pfd. ......... 2,899,812
223,755 Series J, 7.58% Pfd. ......... 5,719,737
36,600 Citicorp,
Series 22, 7.75% Pfd. ........ 951,600

</TABLE>

<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ----------- ------------
<C> <S> <C>
PREFERRED STOCK (CONTINUED)
FIXED RATE PREFERRED STOCK (CONTINUED)
BANKING (CONTINUED)
12,500 First Chicago Corporation,
Series E, 8.45% Pfd. ......... $ 329,687
10,100 First Fidelity Bancorporation,
10.64% Pfd. .................. 260,075
First Interstate Bancorp:
15,000 Series F, 9.875% Pfd. ........ 398,438
26,005 Series G, 9.00% Pfd. ......... 690,758
Fleet Financial Group, Inc.:
68,100 9.35% Pfd. ................... 1,911,056
12,500 Series B, 10.12% Pfd. ........ 339,062
63,000 Great Western Financial
Corporation,
8.30% Pfd. ................... 1,626,188
45,000 KeyCorp,
Series A, 10.00% Pfd. ........ 1,189,687
148,000 MBNA Corporation,
Series A, 7.50% Pfd. ......... 3,690,750
15,000 Republic New York Corporation,
Series C, $1.9375 Pfd. ....... 386,250
20,000 U.S. Bancorp,
Series A, 8.125% Pfd. ........ 515,000
-----------
TOTAL BANKING FIXED RATE
PREFERRED STOCK............... 38,768,505
-----------
FINANCIAL SERVICES -- 5.0%
Ford Holdings, Inc.:
53,540 Series A, 8.00% Pfd. ......... 1,348,539
70,010 Series B, 8.00% Pfd. ......... 1,763,377
25,000 Series C, 7.12% Pfd. ......... 626,563
64,920 Series D, 8.10% Pfd. ......... 1,635,172
Household International, Inc.:
15,200 Series 1992 A, 8.25% Pfd. .... 418,950
95,200 Series 1993 A, 7.35% Pfd. .... 2,439,500
79,600 Merrill Lynch & Company, Inc.,
Series A, 9.00% Pfd. ....... 2,323,325
-----------
TOTAL FINANCIAL SERVICES FIXED
RATE PREFERRED STOCK.......... 10,555,426
-----------
</TABLE>

See Notes to Financial Statements.

<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ----------- ------------
<C> <S> <C>
PREFERRED STOCK (CONTINUED)
FIXED RATE PREFERRED STOCK (CONTINUED)
INSURANCE -- 1.3%
80,000 AON Corporation,
8.00% Pfd. ................... $ 2,060,000
26,288 Berkley (W.R.) Corporation,
Series A, 7.375% Pfd. ........ 652,600
------------
TOTAL INSURANCE FIXED RATE
PREFERRED STOCK............... 2,712,600
------------
OTHER -- 2.9%
9,520 Dial Corporation, $4.75 Sinking
Fund Pfd. .................... 616,420
204,500 Ford Motor Company, Series B,
8.25% Pfd. ................... 5,623,750
------------
TOTAL OTHER FIXED RATE
PREFERRED STOCK............... 6,240,170
------------
TOTAL FIXED RATE PREFERRED
STOCK......................... 150,154,125
------------
TOTAL PREFERRED STOCK
(Cost $194,788,551)........... 210,355,871
------------
</TABLE>

<TABLE>
<CAPTION>
VALUE
(NOTE 1)
------------
<C> <S> <C>
MISCELLANEOUS SECURITIES -- 0.2% (Cost $1,357,404)
Put Options on U.S. Treasury
Bond Futures.................. $ 371,722
------------
TOTAL INVESTMENTS (Cost $196,145,955*).. 98.9% 210,727,593
OTHER ASSETS AND LIABILITIES (Net)...... 1.1 2,325,642
----- ------------
NET ASSETS..............................100.0% $213,053,235
===== ============
<FN>
- ---------------

* Aggregate cost for Federal tax purposes is $195,412,278.

</TABLE>

See Notes to Financial Statements.

