PREFERRED INCOME FUND INC, N-30D, 1997-01-17

PREFERRED INCOME FUND INC
N-30D, 1997-01-17

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<PAGE>

PREFERRED INCOME FUND
INCORPORATED

Dear Shareholder:

In its November 30, 1996 fiscal year, the Preferred Income Fund earned very
commendable TOTAL RETURNS OF 12.8% ON NET ASSET VALUE ("NAV") AND 18.5% ON THE
MARKET PRICE of the shares. It was not a year in which things came easy,
however, as we had our share of challenges to overcome.

We think we have A HOME FIELD ADVANTAGE IN TOUGH MARKETS. As we have
previously commented in these letters, the Preferred Income Fund is intended to
be an alternative to bond funds. The important difference is that the Fund
hopefully involves less exposure to some of the unpleasant effects of
fluctuations in long term interest rates. That is easier said than done, but we
have been able to accomplish it through a blend of fixed and adjustable rate
preferreds, hedging strategies and leverage that is unique to the Fund and its
two sister funds.

The following chart shows how well it has worked. IN EVERY FULL FISCAL YEAR
COMPLETED TO DATE, including both good and bad markets, the return on THE FUND'S
NAV HAS OUTPERFORMED THE AVERAGE OF A GROUP OF UP TO 60 CLOSED-END BOND FUNDS,
compiled by Lipper Analytical Services, Inc. That comparison group consists of
all U.S. Government bond, mortgage bond and term trust, and investment grade
bond funds in Lipper's closed-end fund data base. The cumulative effect has been
an OUTSTANDING RETURN ON NAV OF 14.4% FOR THE FUND PER YEAR COMPOUNDED OVER THE
ENTIRE 5 YEARS COMPARED TO 8.2% FOR THE AVERAGE OF THE COMPARISON GROUP OF BOND
FUNDS.

[Bar Graph: Comparison of the NAV returns of the Fund vs
The Lipper High Quality Closed End Bond Funds Average]

Total Return on NAV for Fiscal Year Ended

Lipper High
Quality Closed
End Bond Funds
Fund Average
------ ------
12/1/91-11/30/96 14.40% 8.23%
11/30/92 28.00% 10.24%
11/30/93 15.93% 11.45%
11/30/94 (5.46)% (6.92)%
11/30/95 24.75% 20.17%
11/30/96 11.94% 7.72%

SOURCE: LIPPER ANALYTICAL SERVICES, INC.
(ASSUMES ALL DISTRIBUTIONS REINVESTED AT NAV)

<PAGE>

The WIDE SWINGS IN LONG TERM INTEREST RATES IN FISCAL 1996 TURNED OUT TO BE
AN OPPORTUNITY for the Fund, although we had to make some mid-course
adjustments. The yields of 30 year Treasury bonds rose from around 6% at the
start of the year to a high of close to 7 1/4% by early summer, only to tumble
to roughly 6 3/8% by November 30. The Fund's hedges served it well as interest
rates rose, helping to offset much of the decline in the value of the Fund's
preferred stock portfolio. As rates later declined, we gave back part of the
gains on our hedges, but the accompanying rise in the value of our preferred
stocks more than made up for it. When the smoke cleared, the NAV was up and the
Fund had a win-win result with net appreciation for the year on both its hedges
and its preferred stocks.

There were also CROSSCURRENTS WITHIN THE PREFERRED STOCK MARKET IN FISCAL
1996. In the heat of the budget battle in December, 1995, the Clinton
Administration proposed some tax law changes that would have reduced the
benefits of the Dividends Received Deduction ("DRD") for corporate investors,
with negative overtones for traditional preferred stocks eligible for the DRD.
As the year wore on investors' concern about adverse tax changes faded, and the
market for traditional preferred stocks strengthened significantly. The market
now seems to be focusing almost exclusively on the shrinking supply of
traditional preferreds. Such traditional preferreds are being steadily replaced
by newer forms of "hybrid" preferreds that do not qualify for the DRD, but may
offer greater tax advantages to issuers. The growing recognition of what we have
previously called the "creeping scarcity" of traditional preferreds has
benefited the Fund's portfolio significantly.

The following "pie charts" illustrate the SHIFTS DURING THE YEAR IN THE
PORTIONS OF THE PORTFOLIO ALLOCATED TO VARIOUS SECTORS OF THE PREFERRED MARKET.
The increase in adjustable rate preferreds ("ARPs") from 28% to 41%, in round
numbers, was especially helpful to the Fund's performance. For most of the year,
ARPs dawdled along, becoming increasingly undervalued in our opinion, until they
caught fire in the last quarter. We also ventured, to the extent of 6% of the
portfolio, into "hybrid" preferreds that are not eligible for the DRD. The
latter purchases reflected specific opportunities uncovered in a market sector
that we previously considered to be generally overpriced.

[Pie Charts]
Preferred Income Fund

11/30/95 11/30/95
-------- --------
Adjustable Rates 28.2% 40.6%
Traditional Fixed Rates 70.5% 51.3%
Non-DRD Preferreds 0.0% 6.1%
Cash & Other 1.3% 2.0%

THE FISCAL 1996 RETURN OF 18.5% BASED ON THE MARKET PRICE OF THE FUND'S
SHARES WAS HELPED BY A NARROWING OF THE DISCOUNT OF THE MARKET PRICE FROM NAV
DURING THE YEAR, as shown by the chart on the following page. The narrowing may
reflect the market scarcity of preferreds eligible for the DRD, which make up
most of the Fund's portfolio, and fading concern over the risk of tax changes.
The purchase of

<PAGE>

over 20% of the shares of the Preferred Income Management Fund, a sister fund,
by Horesji Enterprises, Inc. may have had a market impact also.

[Graph showing Premium discount of Market Price to NAV]

