PREFERRED INCOME FUND INC, N-30D, 1998-01-30

PREFERRED INCOME FUND INC
N-30D, 1998-01-30

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<PAGE>

PREFERRED INCOME FUND
INCORPORATED

Dear Shareholder:

Fiscal 1997, which ended on November 30th, was a good year, but not
necessarily an easy one. Lots of little things added up to produce a return of
13.7% on the net asset value ("NAV") of the shares. This extended the Fund's
history of excellent returns as shown in the following table.

PREFERRED INCOME FUND
TOTAL RETURNS ON NET ASSET VALUE THROUGH 11/30/97

<TABLE>
<S> <C>
1 Year......................................................... 13.7% Per Year
3 Years........................................................ 17.1% Per Year
5 Years........................................................ 11.9% Per Year
Since Inception on 1/31/91..................................... 16.5% Per Year
</TABLE>

Distributions are assumed to be reinvested at the price obtained by the
Fund's Dividend Reinvestment Plan.

We have often said that the Fund is intended to be an alternative to better
quality bond funds, hopefully involving less exposure to the unpleasant effects
of fluctuations in interest rates. Our success in accomplishing that part of our
mission is demonstrated by the table below, which separates the Fund's
performance into weak and strong market periods. It compares the Fund to a group
of up to 59 closed-end bond funds consisting of all U.S. Government bond,
mortgage bond and term trust, and investment grade bond funds in the data base
compiled by Lipper Analytical Services, Inc. Any month in which the Lipper bond
fund composite earned a better total return than U.S. Treasury Bills was
considered a strong market; all other months were deemed to be weak markets.

TOTAL RETURNS ON NET ASSET VALUE

<TABLE>
<CAPTION>
WEAK STRONG ALL
MARKETS MARKETS MARKETS
-------- -------- --------
<S> <C> <C> <C>
Preferred Income Fund................................ 1.7% 24.4% 16.4%*
Lipper Higher Quality Bond Fund Composite............ -9.9% 19.9% 9.1%
</TABLE>

Based on data prepared by Lipper Analytical Services, Inc. on the
average annualized total returns in the 82 months ended 11/30/97,
including 27 weak months and 55 strong months.

* Differs from 16.5% return shown in the first table because Lipper
assumes distributions are reinvested at NAV.

<PAGE>

As shown above, based on total returns on NAV, the Fund has outperformed
the bond funds in both weak and strong markets. We expect to do well in really
weak markets, despite our leverage, because of the hedging strategy that is
unique to the Fund (and its two sister funds). In strong markets, however, the
cost of our hedges is, pure and simple, a drag on the Fund's performance that
must be overcome by our leverage; and just keeping up with the bond funds would
be a reasonable goal. Obviously, we did better than that! Overall, the
combination of exceptional performance in weak markets and good returns in
strong markets resulted in the return of 16.4% on NAV versus 9.1% for the bond
funds over the entire period of almost 7 years since the Fund started.

On balance, the Fund benefited from some rather wide swings in long term
interest rates during the fiscal year, but it was a constant battle. Long term
U.S. Treasury bond yields ended the year at just over 6%, compared to
approximately 6 3/8% a year earlier. The net decline in interest rates produced
stronger prices for the Fund's portfolio of preferred stock prices, which was
certainly helpful. However, moderate declines in interest rates such as this,
with significant zigs and zags along the way, can create some "interesting"
hedging challenges. On the whole, the systematic adjustments we made in our
hedge positions along the way worked out well. Thus, the Fund earned attractive
total returns on hedged preferreds overall.

The supply of traditional preferred stocks eligible for the Dividends
Received Deduction ("DRD") continues to shrink as outstanding issues are retired
faster than new issues come to market. Most of these retirements have been tax
motivated. More recently, however, we have also seen a number of utilities
seeking to modify or eliminate their outstanding traditional preferred stocks in
order to gain greater flexibility for coping with increasing competition in the
utility industry. This "creeping scarcity" has helped the value of the Fund's
holdings of traditional preferreds, although the phenomenon is now pretty well
reflected in the market. The newer forms of "hybrid" preferreds that are not
eligible for the DRD are in much more ample supply.

The pie charts show the shifts in the composition of the Fund's portfolio
by sectors over the last year.