<PAGE>
<TABLE>
- --------------------------------------------------------------------------------------------------
Preferred Income Fund Incorporated
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1995
-----------------------------------

<S> <C> <C>
ASSETS:
Investments, at value (Cost $196,145,955) (Note 1)
See accompanying schedule................................ $210,727,593
Cash....................................................... 1,087,272
Receivable for securities sold............................. 2,106,336
Dividends receivable....................................... 1,995,128
Prepaid expense............................................ 21,560
Unamortized organization costs (Note 6).................... 3,833
------------
Total Assets.......................................... 215,941,722
LIABILITIES:
Payable for securities purchased........................... $ 2,262,092
Dividends payable.......................................... 371,271
Investment advisory fee payable (Note 2)................... 97,375
Accrued expenses and other payables........................ 157,749
-----------
Total Liabilities..................................... 2,888,487
------------
NET ASSETS...................................................... $213,053,235
============
NET ASSETS consist of:
Undistributed net investment income (Note 1)............... $ 143,497
Accumulated net realized loss on investments sold
(Note 1)................................................. (1,045,010)
Unrealized appreciation of investments..................... 14,581,638
Par value of Common Stock.................................. 98,386
Paid-in capital in excess of par value of Common Stock..... 141,774,724
Money Market Cumulative Preferred(TM) Stock (Note 5)....... 57,500,000
------------
Total Net Assets...................................... $213,053,235
============
PER SHARE
-----------
NET ASSETS AVAILABLE TO:
Money Market Cumulative Preferred(TM) Stock (575 shares
outstanding) redemption value............................ $100,000.00 $ 57,500,000
Accumulated undeclared dividends on Money Market Cumulative
Preferred(TM) Stock...................................... 262.17 150,746
----------- ------------
$100,262.17 57,650,746
===========
Common Stock (9,838,571 shares outstanding)................ $ 15.80 155,402,489
=========== ------------

TOTAL NET ASSETS................................................ $213,053,235
============
</TABLE>

See Notes to Financial Statements.

<PAGE>
<TABLE>
- --------------------------------------------------------------------------------------------------
Preferred Income Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 1995
- ------------------------------------

<S> <C> <C>
INVESTMENT INCOME:
Dividends................................................... $16,703,420
Interest.................................................... 178,968
-----------
Total Investment Income................................ 16,882,388
EXPENSES:
Investment advisory fee (Note 2)............................ $1,138,595
Administration fee (Note 2)................................. 385,166
Shareholder servicing agent fees (Note 2)................... 148,492
Money Market Cumulative Preferred(TM) broker commissions
and Auction Agent fees.................................... 145,756
Insurance expense........................................... 105,640
Economic consulting fee (Note 2)............................ 75,000
Legal and audit fees........................................ 68,992
Custodian fees (Note 2)..................................... 51,458
Directors' fees and expenses (Note 2)....................... 46,242
Amortization of deferred organization costs (Note 6)........ 19,000
Other....................................................... 64,716
----------
Total Expenses......................................... 2,249,057
-----------
NET INVESTMENT INCOME............................................ 14,633,331
-----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(Notes 1 and 3):
Net realized loss on investments sold during the year....... (2,440,261)
Change in net unrealized appreciation/(depreciation) of
investments during the year............................... 22,527,612
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS.................. 20,087,351
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............. $34,720,682
===========
</TABLE>

See Notes to Financial Statements.

<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------
Preferred Income Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS
----------------------------------

<CAPTION>
YEAR ENDED YEAR ENDED
NOVEMBER 30, 1995 NOVEMBER 30, 1994
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income........................................ $ 14,633,331 $ 13,893,525
Net realized gain/(loss) on investments sold during the
year....................................................... (2,440,261) 10,701,042
Change in net unrealized appreciation/(depreciation) of
investments during the year................................ 22,527,612 (30,729,532)
------------ ------------
Net increase/(decrease) in net assets resulting from
operations................................................. 34,720,682 (6,134,965)
DISTRIBUTIONS:
Dividends paid from net investment income to Money Market
Cumulative Preferred(TM) Stock Shareholders (Note 5)....... (2,572,041) (1,571,219)
Distributions paid from net realized capital gains to Money
Market Cumulative Preferred(TM) Stock Shareholders
(Note 5)................................................... (87,731) (665,100)
Dividends paid from net investment income to Common Stock
Shareholders............................................... (13,352,608) (10,975,366)
Distributions paid from net realized capital gains to Common
Stock Shareholders......................................... (8,002,477) (15,036,290)
FUND SHARE TRANSACTIONS:
Increase from Common Stock transactions (Note 4)............. 2,961,204 7,873,592
------------ ------------
Net increase/(decrease) in net assets................... 13,667,029 (26,509,348)
NET ASSETS:
Beginning of year................................................. 199,386,206 225,895,554
------------ ------------
End of year (including undistributed net investment income of
$143,497 and $1,434,815, respectively).......................... $213,053,235 $199,386,206
============ ============
</TABLE>

See Notes to Financial Statements.