<TABLE>
Preferred Income Fund

<CAPTION>
Premium/ Premium/ Premium/ Premium/ Premium/
Date Discount Date Discount Date Discount Date Discount Date Discount
---- -------- ---- -------- ---- -------- ---- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
02/08/91 8.42% 05/01/92 5.23% 07/23/93 5.76% 10/14/94 -12.51% 01/05/96 -13.65%
02/15/91 4.38% 05/08/92 3.12% 07/30/93 5.98% 10/21/94 -14.16% 01/12/96 -14.35%
02/22/91 3.95% 05/15/92 3.47% 08/06/93 7.90% 10/28/94 -7.32% 01/19/96 -14.59%
03/01/91 4.24% 05/22/92 0.83% 08/13/93 4.84% 11/04/94 -9.48% 01/26/96 -12.51%
03/08/91 1.83% 05/29/92 0.39% 08/20/93 3.77% 11/11/94 -9.12% 02/02/96 -12.44%
03/15/91 1.51% 06/05/92 2.34% 08/27/93 4.34% 11/18/94 -9.51% 02/09/96 -12.38%
03/22/91 2.015 06/12/92 3.08% 09/03/93 4.50% 11/23/94 -7.03% 02/16/96 -13.60%
03/29/91 2.30% 06/19/92 2.27% 09/10/93 3.61% 12/02/94 -5.93% 02/23/96 -12.81%
04/05/91 1.49% 06/26/92 4.91% 09/17/93 4.00% 12/09/94 -5.08% 03/01/96 -11.18%
04/12/91 1.96% 07/03/92 4.91% 09/24/93 3.21% 12/16/94 -5.54% 03/08/96 -10.89%
04/19/91 3.14% 07/10/92 5.25% 10/01/93 2.93% 12/23/94 -8.22% 03/15/96 -15.21%
04/26/91 2.68% 07/17/92 5.70% 10/08/93 1.10% 12/30/94 -7.44% 03/22/96 -15.64%
05/03/91 2.30% 07/24/92 7.12% 10/15/93 1.73% 01/06/95 -1.10% 03/29/96 -14.64%
05/10/91 1.20% 07/31/92 5.80% 10/22/93 0.48% 01/13/95 -1.34% 04/05/96 -13.43%
05/17/91 1.46% 08/07/92 5.34% 10/29/93 -0.75% 01/20/95 -5.25% 04/12/96 -14.77%
05/24/91 1.39% 08/14/92 3.89% 11/05/93 0.95% 01/27/95 -6.97% 04/19/96 -14.02%
05/31/91 5.10% 08/21/92 3.06% 11/12/93 0.19% 02/03/95 0.61% 04/26/96 -14.88%
06/07/91 4.23% 08/28/92 2.50% 11/19/93 -3.16% 02/10/95 -2.89% 05/03/96 -14.77%
06/14/91 3.37% 09/04/92 2.28% 11/26/93 0.30% 02/17/95 -4.19% 05/10/96 -15.32%
06/21/91 6.16% 09/11/92 3.56% 12/03/93 -1.75% 02/24/95 -0.92% 05/17/96 -13.63%
06/28/91 6.59% 09/18/92 4.89% 12/10/93 -1.03% 03/03/95 0.35% 05/24/96 -14.32%
07/05/91 7.26% 09/25/92 4.06% 12/17/93 3.23% 03/10/95 -3.58% 05/31/96 -11.11%
07/12/91 6.59% 10/02/92 7.16% 12/24/93 -0.51% 03/17/95 -5.79% 06/07/96 -11.80%
07/19/91 6.43% 10/09/92 4.83% 12/31/93 -2.87% 03/24/95 -5.68% 06/14/96 -10.83%
07/26/91 5.49% 10/16/92 4.17% 01/07/94 0.93% 03/31/95 -2.90% 06/21/96 -11.29%
08/02/91 6.78% 10/23/92 3.78% 01/14/94 0.75% 04/07/95 -2.56% 06/28/96 -10.49%
08/09/91 4.15% 10/30/92 8.40% 01/21/94 -2.00% 04/14/95 -3.04% 07/05/96 -10.31%
08/16/91 3.72% 11/06/92 3.78% 01/28/94 -3.16% 04/21/95 -4.39% 07/12/96 -10.60%
08/23/91 5.71% 11/13/92 5.90% 02/04/94 -1.96% 04/28/95 -2.71% 07/19/96 -10.71%
08/30/91 3.14% 11/20/92 5.51% 02/11/94 -2.24% 05/05/95 -3.98% 07/26/96 -10.77%
09/06/91 5.70% 11/27/92 5.74% 02/18/94 -7.41% 05/12/95 -2.62% 08/02/96 -10.26%
09/13/91 8.83% 12/04/92 6.80% 02/25/94 -5.39% 05/19/95 -4.10% 08/09/96 -5.74%
09/20/91 5.75% 12/11/92 6.01% 03/04/94 -0.89% 05/26/95 -8.70% 08/16/96 -7.14%
09/27/91 6.06% 12/18/92 5.82% 03/11/94 -2.70% 06/02/95 -2.59% 08/23/96 -7.05%
10/04/91 7.64% 12/25/92 6.18% 03/18/94 -3.79% 06/09/95 -6.08% 08/30/96 -6.69%
10/11/91 7.45% 01/01/93 7.39% 03/25/94 -5.05% 06/16/95 -7.59% 09/06/96 -8.24%
10/18/91 7.19% 01/08/93 9.87% 04/01/94 -4.66% 06/23/95 -8.84% 09/13/96 -7.56%
10/25/91 5.87% 01/15/93 11.45% 04/08/94 -7.13% 06/30/95 -7.53% 09/20/96 -11.06%
11/01/91 6.93% 01/22/93 10.21% 04/15/94 -5.96% 07/07/95 -8.44% 09/27/96 -11.06%
11/08/91 8.27% 01/29/93 7.60% 04/22/94 -5.98% 07/14/95 -9.14% 10/04/96 -8.61%
11/15/91 8.01% 02/05/93 6.02% 04/29/94 -8.63% 07/21/95 -9.76% 10/11/96 -9.41%
11/22/91 6.50% 02/12/93 4.52% 05/06/94 -5.81% 07/28/95 -9.17% 10/18/96 -9.98%
11/29/91 8.07% 02/19/93 4.34% 05/13/94 -6.35% 08/04/95 -8.88% 10/25/96 -8.58%
12/06/91 6.41% 02/26/93 6.28% 05/20/94 -4.09% 08/11/95 -9.35% 11/01/96 -6.89%
12/13/91 7.91% 03/05/93 9.09% 05/27/94 -3.97% 08/18/95 -9.42% 11/08/96 -8.31%
12/20/91 8.39% 03/12/93 6.07% 06/03/94 -2.86% 08/25/95 -8.32% 11/15/96 -8.33%
12/27/91 10.57% 03/19/93 2.48% 06/10/94 1.46% 09/01/95 -6.98% 11/22/96 -6.53%
01/03/92 11.68% 03/26/93 6.38% 06/17/94 -0.37% 09/08/95 -8.16% 11/29/96 -6.06%
01/10/92 12.67% 04/02/93 8.76% 06/24/94 1.75% 09/15/95 -9.68%
01/17/92 9.78% 04/09/93 7.64% 07/01/94 0.06% 09/22/95 -9.78%
01/24/92 9.12% 04/16/93 6.71% 07/08/94 0.63% 09/29/95 -8.97%
01/31/92 4.17% 04/23/93 7.64% 07/15/94 1.88% 10/06/95 -8.93%
02/07/92 4.04% 04/30/93 6.77% 07/22/94 -0.84% 10/13/95 -10.94%
02/14/92 6.13% 05/07/92 9.18% 07/29/94 -0.79% 10/20/95 -10.48%
02/21/92 4.90% 05/14/93 7.79% 08/05/94 -1.57% 10/27/95 -12.10%
02/28/92 3.81% 05/21/93 7.00% 08/12/94 -2.15% 11/03/95 -11.51%
03/06/92 3.39% 05/28/93 7.40% 08/19/94 -2.63% 11/10/95 -11.46%
03/13/92 3.75% 06/04/93 4.97% 08/26/94 -4.39% 11/17/95 -11.17%
03/20/92 3.87% 06/11/93 5.26% 09/02/94 -3.79% 11/24/95 -10.43%
03/27/92 3.27% 06/18/93 5.60% 09/09/94 -2.32% 12/01/95 -10.71%
04/03/92 3.57% 06/25/93 7.03% 09/16/94 -2.93% 12/08/95 -11.92%
04/10/92 3.81% 07/02/93 4.51% 09/23/94 -2.73% 12/15/95 -12.44%
04/17/92 4.64% 07/09/93 5.41% 09/30/94 -5.65% 12/22/95 -12.56%
04/24/92 4.93% 07/16/93 4.90% 10/07/94 -11.41% 12/29/95 -13.13%
</TABLE>

On December 31, 1996, the Fund paid A SPECIAL DISTRIBUTION TO SHAREHOLDERS
OF $0.84 PER SHARE. Information on the tax status of that distribution appears
on page 23 of this report.