[PREFERRED INCOME FUND]

<PAGE>

In the absence of strong overriding market trends, being in the right place
at the right time is, if possible, more important than ever. Adjustable rate
preferreds ("ARPs") have been star performers for the Fund, and we steadily
built up the Fund's position in ARPs over several years to roughly 42% of the
portfolio earlier this year. In the last several quarters, however, we have
reduced our holdings of ARPs to about 32% in recognition of the relatively full
valuations reached by certain ARPs. Our holdings of hybrid preferreds (which are
not eligible for the DRD) have been increased, although at a somewhat more
moderate pace just recently, to approximately 22%, reflecting their attractive
yields brought on by an abundant supply of such issues.

The Fund's position in common stocks is worth mentioning, even though it is
still a relatively small "blip" on the pie chart, well below the maximum level
of 15%. The several utility common stocks that we hold are special situations
that seemed to be attractive substitutes for traditional utility preferreds when
they were purchased. This part of the portfolio has contributed very positively
to the Fund's performance so far.

The Fund has declared a special year-end distribution to shareholders in
the amount of $0.46 per share, payable on December 31, 1997. The details
concerning the tax treatment of the distribution appear under "Subsequent
Events" on page 22 of this report. Since the inception of the Fund, such
year-end distributions have totaled $6.15 per share "above and beyond" the
regular monthly dividends that shareholders would normally have expected to
receive. This is another tangible reflection of the superior long term
performance of the Fund.

The Fund's regular monthly dividend rate has been reduced to take into
account the cumulative impact of the decline in interest rates as well as the
reduction in earning assets in the Fund's portfolio due to the special year-end
distribution to shareholders. This is a normal development, since the dividend
is expected to rise and fall with interest rates as a byproduct of the Fund's
portfolio strategies. The new monthly rate is $0.081 per share, compared to
$0.087 per share previously; and it will take effect in January, 1998 after the
special year-end distribution. Please see the Question and Answer section
following this letter for a further discussion of the Fund's dividends.

Sincerely,

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

December 18, 1997

<PAGE>

QUESTIONS AND ANSWERS

HOW HAS THE FUND'S DIVIDEND RATE BEEN IMPACTED BY INTEREST RATE CHANGES?

The Fund's income has behaved pretty much according to plan. We expect it
to rise and fall with long term interest rates. The hard part is that we want
income to go up more when rates are on the upswing and fall less when rates go
down. The following graph, which has been updated from several previous annual
reports, indicates that we have been quite successful at accomplishing just
that.

[PREFERRED INCOME FUND]

The chart shows the history of the Fund's income (on the left hand scale)
compared to 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 very reluctantly when rates were falling.
That is what we want.

We should point out that the chart takes into account the special
distribution on December 31, 1997 and the reduction in the dividend rate
effective in January, 1998. It is based on a hypothetical investment in 1,000
shares of the Fund at its inception. We have assumed that the shareholder took
the regular dividends in cash each month and reinvested in additional shares (at
net asset value) only the portions of the year-end special distributions that
were "above and beyond" the regular monthly dividend rate.

<PAGE>

ARE REDEMPTIONS OF PREFERREDS BY THEIR ISSUERS A PROBLEM AT THE CURRENT LEVEL OF
INTEREST RATES?

Yes! Unfortunately, nothing is forever, even a well timed purchase of a
bond or preferred stock. Most such securities are redeemable by their issuers
after a specified period of time, often at a premium price. When interest rates
fall and issuers can save money by refinancing, the older, higher rate issues
start disappearing as they become callable.

Our job as portfolio managers is to do whatever we can to delay and
minimize the impact of redemptions and falling interest rates on the Fund's
portfolio. So far, the steps we have taken have been very helpful. If interest
rates were to stay at current levels or to decline even further over the next
several years, however, the impact of redemptions would be difficult to dodge.

DO YOU EXPECT THE FUND'S HOLDINGS OF HYBRID PREFERREDS TO INCREASE FURTHER?

We probably will add to hybrid preferreds, but it depends on the market.
Typically, we increase our holdings of hybrids when, first, they look
particularly cheap and, second, traditional preferreds, which are eligible for
the Dividends Received Deduction ("DRD") for corporate investors, are hard to
buy at prices that make sense. Under those conditions, hybrids are pretty much a
win-win situation in that they greatly increase the current yield of the
portfolio without significantly reducing the after-tax yield to our corporate
shareholders. It has been a great strategy for reducing the impact on the
portfolio of potential redemptions of higher rate traditional preferreds.