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH YEAR.
- ----------------------------------------------------
<TABLE>

Contained below is per share operating performance data, total investment returns, ratios to average net assets and other
supplemental data. This information has been derived from information provided in the financial statements and market price data for
the Fund's shares.

<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1995 1994 1993 1992 1991*
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of year.......... $ 14.74 $ 18.39 $ 18.59 $ 16.56 $ 13.95
-------- -------- -------- -------- --------
Net investment income....................... 1.48 1.42 1.48 1.75 1.43
Net realized and unrealized gain/(loss) on
investments............................... 2.05 (2.06) 1.37 2.82 2.67
-------- -------- -------- -------- --------
Net increase/(decrease) in net asset value
resulting from investment operations...... 3.53 (0.64) 2.85 4.57 4.10
Offering costs and Money Market Cumulative
Preferred(TM) Stock underwriting
commissions charged to paid-in capital.... -- -- -- -- (0.27)
DISTRIBUTIONS:
Dividends paid from net investment income to
Money Market Cumulative Preferred(TM)
Stock Shareholders........................ (0.26) (0.16) (0.12) (0.17) (0.15)
Distributions paid from net realized capital
gains to Money Market Cumulative
Preferred(TM) Stock Shareholders.......... (0.01) (0.07) (0.07) (0.09) (0.04)
Dividends paid from net investment income to
Common Stock Shareholders................. (1.36) (1.15) (1.34) (1.72) (0.99)
Distributions paid from net realized capital
gains to Common Stock Shareholders........ (0.83) (1.64) (1.51) (0.59) --
Change in accumulated undeclared dividends
on Money Market Cumulative Preferred(TM)
Stock..................................... (0.01) 0.01 (0.01) 0.03 (0.04)
-------- -------- -------- -------- --------
Total distributions......................... (2.47) (3.01) (3.05) (2.54) (1.22)
-------- -------- -------- -------- --------
Net asset value, end of year................ $ 15.80 $ 14.74 $ 18.39 $ 18.59 $ 16.56
======== ======== ======== ======== ========
Market value, end of year................... $ 14.125 $ 13.500 $ 18.375 $ 19.625 $ 17.875
======== ======== ======== ======== ========
Total investment return based on net asset
value***.................................. 25.13% (5.22)% 15.54% 27.70% 26.16%
======== ======== ======== ======== ========
Total investment return based on market
value***.................................. 22.14% (13.12)% 9.33% 24.89% 26.68%
======== ======== ======== ======== ========
Net assets, end of year (in 000's).......... $213,053 $199,386 $225,896 $214,593 $187,928
======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO
COMMON STOCK SHAREHOLDERS/SUPPLEMENTAL
DATA:
Net investment income..................... 8.33% 7.55% 7.33% 8.58% 9.18%**
Operating expenses........................ 1.55% 1.52% 1.50% 1.63% 1.67%**
Portfolio turnover rate................... 94% 98% 110% 86% 90%
<FN>
- ---------------

* The Fund commenced operations on January 31, 1991.
** Annualized.
*** Assumes reinvestment of distributions.

</TABLE>
See Notes to Financial Statements.

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS (CONTINUED)
----------------------------------
<TABLE>
The table below sets out information with respect to Money Market
Cumulative Preferred(TM) Stock currently outstanding.

<CAPTION>
INVOLUNTARY AVERAGE
ASSET LIQUIDATING MARKET
TOTAL SHARES COVERAGE PREFERENCE VALUE
OUTSTANDING PER SHARE PER SHARE(1) PER SHARE(1 & 2)
------------ --------- ------------- ----------------
<S> <C> <C> <C> <C>
11/30/95 575 $370,527 $100,000 $100,000
11/30/94 575 346,759 100,000 100,000
11/30/93 575 392,862 100,000 100,000
11/30/92 575 373,205 100,000 100,000
11/30/91 575 326,832 100,000 100,000
<FN>
- ---------------

(1) Excludes accumulated undeclared dividends.
(2) See Note 5.

</TABLE>
See Notes to Financial Statements.

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS
- ----------------------------------

1. SIGNIFICANT ACCOUNTING POLICIES

Preferred Income Fund Incorporated (the "Fund") is a diversified,
closed-end management investment company organized as a Maryland corporation on
September 28, 1990 and is registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, as amended. The Fund commenced
operations on January 31, 1991. The policies described below are followed
consistently by the Fund in the preparation of its financial statements in
conformity with generally accepted accounting principles.