The Fund's income is doing well. We raised the dividend rate once during
the fiscal year after the run-up in interest rates in early Spring. Following
the year-end distributions, THE FUND WILL RESUME REGULAR MONTHLY DISTRIBUTIONS
IN JANUARY, 1997 AT THE NEW RATE OF $0.087 PER SHARE. That rate is below the
previous rate due to the reduction of earning assets in the Fund's portfolio
caused by the year-end distribution. Those shareholders that participate in the
Fund's Dividend Reinvestment Plan will see little change in their monthly
income. Other shareholders have, in effect, had part of their principal returned
to them.

We are also watching the nickels and dimes closely. The management of the
Fund conducted an EXTENSIVE REVIEW OF GENERAL AND ADMINISTRATIVE COSTS during
the year in light of an increasingly competitive market for such services.
Meaningful reductions have been achieved in several areas, which will generally
come into effect in fiscal 1997. Additional information appears in Footnote No.
2 to the financial statements in this report.

The Fund's Board of Directors recently ELIMINATED THE POLICY THAT THE
FUND'S PORTFOLIO BE MANAGED WITH A VIEW TO MAXIMIZING DISTRIBUTIONS THAT ARE
ELIGIBLE FOR THE DRD. This change is intended to create

<PAGE>

future flexibility rather than to signal any significant near term shift in the
Fund's portfolio. It is very difficult to pinpoint what the situation will be
several years down the road given the tax factors mentioned above and recent
changes in bank regulation that could contribute to the shrinkage of the supply
of preferred stocks eligible for the DRD. We simply want to be prepared for
whatever may come.

The Question and Answer section that follows is recommended reading. It
provides additional information on such matters as the Fund's income and
performance, the discount from NAV and the situation surrounding the DRD.

Sincerely,

/s/ Robert T. Flaherty
Robert T. Flaherty
Chairman of the Board

December 31, 1996

QUESTIONS AND ANSWERS CONCERNING THE FUND

HAS THE FUND'S INCOME STRATEGY WORKED AS EXPECTED?

Yes, our income strategy has worked very well. Just to remind everyone, we
expect income to rise and fall with long term interest rates. However, we would
like it to go up more when rates are on the upswing and fall less when rates go
down.

The chart on the following page, which is one of our favorites, is a rerun
from last year's annual report. It shows the history of the Fund's income (on
the left hand scale) against the level of interest rates on long term Treasury
bonds (on the right hand scale). Over the life of the Fund, income has increased
when interest rates were rising and given ground only begrudgingly when rates
were falling. That is what we set out to do.

The chart is based on a hypothetical investment in 1,000 shares ($15,000)
initial investment 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. The
Fund's income has been projected into January, 1997 to reflect the year-end
distribution and the dividend rate that will be effective afterwards.

<PAGE>
[Graph showing the history of the Funds income against the level of interest
rates on long term Treasury bonds on a 1,000 shares (15,000) initial
investment]

PREFERRED INCOME FUND

Income Income
W/Reinv UST 3 W/Reinv UST 3
Date Cap Gains YTM Date Cap Gains YTM
- ---- --------- ----- ---- --------- -----
Jan-91 8.16% Jan-94 $121.76 6.24%
Feb-91 8.20% Feb-94 $121.76 6.66%
Mar-91 8.22% Mar-94 $121.76 7.09%
Apr-91 $122.50 8.18% Apr-94 $121.76 7.30%
May-91 $122.50 8.26% May-94 $128.67 7.43%
Jun-91 $122.50 8.40% Jun-94 $128.67 7.61%
Jul-91 $122.50 8.34% Jul-94 $128.67 7.39%
Aug-91 $125.00 8.06% Aug-94 $128.67 7.48%
Sep-91 $125.00 7.81% Sep-94 $128.67 7.82%
Oct-91 $125.00 7.91% Oct-94 $128.67 7.96%
Nov-91 $125.00 7.94% Nov-94 $133.06 7.94%
Dec-91 $126.46 7.40% Dec-94 $132.51 7.88%
Jan-92 $126.46 7.76% Jan-95 $132.51 7.73%
Feb-92 $126.46 7.79% Feb-95 $132.51 7.55%
Mar-92 $126.46 7.96% Mar-95 $132.51 7.43%
Apr-92 $126.46 8.03% Apr-95 $132.51 7.33%
May-92 $126.46 7.84% May-95 $132.51 6.33%
Jun-92 $126.46 7.78% Jun-95 $125.21 6.54%
Jul-92 $126.46 7.46% Jul-95 $125.21 6.90%
Aug-92 $126.46 7.41% Aug-95 $125.21 6.61%
Sep-92 $126.46 7.38% Sep-95 $125.21 6.50%
Oct-92 $126.46 7.62% Oct-95 $125.21 6.36%
Nov-92 $126.46 7.60% Nov-95 $125.21 6.08%
Dec-92 $127.87 7.39% Dec-95 $117.63 5.95%
Jan-93 $127.87 7.19% Jan-96 $117.63 6.05%
Feb-93 $127.87 6.90% Feb-96 $117.63 6.36%
Mar-93 $127.87 6.92% Mar-96 $117.63 6.67%
Apr-93 $127.87 6.93% Apr-96 $117.63 6.83%
May-93 $127.87 6.98% May-96 $124.39 7.00%
Jun-93 $127.87 6.67% Jun-96 $124.39 6.95%
Jul-93 $127.87 6.56% Jul-96 $124.39 7.01%
Aug-93 $127.87 6.09% Aug-96 $124.39 7.12%
Sep-93 $127.87 6.02% Sep-96 $124.39 6.90%
Oct-93 $127.87 5.97% Oct-96 $124.39 6.81%
Nov-93 $127.87 6.30% Nov-96 $124.39 6.51%
Dec-93 $121.76 6.35% Dec-96 $123.05 6.60%

HOW HAS THE FUND'S NAV RETURN BEEN ABLE TO OUTPERFORM THE PREVIOUSLY MENTIONED
GROUP OF INVESTMENT QUALITY BOND FUNDS IN BOTH GOOD AND BAD MARKETS?

The rather remarkable record shown in the chart on the first page of this
report is actually just the flip side of the success of our income strategy
discussed above.

It is not too surprising that we have done well relative to the group of
bond funds when long term interest rates have increased. Our hedging strategies
have generally been profitable when that has happened, giving us a source of
funds to add to our portfolio and increase income. Such hedging gains have also
cushioned the decline in the value of our preferred stock holdings and helped
support the Fund's NAV. The key has been keeping overall principal declines
small enough to get a good result even after the magnifying effect of the Fund's
leverage. So far, we have been able to do just that.

Beating the bond funds when interest rates were falling was a good trick.
We do not expect the Fund's portfolio to keep up with a sharply rising bond
market, since it will have to absorb some hedging losses. If we can stay close,
however, the Fund's leverage should do the rest. Our success in limiting hedge
losses was due, in part, to hedging by buying put options (on Treasury bond
futures contracts) where the risk can not exceed the purchase price. The hedge
losses we did incur were covered by selling some of the preferred stocks in the
Fund's portfolio. Income declined as we did that, of course, which is expected
when rates fall.

<PAGE>

The Fund's returns also reflect successful execution "in the trenches" of
hundreds of market and credit decisions designed to take advantage of the
inefficient nature of the preferred market. Active management in a relatively
illiquid market may seem like a contradiction in terms, but it is an important
source of added value.

HAS THE RETURN ON THE MARKET PRICE OF THE FUND'S SHARES KEPT UP WITH THE STRONG
PERFORMANCE OF NAV?

The following chart shows the cumulative market value and NAV of an
investment of $1,000 in the Fund at its inception. Recently, the market value
has done even better than NAV as the discount from NAV has narrowed. Previously,
particularly in fiscal 1993 and 1994, the opposite was true as the market price
of the Fund's shares went from a premium to a discount.