The Fund's Board of Directors recently refined its policies concerning
hybrids, recognizing the way in which that market has evolved. We now
distinguish between hybrids that are essentially debt securities and those that
are more properly described as preferreds. Issues categorized as debt are
limited, in the aggregate, to 35% of the Fund's portfolio, while there is no
limit on issues classified as preferreds.

IS THE PORTION OF THE FUND'S DIVIDENDS QUALIFYING FOR THE DRD LIKELY TO DECLINE?

Most probably, yes! Over the course of fiscal 1997, we increased our
holdings of hybrids from about 6% of the portfolio to approximately 22%. Just
holding on to the hybrids we now own throughout fiscal 1998 would, by itself,
increase our income that does not qualify for the DRD. Any distributions to
shareholders attributable to the excess of that non-qualifying income over the
Fund's expenses would not qualify for the DRD.

Although the Fund is no longer managed with a view to maximizing income
eligible for the DRD, the DRD is still important. To the extent that our
distributions do not fully qualify for the DRD, we must make extra "gross up"
payments to the holders of the Money Market Cumulative Preferred(TM) stock that
provides the Fund's leverage. In addition, the DRD increases the appeal of the
Fund's shares to corporate investors and broadens the market for our stock,
which helps all shareholders.

As a rule of thumb, if a traditional DRD eligible preferred is attractive
to corporate investors generally, the Fund will probably be able to make money
on it and get some advantage from the DRD also. If it is not attractive to
corporate holders, who are typically the investors willing to pay the highest
price, the Fund probably should not own it either.

<PAGE>

WHAT HAS HAPPENED WITH THE DISCOUNT OF THE MARKET PRICE OF THE FUND'S SHARES
FROM THEIR NET ASSET VALUE?

Over the last year, the discount was more moderate, and certainly more
stable, compared to the several previous years. The following graph shows the
history.

[GRAPH OF THE DISCOUNT FROM NAV]

One very positive effect of the stabilization of the discount was that the
market price of the shares fully reflected the excellent performance of the Fund
based on its net asset value. The returns to shareholders based on market price
were actually slightly better than the returns on NAV.

DOES THE FUND HAVE TO BE SO DARN COMPLICATED?

For better or worse, the answer is "Yes!" At a time when money managers
generally are having trouble beating the markets in which they invest and
justifying their existence, you really have to do something different from the
rest. If we simplified the Fund's strategies, it probably would not work as
well. We would rather have to apologize for its complexity than for its results.

<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 31, 1996................................... $0.840 $ 15.57 $ 14.7500 $ 15.23
January 31, 1997.................................... 0.087 15.46 14.7500 14.73
February 28, 1997................................... 0.087 15.74 14.7500 14.88
March 31, 1997...................................... 0.087 15.95 15.1250 15.16
April 30, 1997...................................... 0.087 15.84 14.8750 14.94
May 31, 1997........................................ 0.087 15.99 15.2500 15.27
June 30, 1997....................................... 0.087 16.12 15.5625 15.59
July 31, 1997....................................... 0.087 16.55 15.9375 16.03
August 31, 1997..................................... 0.087 16.46 15.6875 15.86
September 30, 1997.................................. 0.087 16.64 15.8750 16.12
October 31, 1997.................................... 0.087 16.74 15.8750 15.98
November 30, 1997................................... 0.087 16.71 16.1875 15.92
</TABLE>

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

(1) See ADDITIONAL INFORMATION; Dividend Reinvestment and Cash Purchase Plan on
pages 25 and 26 of this report.