Portfolio valuation: The net asset value of the Fund's Common Stock is
determined by the Fund's administrator no less frequently than on the last
business day of each week and month. It is determined by dividing the value of
the Fund's net assets attributable to common shares by the number of shares of
Common Stock outstanding. The value of the Fund's net assets attributable to
common shares is deemed to equal the value of the Fund's total assets less (i)
the Fund's liabilities, (ii) the aggregate liquidation value of the outstanding
Money Market Cumulative Preferred(TM) Stock and (iii) accumulated and unpaid
dividends on the outstanding Money Market Cumulative Preferred(TM) Stock.
Securities listed on a national securities exchange are valued on the basis of
the last sale on such exchange on the day of valuation. In the absence of sales
of listed securities and with respect to securities for which the most recent
sale prices are not deemed to represent fair market value and unlisted
securities (other than money market instruments), securities are valued at the
mean between the closing bid and asked prices when quoted prices for investments
are readily available. Investments for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Fund, including reference to
valuations of other securities which are considered comparable in quality,
maturity and type. Investments in money market instruments, which mature in 60
days or less, are valued at amortized cost.

Securities transactions and investment income: Securities transactions are
recorded as of the trade date. Realized gains and losses from securities sold
are recorded on the identified cost basis. Dividend income is recorded on
ex-dividend dates. Interest income is recorded on the accrual basis.

Option accounting principles: Upon the purchase of a put option by the
Fund, the total purchase price paid is recorded as an investment. The market
valuation is determined as set forth in the second preceding paragraph. When the
Fund enters into a closing sale transaction, the Fund will record a gain or loss
depending on the difference between the purchase and sale price. The risks
associated with purchasing options and the maximum loss the Fund would incur are
limited to the purchase price originally paid.

Repurchase Agreements: The Fund may engage in repurchase agreement
transactions. The Fund's Board of Directors reviews and approves periodically
the eligibility of the banks and dealers with which the Fund enters into
repurchase agreement transactions. The value of the collateral underlying such
transactions is at least equal at all times to the total amount of the
repurchase obligations, including interest. The Fund maintains possession of the
collateral and, in the event of counterparty default, the

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------

Fund has the right to use the collateral to offset losses incurred. There is the
possibility of loss to the Fund in the event the Fund is delayed or prevented
from exercising its rights to dispose of the collateral securities.

Dividends and distributions to shareholders: The Fund expects to declare
dividends on a monthly basis to shareholders of Common Stock. The shareholders
of Money Market Cumulative Preferred(TM) Stock are entitled to receive
cumulative cash dividends as declared by the Fund's Board of Directors.
Distributions to shareholders are recorded on the ex-dividend date. Any net
realized short-term capital gains will be distributed to shareholders at least
annually. Any net realized long-term capital gains may be distributed to
shareholders at least annually or may be retained by the Fund as determined by
the Fund's Board of Directors. Capital gains retained by the Fund are subject to
tax at the corporate tax rate. Any taxes paid by the Fund on such net realized
long-term gains may be used by the Fund's Common Stock Shareholders as a credit
against their own tax liabilities subject to the Fund qualifying as a regulated
investment company as described in the following paragraph.

Federal income taxes: The Fund intends to qualify as a regulated
investment company by complying with the requirements under subchapter M of the
Internal Revenue Code of 1986, as amended, applicable to regulated investment
companies and intends to distribute substantially all of its taxable net
investment income to its shareholders. Therefore, no Federal income tax
provision is required.

Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principals. These differences are primarily due to differing
treatments of income and gains on various investment securities held by the
Fund, timing differences and the differing characterization of distributions
made by the Fund.

2. INVESTMENT ADVISORY FEE, DIRECTORS' FEES, ECONOMIC CONSULTING FEE,
ADMINISTRATION FEE AND TRANSFER AGENT FEE

Flaherty & Crumrine Incorporated (the "Adviser") serves as the Fund's
Investment Adviser. The Fund pays the Adviser a monthly fee at an annual rate of
0.625% of the value of the Fund's average monthly net assets up to $100 million
and 0.50% of the value of the Fund's average monthly net assets in excess of
$100 million.

The Fund currently pays each Director who is not a director, officer or
employee of the Adviser a fee of $9,000 per annum, plus $500 for each in-person
meeting of the Board of Directors or any committee and $100 for each telephone
meeting. In addition, the Fund will reimburse all Directors for travel and out-
of-pocket expenses incurred in connection with such meetings.

Economic Advisors, Inc. ("Economic Advisors"), an indirect, wholly owned
subsidiary of Lehman Brothers Inc., serves as the Fund's Economic Consultant.
The Fund pays Economic Advisors an annual fee equal to $75,000 for services
provided.