[Graph showing NAV and Market Performance on a $1,000 investment]
<TABLE>

<CAPTION>
Total NAV Total Market Total NAV Total Market
Value of Value of Value of Value of
Date Shares Held Shares Held Date Shares Held Shares Held
---- ----------- ------------ ---- ----------- ------------
<S> <C> <C> <C> <C> <C>
Jan-91 $930 $1,000 Jan-94 $1,746 $1,706
Feb-91 $966 $1,008 Feb-94 $1,754 $1,651
Mar-91 $1,002 $1,025 Mar-94 $1,739 $1,648
Apr-91 $1,040 $1,058 Apr-94 $1,724 $1,566
May-91 $1,056 $1,109 May-94 $1,710 $1,616
Jun-91 $1,048 $1,117 Jun-94 $1,716 $1,707
Jul-91 $1,080 $1,143 Jul-94 $1,714 $1,704
Aug-91 $1,117 $1,152 Aug-94 $1,724 $1,635
Sep-91 $1,143 $1,230 Sep-94 $1,695 $1,592
Oct-91 $1,157 $1,247 Oct-94 $1,675 $1,535
Nov-91 $1,165 $1,257 Nov-94 $1,635 $1,491
Dec-91 $1,206 $1,348 Dec-94 $1,640 $1,512
Jan-92 $1,263 $1,311 Jan-95 $1,688 $1,583
Feb-92 $1,313 $1,357 Feb-95 $1,728 $1,700
Mar-92 $1,334 $1,367 Mar-95 $1,738 $1,681
Apr-92 $1,358 $1,433 Apr-95 $1,779 $1,724
May-92 $1,403 $1,404 May-95 $1,882 $1,766
Jun-92 $1,409 $1,462 Jun-95 $1,895 $1,747
Jul-92 $1,452 $1,530 Jul-95 $1,898 $1,712
Aug-92 $1,478 $1,510 Aug-95 $1,932 $1,770
Sep-92 $1,489 $1,550 Sep-95 $1,960 $1,798
Oct-92 $1,490 $1,609 Oct-95 $1,998 $1,746
Nov-92 $1,493 $1,569 Nov-95 $2,038 $1,822
Dec-92 $1,504 $1,606 Dec-95 $2,015 $1,736
Jan-93 $1,531 $1,638 Jan-96 $2,036 $1,780
Feb-93 $1,581 $1,670 Feb-96 $2,011 $1,775
Mar-93 $1,605 $1,736 Mar-96 $2,038 $1,745
Apr-93 $1,625 $1,746 Apr-96 $2,047 $1,765
May-93 $1,636 $1,746 May-96 $2,085 $1,860
Jun-93 $1,670 $1,745 Jun-96 $2,099 $1,889
Jul-93 $1,689 $1,778 Jul-96 $2,103 $1,902
Aug-93 $1,707 $1,754 Aug-96 $2,110 $1,982
Sep-93 $1,726 $1,765 Sep-96 $2,129 $1,926
Oct-93 $1,742 $1,717 Oct-96 $2,213 $2,059
Nov-93 $1,729 $1,693 Nov-96 $2,279 $2,159
Dec-93 $1,731 $1,696
</TABLE>

The chart sends a very strong message. Swings in premiums and discounts can
cause distortions between market and NAV performance over shorter periods. Over
longer periods, it is much more difficult for the market to take leave of the
reality of NAV, which is the value actually standing behind each share of the
Fund.

<PAGE>

The most important point is that returns have been very good on both NAV
and market price. The table below sets forth the total returns on NAV and Market
per year for the last fiscal year, the last two fiscal years and since the
inception of the Fund, assuming all dividends were reinvested at the Dividend
Reinvestment Plan price.

<TABLE>
<CAPTION>
TOTAL RETURN PER YEAR
--------------------
ON MARKET
ON NAV PRICE
------ ---------
<S> <C> <C>
Fiscal 1996 12.8% 18.5%
Last 2 Fiscal Years, 1995 and 1996 18.8 20.3
Inception Through Fiscal 1996 16.9 14.3

</TABLE>

One last thought on the Fund's performance is worth noting. On the
ex-dividend date for the year-end distribution, the market price and the NAV of
the Fund's shares must decline to reflect the assets being paid out of the Fund
to shareholders. Once the checks have been cashed and spent (except by those who
participate in the Fund's Dividend Reinvestment Plan), the memory of the
distribution will fade. Next, we will get questions from shareholders about why
the performance of the Fund is down, even if things are going great. Please tie
a string around your finger to remind yourself of your year-end check from the
Preferred Income Fund.

WHAT CAN BE DONE ABOUT SHARE PRICE DISCOUNTS?

This is a tough question. The easy answers that often come up in connection
with reducing discounts do not offer much promise for the Preferred Income Fund.
As discussed previously in these letters, converting to an open-end format would
require the Fund to give up its leverage, which is an important element in its
strategy. Furthermore, we believe that a closed-end fund is better able to take
advantage of periods when the preferred market is relatively illiquid. Stock
repurchase offers have not demonstrated any lasting effect on narrowing
discounts.

IS THE FUND STILL APPROPRIATE FOR CORPORATE INVESTORS GIVEN THE PREVIOUSLY
MENTIONED CHANGE IN POLICY REGARDING MAXIMIZING THE DIVIDENDS RECEIVED
DEDUCTION?

We think it is very appropriate. Remember, this is still a preferred fund.
Traditional preferred stocks that qualify for the DRD account for the lion's
share of its portfolio. Subject to future market developments, we do not see
that changing significantly in the near future.

It is very difficult to predict the future course of tax policy. The
Clinton Administration has previously proposed restricting the tax "loophole"
that is stimulating the replacement of DRD-eligible preferreds by new hybrid
preferreds. However, the Administration has also proposed reducing the DRD
percentage from 70% to 50%. As things are going now, the DRD could continue at
70% but be available only to a much smaller, and probably higher priced, supply
of traditional preferreds.

We do not want to make this change in the Fund's policy regarding the DRD
into any more or less than it really is. Some new development will probably come
along well before traditional preferreds become high-priced buggy whips, largely
replaced by hybrid preferreds. It is in the best interests of all shareholders,
corporate or not, for the Fund to be as flexible as possible in dealing with
whatever develops.

<PAGE>

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

<TABLE>
<CAPTION>
DIVIDEND
DIVIDEND NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE(1)
-------- --------- ------------- ------------
<S> <C> <C> <C> <C>
December 29, 1995.............. $0.087 $ 15.54 $13.500 $13.48
January 31, 1996............... 0.087 15.61 13.625 13.74
February 29, 1996.............. 0.087 15.33 13.625 13.65
March 29, 1996................. 0.087 15.45 13.125 13.22
April 30, 1996................. 0.087 15.43 13.250 13.20
May 31, 1996................... 0.092 15.63 13.875 13.80
June 28, 1996.................. 0.092 15.64 14.000 14.03
July 31, 1996.................. 0.092 15.58 14.125 14.09
August 30, 1996................ 0.092 15.54 14.500 14.53
September 30, 1996............. 0.092 15.59 13.875 13.96
October 31, 1996............... 0.092 16.11 14.875 14.91
November 29, 1996.............. 0.092 16.50 15.500 15.47
</TABLE>

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

(1) See ADDITIONAL INFORMATION; Dividend Reinvestment and Cash Purchase Plan on
pages 26 and 27 of this report.