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1997
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- ------------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES -- 95.4 %
ADJUSTABLE RATE PREFERRED STOCKS -- 32.1 %
UTILITIES -- 7.8 %
24,920 Arizona Public Service Company,
Series Q, Adj. Rate Pfd. ...... $ 2,379,860
11,140 Gulf Power Company,
Adj. Rate Pfd. ................ 279,892
194,960 New York State Electric & Gas
Corporation,
Series B, Adj. Rate Pfd. ...... 4,898,370
Niagara Mohawk Power Corporation:
154,879 Series A, Adj. Rate Pfd. ........ 3,542,857
32,455 Series B, Adj. Rate Pfd. ........ 811,375
88,745 Series C, Adj. Rate Pfd. ........ 2,129,880
Northern States Power Company:
19,350 Series A, Adj. Rate Pfd. ........ 1,935,000
14,200 Series B, Adj. Rate Pfd. ........ 1,420,000
------------
TOTAL UTILITY ADJUSTABLE RATE
PREFERRED STOCKS............... 17,397,234
------------
BANKING -- 24.1 %
BankAmerica Corporation:
9,700 Series A, Adj. Rate Pfd. ........ 485,606
29,800 Series B, Adj. Rate Pfd. ........ 2,965,100
BankBoston Corporation:
13,400 Series A, Adj. Rate Pfd. ........ 665,813
114,900 Series B, Adj. Rate Pfd. ........ 5,716,275
52,573 Series C, Adj. Rate Pfd. ........ 4,941,862
Bankers Trust New York
Corporation:
262,100 Series Q, Adj. Rate Pfd. ........ 6,511,547
37,200 Series R, Adj. Rate Pfd. ........ 919,538
Chase Manhattan Corporation:
62,275 Series L, Adj. Rate Pfd. ........ 6,243,069
10,000 Series N, Adj. Rate Pfd. ........ 251,563
Citicorp:
67,600 Second Series, Adj. Rate Pfd. ... 6,705,070
11,500 Third Series, Adj. Rate Pfd. .... 1,155,750
80,600 Series 18, Adj. Rate Pfd. ....... 2,012,481
42,400 Series 19, Adj. Rate Pfd. ....... 1,060,000
First Chicago NBD:
30,175 Series B, Adj. Rate Pfd. ........ 3,002,413
34,000 Series C, Adj. Rate Pfd. ........ 3,417,000

<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- ------------
<C> <S> <C>
56,300 Morgan (J.P.) & Company Inc.,
Series A, Adj. Rate Pfd. ...... $ 5,095,150
56,100 Republic New York Corporation,
Series D, Adj. Rate Pfd. ...... 1,402,500
20,000 Wells Fargo & Company,
Series B, Adj. Rate Pfd. ...... 980,000
------------
TOTAL BANKING ADJUSTABLE RATE
PREFERRED STOCKS............... 53,530,737
------------
OTHER -- 0.2%
3 Federal Home Loan Mortgage
Corporation,
6.125% Var. Inverse Pfd........ 333,750
------------
TOTAL ADJUSTABLE RATE
PREFERRED STOCKS............... 71,261,721
------------
FIXED RATE PREFERRED STOCKS AND SECURITIES -- 63.3%
UTILITIES -- 32.9 %
Alabama Power Company:
75,000 7.375% TOPRS..................... 1,898,438
140,900 Class A, 6.40% Pfd. ............. 3,592,950
45,000 Appalachian Power Company,
Series A, 8.25% TOPRS.......... 1,164,375
21,100 Arizona Public Service Company,
Series W, 7.25% Pfd. .......... 539,369
Baltimore Gas & Electric Company:
4,750 Series 1993, 6.70% Pfd. ......... 527,250
44,750 Series 1995, 6.99% Pfd. ......... 5,123,875
10,000 Boston Edison Company,
4.78% Pfd. .................... 817,500
5,000 Central Hudson Gas & Electric
Corporation,
Series D, 4.35% Pfd. .......... 371,250
18,000 Columbus Southern Power Company,
Series B, 7.92% Jr. Sub.
Debt........................... 459,000
33,800 Consolidated Edison Company
of New York,
Series A, 7.75% QUICS.......... 868,238
128,747 Consumers Energy Company,
8.32% Pfd. .................... 3,403,749
80,850 CPL Capital,
Series A, 8.00% QUIPS.......... 2,107,153
</TABLE>

See Notes to Financial Statements.