<PAGE>

First Data Investor Services Group, Inc. ("FDISG") (formerly The
Shareholder Services Group, Inc.), a wholly owned subsidiary of First Data
Corporation, serves as the Fund's Administrator and Transfer Agent. As
Administrator, FDISG calculates the net asset value of the Fund's shares and
generally assists in all aspects of the Fund's administration and operation. As
compensation for FDISG's services as Administrator, the Fund currently pays
FDISG a monthly fee at an annual rate of 0.19% of the value of the Fund's
average monthly net assets. Boston Safe Deposit and Trust Company ("Boston
Safe"), a wholly owned subsidiary of Mellon Bank Corporation, serves as the
Fund's Custodian. As compensation for Boston Safe's services as Custodian, the
Fund currently pays Boston Safe a monthly fee at an annual rate of 0.02% of the
value of the Fund's average monthly net assets. FDISG also serves as the Fund's
common stock servicing agent (transfer agent), dividend-paying agent and
registrar, and as compensation for FDISG's services as transfer agent, the Fund
currently pays FDISG a fee at an annual rate of 0.04% of the value of the Fund's
average monthly net assets plus certain out-of-pocket expenses. If, however, the
net assets of the Fund fall below $166,000,000, the fee will increase to an
annual rate of 0.05% of the value of the Fund's average monthly net assets.

Chemical Bank ("Auction Agent") serves as the Fund's Money Market
Cumulative Preferred(TM) Stock transfer agent, registrar, dividend disbursing
agent and redemption agent.

3. PURCHASES AND SALES OF SECURITIES

Cost of purchases and proceeds from sales of securities for the year ended
November 30, 1995, excluding short-term investments, aggregated $186,584,438 and
$192,609,618, respectively.

At November 30, 1995, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $17,048,581
and aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over value was $1,733,266.

4. COMMON STOCK

At November 30, 1995, 240,000,000 shares of $0.01 par value Common Stock
were authorized.

<TABLE>
Common Stock transactions were as follows:

<CAPTION>
YEAR ENDED YEAR ENDED
11/30/95 11/30/94
--------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
------- ----------- ------- ----------
<S> <C> <C> <C> <C>
Issued as reinvestment of dividends under the Dividend
Reinvestment and Cash Purchase Plan................. 214,425 $2,961,204 473,182 $7,873,592
======= ========== ======== ==========
</TABLE>

5. MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK

The Fund's Articles of Incorporation authorize the issuance of up to
10,000,000 shares of $0.01 par value preferred stock. On April 17, 1991, the
Fund received proceeds from the public offering of 575

<PAGE>

shares of Money Market Cumulative Preferred(TM) Stock of $57,500,000 before
offering costs of $234,375 and underwriting discounts and commissions paid
directly to Lehman Brothers Inc. of $1,006,250. The Money Market Cumulative
Preferred(TM) Stock is senior to the Common Stock and results in the financial
leveraging of the Common Stock. Such leveraging tends to magnify both the risks
and opportunities to Common Stock Shareholders. Dividends on shares of Money
Market Cumulative Preferred(TM) Stock are cumulative.

The Fund is required to meet certain asset coverage tests with respect to
the Money Market Cumulative Preferred(TM) Stock. If the Fund fails to meet these
requirements and does not correct such failure, the Fund may be required to
redeem, in part or in full, Money Market Cumulative Preferred(TM) Stock at a
redemption price of $100,000 per share plus an amount equal to the accumulated
and unpaid dividends on such shares in order to meet these requirements.
Additionally, failure to meet the foregoing asset requirements could restrict
the Fund's ability to pay dividends to Common Stock Shareholders and could lead
to sales of portfolio securities at inopportune times.

If the Fund allocates any net gains or income ineligible for the Dividends
Received Deduction to shares of the Money Market Cumulative Preferred(TM) Stock,
the Fund may be required to make additional distributions to Money Market
Cumulative Preferred(TM) Stock Shareholders or to pay a higher dividend rate in
amounts needed to provide a return, net of tax, equal to the return had such
originally paid dividends been eligible for the Dividends Received Deduction. On
December 27, 1994, the Fund declared an additional distribution payable December
28, 1994 to Money Market Cumulative Preferred(TM) Stock Shareholders of $203,694
attributable to fiscal year 1994 as required by the Fund's Articles
Supplementary. This additional distribution was required to reflect the fact
that the original distributions paid between December 1, 1993 and November 30,
1994 did not qualify 100% for the corporate Dividends Received Deduction.