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1996
---------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ----------- ------------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES -- 98.0%
ADJUSTABLE RATE PREFERRED STOCKS -- 40.6%
UTILITIES -- 8.4%
24,920 Arizona Public Service Company,
Series Q, Adj. Rate Pfd. ..... $ 2,317,560
28,800 ENSERCH Corporation,
Series F, Adj. Rate Pfd. ..... 666,000
13,636 Entergy Gulf States Utilities
Inc.,
Series A, Adj. Rate Pfd. ..... 1,349,964
Georgia Power Company:
42,500 Series 1993 K, Adj. Rate
Pfd. ......................... 1,033,281
36,375 Series 1993-2 L, Adj. Rate
Pfd........................... 822,984
11,140 Gulf Power Company, Adj. Rate
Pfd. ......................... 246,472
52,000 Illinois Power Company,
Series A, Adj. Rate Pfd. ..... 2,414,750
78,500 New York State Electric & Gas
Corporation,
Series B, Adj. Rate Pfd. ..... 1,844,750
Niagara Mohawk Power
Corporation:
154,879 Series A, Adj. Rate Pfd. ....... 2,603,903
32,455 Series B, Adj. Rate Pfd. ....... 657,214
88,745 Series C, Adj. Rate Pfd. ....... 1,697,248
Northern States Power Company:
13,550 Series A, Adj. Rate Pfd. ....... 1,304,188
6,000 Series B, Adj. Rate Pfd. ....... 578,250
39,600 Puget Sound Power & Light
Company, Series B, Adj. Rate
Pfd. ......................... 898,425
------------
TOTAL UTILITY ADJUSTABLE RATE
PREFERRED STOCKS.............. 18,434,989
------------
BANKING -- 32.2%
Bank of Boston Corporation:
9,800 Series A, Adj. Rate Pfd. ....... 462,437
106,000 Series B, Adj. Rate Pfd. ....... 4,982,000
41,510 Series C, Adj. Rate Pfd. ....... 3,549,105
BankAmerica Corporation:
9,700 Series A, Adj. Rate Pfd. ....... 480,150
78,800 Series B, Adj. Rate Pfd. ....... 7,387,500
Bankers Trust New York
Corporation:
322,100 Series Q, Adj. Rate Pfd. ....... 7,287,513
6,500 Series R, Adj. Rate Pfd. ....... 147,875

<CAPTION>
VALUE
SHARES (NOTE 1)
- ----------- ------------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
ADJUSTABLE RATE PREFERRED STOCKS (CONTINUED)
BANKING (CONTINUED)
Chase Manhattan Corporation:
39,050 Series L, Adj. Rate Pfd. .......$ 3,670,700
59,900 Series N, Adj. Rate Pfd. ....... 1,422,625
Citicorp:
96,600 Second Series, Adj. Rate
Pfd. ......................... 9,068,325
11,500 Third Series, Adj. Rate Pfd. ... 1,143,531
15,950 Series 18, Adj. Rate Pfd. ...... 370,837
27,055 Series 19, Adj. Rate Pfd. ...... 629,029
First Chicago NBD:
72,775 Series B, Adj. Rate Pfd. ....... 6,909,077
34,000 Series C, Adj. Rate Pfd. ....... 3,366,000
40,000 Fleet Financial Group, Inc.,
Adj. Rate Pfd. ............... 1,870,000
72,200 HSBC Americas Inc.,
Series A, Adj. Rate Pfd. ..... 3,375,350
275,700 MBNA Corporation,
Series B, Adj. Rate Pfd. ..... 7,116,506
37,100 Morgan (J.P.) & Company Inc.,
Series A, Adj. Rate Pfd. ..... 2,977,275
161,750 Republic New York Corporation,
Series D, Adj. Rate Pfd. ..... 3,780,906
20,000 Wells Fargo & Company,
Series B, Adj. Rate Pfd. ..... 920,000
------------
TOTAL BANKING ADJUSTABLE RATE
PREFERRED STOCKS.............. 70,916,741
------------
TOTAL ADJUSTABLE RATE
PREFERRED STOCKS.............. 89,351,730
------------
FIXED RATE PREFERRED STOCKS AND SECURITIES -- 57.4%
UTILITIES -- 36.5%
Alabama Power Company:
140,900 Class A, 6.40% Pfd. ............ 3,504,888
50,000 Series 1992-1, 7.60% Pfd. ...... 1,259,375
28,600 Series 1992-2, 7.60% Pfd. ...... 723,937
45,000 Appalachian Power Company,
Series A, 8.25% TOPRS. ....... 1,130,625
90,500 Arizona Public Service Company,
Series W, 7.25% Pfd. ......... 2,285,125
</TABLE>

See Notes to Financial Statements.

<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ----------- ------------
<S> <C> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
UTILITIES (CONTINUED)
Baltimore Gas & Electric
Company:
21,250 Series 1993, 6.70% Pfd. ...... $ 2,273,750
44,750 Series 1995, 6.99% Pfd. ...... 4,905,719
8,793 Boston Edison Company,
4.78% Pfd. ................... 617,708
5,000 Central Hudson Gas & Electric
Corporation,
Series D, 4.35% Pfd. ......... 331,250
3,000 Columbus Southern Power Company,
7.875% Sinking Fund Pfd. ..... 319,875
Consumers Power Company:
128,747 Class A, 8.32% Pfd. .......... 3,299,142
2,850 Series G, $7.76 Pfd. ......... 285,712
6,870 Dayton Power & Light Company,
Series C, 3.90% Pfd. ......... 438,821
25,300 Detroit Edison Company,
7.75% Pfd. ................... 654,638
Duke Power Company:
4,500 Series C, 4.50% Pfd. ......... 334,125
8,600 Series S, 7.85% Pfd. ......... 959,975
23,575 Series W, 7.00% Pfd. ......... 2,537,259
14,500 Series Y, 7.04% Pfd. ......... 1,564,187
43,500 Duquesne Capital,
Series A, 8.375% MIPS......... 1,088,588
2,430 Entergy Gulf States Utilities
Inc.,
$9.96 Pfd. ................... 250,897
Entergy Mississippi Inc.:
12,436 4.92% Pfd. ................... 867,411
6,000 8.36% Pfd. ................... 616,500
Florida Power & Light Company:
39,250 Series S, 6.98% Pfd. ......... 4,239,000
33,500 Series T, 7.05% Pfd. ......... 3,634,750
9,500 Series U, 6.75% Pfd. ......... 1,012,938
8,000 Gulf Power Company,
Series A, 7.00% Pfd. ......... 203,000
3,000 Houston Lighting & Power
Company, $8.12 Pfd. .......... 312,750

VALUE
SHARES (NOTE 1)
- ----------- ------------
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
UTILITIES (CONTINUED)
Illinois Power Company:
3,980 Series A, 4.08% Pfd. ......... $ 121,390
8,960 Series D, 4.42% Pfd. ......... 295,680
29,370 Series E, 4.70% Pfd. ......... 1,027,950
10,000 Jersey Central Power & Light
Company, Series K, 7.52%
Sinking Fund Pfd. ............ 1,052,500
45,400 Mississippi Power Company,
7.25% Pfd. ................... 1,157,700
8,500 Monongahela Power Company,
Series L, $7.73 Pfd. ......... 936,063
52,000 Montana Power Capital,
Series A, 8.45% QUIPS. ....... 1,326,000
5,600 Montana Power Company,
$6.875 Pfd. .................. 598,500
New York State Electric & Gas
Corporation:
5,000 6.30% Sinking Fund Pfd. ...... 515,625
6,956 6.48% Pfd. ................... 665,168
Niagara Mohawk Power
Corporation:
37,600 7.85% Sinking Fund Pfd. ...... 930,600
58,135 9.50% Pfd. ................... 1,393,787
3,500 Northern Indiana Public Service
Company,
7.44% Pfd. ................... 360,938
Northern States Power Company:
6,510 Series H, $6.80 Pfd. ......... 677,040
5,600 Series I, $7.00 Pfd. ......... 583,800
6,170 Ohio Edison Company,
4.44% Pfd. ................... 366,344
4,000 Pacificorp,
7.48% Sinking Fund Pfd. ...... 437,000
18,400 Pennsylvania Power Company,
7.75% Pfd. ................... 1,784,800
21,400 Pennsylvania Power & Light
Company, $6.75 Pfd. .......... 2,289,800
</TABLE>

See Notes to Financial Statements.