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1997
---------------------------------------------------------------

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- ------------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
UTILITIES (CONTINUED)
6,870 Dayton Power & Light Company,
Series C, 3.90% Pfd. .......... $ 472,313
Duke Power Company:
20,000 Series C, 4.50% Pfd. ............ 1,627,500
6,000 Series R, 7.50% Sinking Fund
Pfd. .......................... 629,625
8,600 Series S, 7.85% Pfd. ............ 986,850
8,400 Series W, 7.00% Pfd. ............ 933,450
54,000 Duquesne Capital,
Series A, 8.375% MIPS.......... 1,390,500
26,650 El Paso, Tennessee Pipeline
Company,
Series A, 8.25% Pfd. .......... 1,512,388
Florida Power & Light Company:
30,250 Series S, 6.98% Pfd. ............ 3,357,750
16,600 Series T, 7.05% Pfd. ............ 1,850,900
13,500 Georgia Power, 7.75% TOPRS....... 347,625
8,000 Gulf Power Company,
Series A, 7.625% QUIPS......... 205,000
Hawaiian Electric Industries:
20,000 8.05% QUIPS...................... 515,000
22,100 8.36% TOPRS...................... 574,600
Illinois Power Company:
4,530 Series A, 4.08% Pfd. ............ 157,984
8,960 Series D, 4.42% Pfd. ............ 339,360
29,370 Series E, 4.70% Pfd. ............ 1,182,143
10,000 Jersey Central Power & Light
Company,
Series K, 7.52% Sinking Fund
Pfd. .......................... 1,047,500
18,500 Long Island Lighting,
7.95% Sinking Fund Pfd. ....... 479,844
8,500 Monongahela Power Company,
Series L, $7.73 Pfd. .......... 977,500
52,000 Montana Power Capital,
Series A, 8.45% QUIPS. ........ 1,384,500
5,600 Montana Power Company,
$6.875 Pfd. ................... 622,300
10,000 MP&L Capital,
8.05% QUIPS.................... 257,500
New York State Electric & Gas
Corporation:
5,000 6.30% Sinking Fund Pfd. ......... 520,625
6,956 6.48% Pfd........................ 720,816
VALUE
SHARES/PAR (NOTE 1)
- ---------- ------------
Niagara Mohawk Power Corporation:
30,111 7.85% Sinking Fund Pfd. ......... $ 754,657
58,135 9.50% Pfd. ...................... 1,533,311
3,500 Northern Indiana Public Service
Company,
7.44% Pfd. .................... 360,937
6,170 Ohio Edison Company,
4.44% Pfd. .................... 387,939
Ohio Power Company:
23,100 Series A, 8.16% QUIDS............ 594,825
15,500 Series B, 7.92% QUIDS............ 395,250
4,000 Pacificorp,
7.48% Sinking Fund Pfd......... 454,000
PP&L Capital Trust:
86,900 8.10% TOPRS...................... 2,237,675
7,630 8.20% TOPRS...................... 197,426
2,800,000 PSD Capital,
8.231%, 6/1/27 Capital
Security....................... 2,968,000
PSI Energy, Inc.:
12,350 6.875% Pfd. ..................... 1,369,306
69,782 7.44% Pfd. ...................... 1,757,634
10,000 Public Service Company of New
Mexico,
4.58% Private Pfd. ............ 616,250
Puget Sound Power & Light
Company:
13,650 7.75% Sinking Fund Pfd. ......... 1,440,075
115,900 Series II, 7.45% Pfd. ........... 3,259,688
4,884 Rochester Gas & Electric
Corporation,
Series II, 4.10% Pfd. ......... 338,828
54,200 San Diego Gas & Electric Company,
6.80% Pfd. .................... 1,514,212
43,000 Sierra Pacific Capital,
8.60% TOPRS.................... 1,158,312
39,000 South Carolina Electric & Gas,
7.55% TOPRS.................... 982,313
50,000 Southwestern Public Service
Company,
7.85% TOPRS.................... 1,284,375
Transcanada Pipeline Ltd.:
23,450 8.50% COPRS...................... 617,028
120,000 8.75% TOPRS...................... 3,187,500
TU Capital:
29,050 Series M, 8.25% TOPRS............ 751,669
10,100 Series N, 9.00% TOPRS............ 256,288
</TABLE>

See Notes to Financial Statements.