An auction of the Money Market Cumulative Preferred(TM) Stock is generally
held every 49 days. Existing shareholders may submit an order to hold, bid or
sell such shares at par value on each auction date. Money Market Cumulative
Preferred(TM) Stock Shareholders may also trade shares in the secondary market
between auction dates.

At November 30, 1995, 575 shares of Money Market Cumulative Preferred(TM)
Stock were outstanding at the annual rate of 4.290%. The dividend rate, as set
by the auction process, is generally expected to vary with short-term interest
rates. These rates may vary in a manner unrelated to the income received on the
Fund's assets, which could have either a beneficial or detrimental impact on net
investment income and gains available to Common Stock Shareholders. While the
Fund expects to structure the portfolio holdings and hedging transactions to
lessen such risks to Common Stock Shareholders, there can be no assurance that
such results will be attained.

<PAGE>

6. ORGANIZATION COSTS

Costs incurred by the Fund in connection with its organization and initial
public offering of Common Stock and Money Market Cumulative Preferred(TM) Stock
were $75,000 and $20,000, respectively, and are being amortized on a
straight-line basis over a five year period beginning January 31, 1991 (the date
of the Fund's commencement of investment operations) and April 17, 1991 (the
date of the issuance of the Fund's Money Market Cumulative Preferred(TM) Stock),
respectively.

7. PORTFOLIO INVESTMENTS, CONCENTRATION AND INVESTMENT QUALITY

The Fund invests primarily in adjustable and fixed rate preferred stocks.
Under normal market conditions, the Fund invests at least 25% of its assets in
securities issued by utilities and at least 25% of its assets in securities
issued by companies in the banking industry. The Fund's portfolio may therefore
be subject to greater risk and market fluctuation than a portfolio of securities
representing a broader range of investment alternatives. The risks could
adversely affect the ability and inclination of companies in these industries to
declare and pay dividends or interest and the ability of holders of securities
of such companies to realize any value from the assets of the issuer upon
liquidation or bankruptcy. The Fund may invest up to 15% of its assets at the
time of purchase in securities rated below investment grade, provided that no
such investment may be rated below both "Ba" by Moody's Investors Service, Inc.
and "BB" by Standard & Poor's Corporation or judged to be comparable in quality
at the time of purchase; however, any such securities must be issued by an
issuer having an outstanding class of senior debt rated investment grade. The
Fund's investment policy regarding debt securities was amended on July 21, 1995.
The amended policy allows the Fund to invest up to 35% of its assets in Monthly
Income Preferred Shares ("MIPS") and Quarterly Income Debt Securities ("QUIDS"),
and similarly-structured instruments, subject to the quality standards set forth
above.

8. SPECIAL INVESTMENT TECHNIQUES

The Fund may employ certain investment techniques in accordance with its
fundamental investment policies. These may include the use of when-issued and
delayed delivery transactions. Securities purchased or sold on a when-issued or
delayed delivery basis may be settled within 45 days after the date of the
transaction. Such transactions may expose the Fund to credit and market
valuation risk greater than that associated with regular trade settlement
procedures. The Fund may also enter into transactions, in accordance with its
fundamental investment policies, involving any or all of the following: lending
of portfolio securities, short sales of securities, futures contracts, options
on futures contracts, and options on securities. With the exception of
purchasing securities on a when-issued or delayed delivery basis or lending
portfolio securities, these transactions are used for hedging or other
appropriate risk-management purposes or, under certain other circumstances, to
increase income. As of November 30, 1995, the Fund owned put options on U.S.
Treasury bond futures contracts. No assurance can be given that such
transactions will achieve their desired purposes or will result in an overall
reduction of risk to the Fund.

<PAGE>

9. CAPITAL LOSS CARRYFORWARD

At November 30, 1995, the Fund had available capital loss carryforwards of
$1,725,143 to offset future realized net gains through the fiscal year ending
November 30, 2003.

10. SUBSEQUENT EVENT

On December 11, 1995, the Fund declared a dividend of $0.087 per share (all
of which represents a dividend from net investment income to Common Stock
Shareholders of record December 21, 1995), payable December 29, 1995.

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors
of Preferred Income Fund Incorporated:

We have audited the accompanying statement of assets and liabilities of the
Preferred Income Fund Incorporated, including the schedule of portfolio
investments, as of November 30, 1995 and 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
four years in the period then ended and for the period from January 31, 1991
(commencement of operations) to November 30, 1991. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

We conducted our audits 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
November 30, 1995 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 audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the Preferred Income Fund Incorporated as of November 30, 1995, 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 four years in the period then ended and for the period from
January 31, 1991 (commencement of operations) to November 30, 1991, in
conformity with generally accepted accounting principles.