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1996
---------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ----------- ------------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
UTILITIES (CONTINUED)
PSI Energy, Inc.:
4,850 6.875% Pfd. .................. $ 518,344
159,782 7.44% Pfd. ................... 4,064,455
10,000 Public Service Company of
New Mexico,
4.58% PVT Pfd. ............... 512,500
Puget Sound Power & Light
Company:
13,650 7.75% Sinking Fund Pfd. ...... 1,449,459
75,500 7.875% Pfd. .................. 1,925,250
4,655 Rochester Gas & Electric
Corporation, Series II, 4.10%
Pfd. ......................... 289,774
114,200 San Diego Gas & Electric
Company, 6.80% Pfd. .......... 3,104,812
43,000 Sierra Pacific Capital,
8.60% TOPRS................... 1,126,063
Texas Utilities Electric
Company:
9,447 $4.64 Pfd. ................... 671,918
13,050 $7.98 Pfd. ................... 1,430,606
TU Capital:
29,050 Series M, 8.25% TOPRS......... 728,429
10,100 Series N, 9.00% TOPRS......... 263,862
4,750 Union Electric Company,
Series G, $6.40 Pfd. ....... 475,594
Virginia Electric & Power
Company:
17,700 $6.98 Pfd. ................... 1,904,962
23,760 $7.05 Pfd. ................... 2,557,170
115,900 Washington Natural Gas Company,
Series II, 7.45% Pfd. ........ 3,114,812
------------
TOTAL UTILITY FIXED RATE
PREFERRED STOCKS AND
SECURITIES.................... 80,310,640
------------
BANKING -- 5.5%
35,800 Ahmanson (H.F.) & Company,
Series C, 8.40% Pfd. ......... 933,037
BankAmerica Corporation:
7,500 Series L, 8.16% Pfd. ......... 191,719
29,100 Series M, 7.875% Pfd. ........ 743,869
21,158 Bankers Trust New York
Corporation, Series O, 7.625%
Pfd. ......................... 540,851

<CAPTION>
VALUE
SHARES (NOTE 1)
- ----------- ------------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
BANKING (CONTINUED)
Chase Manhattan Corporation:
142,089 Series C, 10.84% Pfd. ........ $ 4,378,117
5,000 Series G, 10.96% Pfd. ........ 154,062
Fleet Financial Group, Inc.:
20,000 Series E, 9.35% Pfd. ......... 562,500
38,100 Series G, 6.75% Pfd. ......... 2,021,681
48,700 Morgan (J.P.) & Company Inc.,
Series H, 6.625% Pfd. ........ 2,538,488
------------
TOTAL BANKING FIXED RATE
PREFERRED STOCKS.............. 12,064,324
------------
FINANCIAL SERVICES -- 6.2%
133,300 Household Capital,
8.70% TOPRS................... 3,465,800
76,900 Household International, Inc.,
Series 1993 A, 7.35% Pfd. .... 1,989,788
95,498 Lehman Brothers Holdings Inc.,
5.00% Conv. Pfd. ............. 2,506,822
90,600 Merrill Lynch & Company, Inc.,
Series A, 9.00% Pfd. ......... 2,712,337
56,800 Morgan Stanley Group Inc.,
7.75% Pfd. ................... 3,074,300
------------
TOTAL FINANCIAL SERVICES
FIXED RATE PREFERRED STOCKS
AND SECURITIES................ 13,749,047
------------
INDUSTRIAL -- 6.4%
80,343 Coastal Corporation,
Series H, $2.125 Pfd. ........ 2,073,854
111,800 Ford Motor Company,
Series B, 8.25% Pfd. ......... 3,109,438
87,633 James River Corporation,
Series O, 8.25% Pfd. ......... 2,245,596
</TABLE>

See Notes to Financial Statements.

<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1996
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ----------- ------------
<S> <C> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
INDUSTRIAL (CONTINUED)
71,750 Tenneco Inc.,
Series A, 8.25% Pfd. ......... $ 3,632,344
93,900 Transcanada Pipeline Ltd.,
8.50% COPRS................... 2,412,056
9,520 Viad Corporation,
$4.75 Sinking Fund Pfd. ...... 523,600
------------
TOTAL INDUSTRIAL FIXED RATE
PREFERRED STOCKS
AND SECURITIES................ 13,996,888
------------
INSURANCE -- 2.8%
116,000 AON Corporation,
8.00% Pfd. ................... 2,994,250
50,000 Berkley (W.R.) Corporation,
Series A, 7.375% Pfd. ........ 1,287,500
70,681 Hartford Capital,
Series B, 8.35% QUIPS......... 1,820,036
------------
TOTAL INSURANCE FIXED RATE
PREFERRED STOCKS
AND SECURITIES................ 6,101,786
------------
TOTAL FIXED RATE
PREFERRED STOCKS
AND SECURITIES................ 126,222,685
------------
TOTAL PREFERRED STOCKS
AND SECURITIES
(Cost $202,592,696)........... 215,574,415
------------
</TABLE>

<TABLE>
<CAPTION>
VALUE
(NOTE 1)
------------
<S> <C> <C>
MISCELLANEOUS SECURITIES -- 0.3% (Cost $1,441,460)
Put Options on U.S. Treasury
Bond Futures.................. $ 626,517
------------
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- -----------
<S> <C> <C> <C>

REPURCHASE AGREEMENT -- 1.2% (Cost $2,707,000)
$2,707,000 Agreement with UBS Securities
Inc., 5.60% dated 11/29/96, to
be repurchased at $2,708,263 on
12/2/96, collateralized by
$2,738,000 U.S. Treasury Note,
5.50% due 9/30/97
(value $2,763,920)............. 2,707,000
------------
TOTAL INVESTMENTS (Cost $206,741,156*).. 99.5% 218,907,932
OTHER ASSETS AND LIABILITIES (Net)...... 0.5 1,180,009
----- ------------
NET ASSETS.............................. 100.0% $220,087,941
===== ============
</TABLE>

- ---------------
* Aggregate cost for Federal tax purposes is $206,193,393.

ABBREVIATIONS:
TOPRS -- Trust Originated Preferred Securities (Note 7)
MIPS -- Monthly Income Preferred Securities (Note 7)
QUIPS -- Quarterly Income Preferred Securities (Note 7)
COPRS -- Canadian Originated Preferred Securities (Note 7)

See Notes to Financial Statements.