Coopers & Lybrand L.L.P.

Boston, Massachusetts
January 4, 1996

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
TAX INFORMATION (UNAUDITED)
----------------------------------

For tax purposes, all of the dividends paid to both Common Stock
Shareholders and Money Market Cumulative Preferred(TM) Stock Shareholders
attributable to fiscal year ended November 30, 1995 are expected to be taxable
as ordinary income. For the fiscal year ended November 30, 1995, 100% of total
distributions qualify for the Dividends Received Deduction for eligible
corporate investors.

For the calendar year ended December 31, 1995, 100% of all dividends paid
to Common Stock Shareholders qualifies for the Dividends Received Deduction for
eligible corporate investors. Shareholders should refer to Form 1099 when
preparing their tax returns to determine the appropriate tax treatment of the
distributions they received from the Fund in calendar year 1995.

<TABLE>
- -----------------------------------------------------------------------------------------------------
Preferred Income Fund Incorporated
QUARTERLY RESULTS OF INVESTMENT OPERATIONS (UNAUDITED)
------------------------------------------------------

<CAPTION>
AVAILABLE TO COMMON STOCK SHAREHOLDERS
----------------------------------------------------------------
NET REALIZED NET INCREASE/
AND UNREALIZED (DECREASE) IN
NET INVESTMENT GAIN/(LOSS) NET ASSETS FROM
INVESTMENT INCOME INCOME ON INVESTMENTS OPERATIONS
------------------- ------------------- --------------------- --------------------
QUARTER PER PER PER PER
ENDED TOTAL SHARE* TOTAL SHARE* TOTAL SHARE* TOTAL SHARE*
- ----------- ---------- ------- ---------- ------- ------------ ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
02/28/94 $3,991,490 $0.42 $2,775,369 $0.28 $ (479,581) $(0.04) $ 2,295,788 $ 0.24
05/31/94 3,806,205 0.40 2,772,065 0.28 (6,664,814) (0.69) (3,892,749) (0.41)
08/31/94 4,548,300 0.47 3,443,817 0.35 (2,282,276) (0.23) 1,161,541 0.12
11/30/94 3,896,667 0.40 2,781,099 0.29 (10,601,819) (1.10) (7,820,720) (0.81)
02/28/95 4,037,295 0.41 2,650,172 0.27 4,919,585 0.50 7,569,757 0.77
05/31/95 4,359,693 0.44 3,125,100 0.31 9,197,708 0.94 12,322,808 1.25
08/31/95 4,334,243 0.44 3,102,458 0.32 851,550 0.09 3,954,008 0.41
11/30/95 4,151,157 0.42 3,032,814 0.31 5,118,508 0.52 8,151,322 0.83
<FN>
- ---------------
* Per share of common stock.

</TABLE>

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED)
- ----------------------------------

DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN

Under the Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
a shareholder whose Common Stock is registered in his own name will have all
distributions reinvested automatically by FDISG as agent under the Plan, unless
the shareholder elects to receive cash. Distributions with respect to shares
registered in the name of a broker-dealer or other nominee (that is, in "street
name") may be reinvested by the broker or nominee in additional shares under the
Plan, but only if the service is provided by the broker or nominee, unless the
shareholder elects to receive distributions in cash. A shareholder who holds
Common Stock registered in the name of a broker or other nominee may not be able
to transfer the Common Stock to another broker or nominee and continue to
participate in the Plan. Investors who own Common Stock registered in street
name should consult their broker or nominee for details regarding reinvestment.

The number of shares of Common Stock distributed to participants in the
Plan in lieu of a cash dividend is determined in the following manner. Whenever
the market price per share of the Fund's Common Stock is equal to or exceeds the
net asset value per share on the valuation date, participants in the Plan will
be issued new shares valued at the higher of net asset value or 95% of the then
current market value. Otherwise, FDISG will buy shares of the Fund's Common
Stock in the open market, on the New York Stock Exchange or elsewhere, on or
shortly after the payment date of the dividend or distribution and continuing
until the ex-dividend date of the Fund's next distribution to holders of the
Common Stock or until it has expended for such purchases all of the cash that
would otherwise be payable to the participants. The number of purchased shares
that will then be credited to the participants' accounts will be based on the
average per share purchase price of the shares so purchased, including brokerage
commissions. If FDISG commences purchases in the open market and the then
current market price of the shares (plus any estimated brokerage commissions)
subsequently exceeds their net asset value most recently determined before the
completion of the purchases, FDISG will attempt to terminate purchases in the
open market and cause the Fund to issue the remaining dividend or distribution
in shares. In this case, the number of shares received by the participant will
be based on the weighted average of prices paid for shares purchased in the open
market and the price at which the Fund issues the remaining shares. These
remaining shares will be issued by the Fund at the higher of net asset value or
95% of the then current market value.