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1996
-----------------------------------

<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $206,741,156) (Note 1)
See accompanying schedule................................ $218,907,932
Receivable for securities sold............................. 2,018,982
Dividends and interest receivable.......................... 1,750,016
Prepaid expenses........................................... 20,712
------------
Total Assets.......................................... 222,697,642
LIABILITIES:
Payable for securities purchased........................... $ 2,013,774
Dividends payable.......................................... 335,368
Investment advisory fee payable (Note 2)................... 100,446
Accrued expenses and other payables........................ 160,113
-----------
Total Liabilities..................................... 2,609,701
------------
NET ASSETS...................................................... $220,087,941
============
NET ASSETS consist of:
Undistributed net investment income (Note 1)............... $ 1,526,596
Accumulated net realized gain on investments sold (Note
1)....................................................... 7,027,787
Unrealized appreciation of investments (Note 3)............ 12,166,776
Par value of Common Stock.................................. 98,386
Paid-in capital in excess of par value of Common Stock..... 141,768,396
Money Market Cumulative Preferred[Trademark] Stock (Note 5) 57,500,000
------------
Total Net Assets...................................... $220,087,941
============
PER SHARE
-----------
NET ASSETS AVAILABLE TO:
Money Market Cumulative Preferred[Trademark] Stock (575
shares outstanding) redemption value..................... $100,000.00 $ 57,500,000
Accumulated undeclared dividends on Money Market
Cumulative Preferred[Trademark] Stock................... 484.13 278,372
----------- ------------
$100,484.13 57,778,372
===========
Common Stock (9,838,571 shares outstanding)................ $16.50 162,309,569
======= ------------
TOTAL NET ASSETS................................................ $220,087,941
============
</TABLE>

See Notes to Financial Statements.

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 1996
- ------------------------------------

<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends.................................................... $15,588,565
Interest..................................................... 198,037
-----------
Total Investment Income................................. 15,786,602
EXPENSES:
Investment advisory fee (Note 2)............................. $1,182,796
Administration fee (Note 2).................................. 401,952
Money Market Cumulative Preferred[Trademark] broker
commissions and Auction Agent fees......................... 146,155
Shareholder servicing agent fees (Note 2).................... 143,766
Insurance expense............................................ 97,620
Legal and audit fees......................................... 71,662
Economic consulting fee (Note 2)............................. 64,561
Custodian fees (Note 2)...................................... 58,536
Directors' fees and expenses (Note 2)........................ 43,110
Amortization of deferred organization costs (Note 6)......... 3,833
Other........................................................ 102,502
----------
Total Expenses.......................................... 2,316,493
-----------
NET INVESTMENT INCOME............................................. 13,470,109
-----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(Notes 1 and 3):
Net realized gain on investments sold during the year........ 8,833,647
Change in net unrealized appreciation/(depreciation) of
investments during the year................................ (2,414,862)
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS................... 6,418,785
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............. $19,888,894
===========
</TABLE>

See Notes to Financial Statements.

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS
----------------------------------

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
NOVEMBER 30, 1996 NOVEMBER 30, 1995
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income........................................ $ 13,470,109 $ 14,633,331
Net realized gain/(loss) on investments sold during the
year....................................................... 8,833,647 (2,440,261)
Change in net unrealized appreciation/(depreciation) of
investments during the year................................ (2,414,862) 22,527,612
------------ ------------
Net increase in net assets resulting from operations......... 19,888,894 34,720,682
DISTRIBUTIONS:
Dividends paid from net investment income to Money Market
Cumulative Preferred(TM) Stock Shareholders (Note 5)....... (1,477,504) (2,572,041)
Distributions paid from net realized capital gains to Money
Market
Cumulative Preferred(TM) Stock Shareholders (Note 5)....... (760,850) (87,731)
Dividends paid from net investment income to Common Stock
Shareholders............................................... (10,615,834) (13,352,608)
Distributions paid from net realized capital gains to Common
Stock Shareholders (Note 9)................................ -- (8,002,477)
FUND SHARE TRANSACTIONS:
Increase from Common Stock transactions (Note 4)............. -- 2,961,204
------------ ------------
NET INCREASE IN NET ASSETS FOR THE YEAR........................... 7,034,706 13,667,029
NET ASSETS:
Beginning of year................................................. 213,053,235 199,386,206
------------ ------------
End of year (including undistributed net investment income of
$1,526,596 and $143,497, respectively).......................... $220,087,941 $213,053,235
============ ============
</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 YEAR ENDED PERIOD ENDED
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1996 1995 1994 1993 1992 1991*
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 15.80 $ 14.74 $ 18.39 $ 18.59 $ 16.56 $ 13.95
-------- -------- -------- -------- -------- --------
Net investment income......................... 1.37 1.48 1.42 1.48 1.75 1.43
Net realized and unrealized gain/(loss) on
investments................................. 0.65 2.05 (2.06) 1.37 2.82 2.67
-------- -------- -------- -------- -------- --------
Net increase/(decrease) in net asset value
resulting from investment operations......... 2.02 3.53 (0.64) 2.85 4.57 4.10
Offering costs and Money Market Cumulative
Preferred[Trademark] Stock underwriting
commissions charged to paid-in capital....... -- -- -- -- -- (0.27)
DISTRIBUTIONS:
Dividends paid from net investment income to
Money Market Cumulative Preferred[Trademark]
Stock Shareholders.......................... (0.15) (0.26) (0.16) (0.12) (0.17) (0.15)
Distributions paid from net realized capital
gains to Money Market Cumulative
Preferred[Trademark] Stock Shareholders...... (0.08) (0.01) (0.07) (0.07) (0.09) (0.04)
Dividends paid from net investment income to
Common Stock Shareholders.................... (1.08) (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[Trademark]
Stock........................................ (0.01) (0.01) 0.01 (0.01) 0.03 (0.04)
-------- -------- -------- -------- -------- --------
Total distributions........................... (1.32) (2.47) (3.01) (3.05) (2.54) (1.22)
-------- -------- -------- -------- -------- --------
Net asset value, end of year.................. $ 16.50 $ 15.80 $ 14.74 $ 18.39 $ 18.59 $ 16.56
======== ======== ======== ======== ======== ========
Market value, end of year..................... $ 15.500 $ 14.125 $ 13.500 $ 18.375 $ 19.625 $ 17.875
======== ======== ======== ======== ======== ========
Total investment return based on net asset
value***..................................... 12.78% 25.13% (5.22)% 15.54% 27.70% 26.16%
======== ======== ======== ======== ======== ========
Total investment return based on market
value***..................................... 18.50% 22.14% (13.12)% 9.33% 24.89% 26.68%
======== ======== ======== ======== ======== ========
Net assets, end of year (in 000's)............ $220,088 $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........................ 7.22% 8.33% 7.55% 7.33% 8.58% 9.18%**
Operating expenses........................... 1.51% 1.55% 1.52% 1.50% 1.63% 1.67%**
Portfolio turnover rate...................... 98% 94% 98% 110% 86% 90%
EXPENSE RATIO TO TOTAL AVERAGE NET ASSETS
(WHICH INCLUDES MONEY MARKET CUMULATIVE
PREFERRED[Trademark] STOCK):
Operating expenses........................... 1.10% 1.11% 1.11% 1.11% 1.17% 1.23%
</TABLE>

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

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

See Notes to Financial Statements.

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS (CONTINUED)
----------------------------------

The table below sets out information with respect to Money Market
Cumulative Preferred[Trademark] Stock currently outstanding.

<TABLE>
<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>
11/30/96 575 $382,762 $100,000 $100,000
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[Trademark] Stock and (iii) accumulated and
unpaid dividends on the outstanding Money Market Cumulative
Preferred[Trademark] 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[Trademark] 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 principles. 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.

The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.

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.

Prior to September 9, 1996, Lehman Brothers Global Economics ("Global
Economics") (formerly Economic Advisors, Inc.), a department of Lehman Brothers
Inc., served as the Fund's Economic

<PAGE>

Consultant. The Fund paid Global Economics at an annual rate equal to $75,000
for services provided. Allen Sinai served as the chief economist at Global
Economics. On September 9, 1996, Mr. Sinai, along with other key economists,
left Global Economics to join Primark Decision Economics Inc. ("Primark"). As of
October 18, 1996, Primark serves as the Fund's Economic Consultant. The Fund
pays Primark an annual fee equal to $45,333 for services provided.