Plan participants are not subject to any charge for reinvesting dividends
or capital gains distributions. Each Plan participant will, however, bear a
proportionate share of brokerage commissions incurred with respect to FDISG's
open market purchases in connection with the reinvestment of dividends or
capital gains distributions. For the year ended November 30, 1995, $14,355 in
brokerage commissions were incurred.

The automatic reinvestment of dividends and capital gains distributions
will not relieve Plan participants of any income tax that may be payable on the
dividends or capital gains distributions. A participant in the Plan will be
treated for Federal income tax purposes as having received, on the dividend

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
----------------------------------------------

payment date, a dividend or distribution in an amount equal to the cash that the
participant could have received instead of shares.

In addition to acquiring shares of Common Stock through the reinvestment of
cash dividends and distributions, a shareholder may invest any further amounts
from $100 to $3,000 semi-annually at the then current market price in shares
purchased through the Plan. Such semi-annual investments are subject to any
brokerage commission charges incurred.

A shareholder whose Common Stock is registered in his or her own name may
terminate participation in the Plan at any time by notifying FDISG in writing,
by completing the form on the back of the Plan account statement and forwarding
it to FDISG or by calling FDISG directly. A termination will be effective
immediately if notice is received by FDISG not less than 10 days before any
dividend or distribution record date. Otherwise, the termination will be
effective, and only with respect to any subsequent dividends or distributions,
on the first day after the dividend or distribution has been credited to the
participant's account in additional shares of the Fund. Upon termination and
according to a participant's instructions, FDISG will either (a) issue
certificates for the whole shares credited to the shareholder's Plan account and
a check representing any fractional shares or (b) sell the shares in the market.
Shareholders who hold Common Stock registered in the name of a broker or other
nominee should consult their broker or nominee to terminate participation.

The Plan is described in more detail in the Fund's Plan brochure.
Information concerning the Plan may be obtained from FDISG at 1-800-331-1710.

MEETING OF SHAREHOLDERS

On July 21, 1995, the Fund held its Annual Meeting of Shareholders to (1)
elect two Directors of the Fund, and (2) ratify the selection of Coopers &
Lybrand L.L.P. as independent accountants for the Fund for the fiscal year
ending November 30, 1995. The results of each proposal are as follows:

<TABLE>
PROPOSAL 1: ELECTION OF TWO DIRECTORS.

<CAPTION>
NAME FOR AGAINST
---- --- -------
<S> <C> <C>
Common Stock
Robert T. Flaherty.............................................. 8,799,885 163,847
Preferred Stock
Morgan Gust..................................................... 500 0
</TABLE>
<TABLE>
PROPOSAL 2: RATIFY THE SELECTION OF COOPERS & LYBRAND L.L.P. AS INDEPENDENT
ACCOUNTANTS.

<S> <C>
Voted:
For......................................................................... 8,819,097
Against..................................................................... 32,043
Abstained................................................................... 113,093
</TABLE>

<PAGE>
DIRECTORS
Martin Brody
Donald F. Crumrine
Robert T. Flaherty [LOGO]
Morgan Gust
Robert F. Wulf

OFFICERS
Robert T. Flaherty
Chairman of the Board Annual
and President Report
Donald F. Crumrine
Vice President
and Secretary
Robert M. Ettinger
Vice President
Peter C. Stimes
Vice President
and Treasurer

INVESTMENT ADVISER
Flaherty & Crumrine Incorporated

QUESTIONS CONCERNING YOUR SHARES OF PREFERRED
INCOME FUND?
- If your shares are held in a Brokerage
Account, contact your Broker.
- If you have physical possession of your
shares in certificate form, contact the Fund's
Transfer Agent & Shareholder Servicing
Agent --

First Data Investor Services Group, Inc.
P.O. Box 1376
Boston, MA 02104
1-800-331-1710

THIS REPORT IS SENT TO SHAREHOLDERS OF PREFERRED
INCOME FUND INCORPORATED FOR THEIR INFORMATION.
IT IS NOT A PROSPECTUS, CIRCULAR OR REPRESENTATION
INTENDED FOR USE IN THE PURCHASE OR SALE OF SHARES
OF THE FUND OR OF ANY SECURITIES MENTIONED IN November 30, 1995
THIS REPORT.