First Data Investor Services Group, Inc. ("FDISG"), 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
pays FDISG a monthly fee at an annual rate of 0.19% 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
pays Boston Safe a monthly fee at an annual rate of 0.02% 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 pays FDISG a fee at an annual rate
of 0.04% of the Fund's average monthly net assets plus certain out-of-pocket
expenses.

As of December 1, 1996, the fees paid by the Fund to its administrator,
custodian and transfer agent have been revised as follows. The Fund will pay
FDISG for administration services a monthly fee at an annual rate of 0.12% of
the Fund's average monthly net assets. As compensation for Boston Safe's
services as custodian, the Fund will pay Boston Safe a monthly fee at an annual
rate of 0.01% of the Fund's average monthly net assets. The Fund will pay FDISG
for transfer agency services a monthly fee at an annual rate of 0.02% of the
Fund's average monthly net assets plus certain out-of-pocket expenses.

Chase Manhattan Bank ("Auction Agent") serves as the Fund's Money Market
Cumulative Preferred[Trademark] 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, 1996, excluding short-term investments, aggregated $201,811,900 and
$200,972,816, respectively.

At November 30, 1996, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $14,074,176
and aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over value was $1,359,637.

4. COMMON STOCK

At November 30, 1996, 240,000,000 shares of $0.01 par value Common Stock
were authorized.

<PAGE>

Common Stock transactions were as follows:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
11/30/96 11/30/95
--------------- --------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------- ----------
<S> <C> <C> <C> <C>
Issued as reinvestment of dividends under the Dividend
Reinvestment and Cash Purchase Plan....................... 0 $0 214,425 $2,961,204
===== ===== ======= ==========
</TABLE>

5. MONEY MARKET CUMULATIVE PREFERRED[TRADEMARK] 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 shares of Money Market
Cumulative Preferred[Trademark] 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[Trademark]
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[Trademark] Stock are cumulative.

The Fund is required to meet certain asset coverage tests with respect to
the Money Market Cumulative Preferred[Trademark] 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[Trademark] 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[Trademark]
Stock, the Fund may be required to make additional distributions to Money
Market Cumulative Preferred[Trademark] 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 distributions been eligible for the Dividends
Received Deduction.

An auction of the Money Market Cumulative Preferred[Trademark] 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[Trademark] Stock Shareholders may also trade shares in the
secondary market between auction dates.

At November 30, 1996, 575 shares of Money Market Cumulative
Preferred[Trademark] Stock were outstanding at the annual rate of 3.873%. 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

<PAGE>

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.

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[Trademark] Stock were $75,000 and $20,000, respectively, and were
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[Trademark] Stock), respectively. As of November 30, 1996,
all such costs have been fully amortized

7. PORTFOLIO INVESTMENT, 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 Ratings Group 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 by the Board of
Directors on July 21, 1995. The amended policy allows the Fund to invest up to
35% of its assets collectively in the following securities: Trust Originated
Preferred Securities ("TOPRS"), Monthly Income Preferred Securities ("MIPS"),
Quarterly Income Debt Securities ("QUIDS"), Quarterly Income Preferred
Securities ("QUIPS"), Canadian Originated Preferred Securities ("COPRS"), 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

<PAGE>

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, 1996, 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.

9. SUBSEQUENT EVENTS

On December 16, 1996, the Fund declared a dividend of $0.840 per share (of
which for tax purposes $0.199 per share represents a dividend from net
investment income and $0.641 per share represents a dividend from realized long
term capital gains) to Common Stock Shareholders of record December 26, 1996,
payable December 31, 1996.

As a result of the gains realized by the Fund, a portion of the
distributions paid to the Fund's Money Market Cumulative Preferred[Trademark]
Stock Shareholders from January 1, 1996 through November 30, 1996 has been
designated as being from long term capital gains, as required by ruling 89-81 of
the Internal Revenue Service Code. Therefore, on December 16, 1996, the Fund
declared an additional distribution of $233,868 payable December 18, 1996 to
Money Market Cumulative Preferred[Trademark] Stock Shareholders as required by
the Fund's Articles Supplementary. This additiona distribution is required to
reflect the fact that the original distributions did not qualify 100% for the
corporate Dividends Received Deduction.

<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 portfolio of investments, as
of November 30, 1996 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 five 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, 1996 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, 1996, 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 five 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.

Boston, Massachusetts Coopers & Lybrand L.L.P.
January 3, 1997

<PAGE>

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

For the fiscal year ended November 30, 1996, the Fund realized, and by
December 31, 1996, had distributed long term capital gains to both Common Stock
Shareholders and Money Market Cumulative Preferred[Trademark] Stock
Shareholders of $7,157,162. The Fund, in doing so, has fully utilized all
capital losses carried forward from the prior year. The amount may differ from
those shown elsewhere in this annual report due to differences in the
calculation of long term gains for tax purposes as compared with SEC financial
reporting requirements. Of the total distributions attributable to the fiscal
year ended November 30, 1996, including the Additional Distribution to Money
Market Cumulative Preferred[Trademark] Stock Shareholders, 65.44% qualifies
for the Dividends Received Deduction for eligible corporate investors. (See
Note 9).

For the calendar year ended December 31, 1996, 65.03% 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 1996.

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

<TABLE>
<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>
02/28/95 $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
02/28/96 3,825,761 0.39 2,608,007 0.27 (4,650,657) (0.47) (2,042,650) (0.20)
05/31/96 4,011,439 0.41 2,859,221 0.29 2,737,954 0.27 5,597,175 0.56
08/31/96 4,109,920 0.41 3,388,047 0.34 (1,126,981) (0.11) 2,261,066 0.23
11/30/96 3,839,482 0.39 3,009,704 0.31 9,458,469 0.96 12,468,173 1.27

<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, 1996, $9,103 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 19, 1996, the Fund held its Annual Meeting of Shareholders to (1)
elect one Director 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, 1996. The results of each proposal are as follows:

PROPOSAL 1: ELECTION OF DIRECTOR.

<TABLE>
<CAPTION>
NAME FOR AGAINST
---- --- -------
<S> <C> <C>
Common Stock
Martin Brody................................ 8,599,678 138,955
Preferred Stock
Not Applicable
</TABLE>

PROPOSAL 2: RATIFY THE SELECTION OF COOPERS & LYBRAND L.L.P. AS INDEPENDENT
ACCOUNTANTS.

<TABLE>
<CAPTION>
FOR AGAINST ABSTAINED
--- ------- ---------
<S> <C> <C> <C>
Voted........................... 8,562,290 37,368 98,975
</TABLE>

<PAGE>

DIRECTORS
Martin Brody
Donald F. Crumrine, CFA
Robert T. Flaherty, CFA
Morgan Gust
Robert F. Wulf [PREFERRED
INCOME
OFFICERS FUND
Robert T. Flaherty, CFA LOGO]
Chairman of the Board
and President
Donald F. Crumrine, CFA
Vice President
and Secretary
Robert M. Ettinger, CFA ANNUAL
Vice President REPORT
Peter C. Stimes, CFA
Vice President
and Treasurer
Carl D. Johns
Assistant 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.
(FDISG)
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 NOVEMBER 30, 1996
INTENDED FOR USE IN THE PURCHASE OR SALE OF SHARES
OF THE FUND OR OF ANY SECURITIES MENTIONED
IN THIS REPORT.