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1997
- ---------------------------------------------------------------

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- ------------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
UTILITIES (CONTINUED)
1,000,000 Union Electric Power Company,
7.69%, 12/15/36 Capital
Security....................... $ 1,037,500
5,200 Virginia Electric & Power
Company,
$6.98 Pfd. .................... 579,150
------------
TOTAL UTILITY FIXED RATE
PREFERRED STOCKS AND
SECURITIES..................... 73,000,868
------------
BANKING -- 13.0 %
4,300 ABN Amro North America,
6.59% Pfd. 144A**.............. 4,697,750
21,158 Bankers Trust New York
Corporation,
Series O, 7.625% Pfd. ......... 537,545
900,000 Bank of New York,
7.78%, 12/1/26 Capital Security
144A**......................... 923,625
1,500,000 Chase Capital,
7.67%, 12/1/26 Capital
Security....................... 1,531,875
Chase Manhattan Corporation:
142,089 Series C, 10.84% Pfd. ........... 4,426,960
5,000 Series G, 10.96% Pfd. ........... 152,656
1,700,000 First Chicago Capital,
7.75%, 12/1/26 Capital Security
144A**......................... 1,734,000
2,000,000 First Union Institutional
Capital,
8.04%, 12/1/26 Capital Security
144A**......................... 2,117,500
Fleet Financial Group, Inc.:
20,000 Series E, 9.35% Pfd. ............ 557,500
38,100 Series G, 6.75% Pfd. ............ 2,107,406
700,000 Great Western Financial
Corporation,
8.206%, 2/1/27 Capital
Security....................... 740,250
2,250 La Salle National Corporation,
6.46% Pfd. .................... 2,418,750
44,300 Republic New York Corporation,
5.715% Pfd. ................... 2,270,375
1,000,000 Summit Bancorp,
8.40%, 3/15/27 Capital Security
144A**......................... 1,073,750
VALUE
SHARES/PAR (NOTE 1)
- ---------- ------------
3,300,000 Washington Mutual Capital,
8.375%, 6/1/27 Capital
Security....................... $ 3,555,750
------------
TOTAL BANKING FIXED RATE
PREFERRED STOCKS AND
SECURITIES..................... 28,845,692
------------
FINANCIAL SERVICES -- 9.2 %
10,000 Heller Financial,
6.687% Pfd. 144A**............. 1,107,500
133,300 Household International, Inc.,
8.70% TOPRS.................... 3,549,112
Lehman Brothers Holdings Inc.:
109,498 5.00% Conv. Pfd. ................ 3,640,809
12,988 Series A, 8.30% QUICS............ 338,500
Merrill Lynch & Company, Inc.:
27,000 7.75% TOPRS...................... 712,125
67,400 8.00% TOPRS...................... 1,815,588
90,600 Series A, 9.00% Pfd. ............ 2,836,912
56,800 Morgan Stanley Group Inc.,
7.75% Pfd. .................... 3,081,400
35 Prudential Human Resources
Management Company,
6.30% Private, Sinking Fund
Pfd. .......................... 3,434,375
------------
TOTAL FINANCIAL SERVICES FIXED
RATE PREFERRED STOCKS AND
SECURITIES..................... 20,516,321
------------
INSURANCE -- 5.4 %
1,200,000 American General Capital,
7.57%, 12/1/45 Capital Security
144A**......................... 1,206,000
53,681 Hartford Capital,
Series B, 8.35% QUIPS.......... 1,415,836
Travelers Group:
36,550 Series F, 6.365% Pfd. ........... 1,896,031
14,700 Series G, 6.213% Pfd. ........... 747,863
66,200 Series H, 6.231% Pfd. ........... 3,401,025
68,050 Series M, 5.864% Pfd. ........... 3,342,956
------------
TOTAL INSURANCE FIXED RATE
PREFERRED STOCKS AND
SECURITIES..................... 12,009,711
------------
</TABLE>

See Notes to Financial Statements.

<PAGE>

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- ------------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
MISCELLANEOUS INDUSTRIES -- 2.8 %
90,443 Coastal Corporation,
Series H, $2.125 Pfd. ......... $ 2,289,338
111,800 Ford Motor Company,
Series B, 8.25% Pfd. .......... 3,221,237
9,520 Viad Corporation,
$4.75 Sinking Fund Pfd. ....... 647,360
------------
TOTAL MISCELLANEOUS FIXED RATE
PREFERRED STOCKS............... 6,157,935
------------
TOTAL FIXED RATE PREFERRED STOCKS
AND SECURITIES................. 140,530,527
------------
TOTAL PREFERRED STOCKS
AND SECURITIES
(Cost $193,057,225)............ 211,792,248
------------
COMMON STOCKS -- 1.7 %
UTILITIES -- 1.7 %
7,000 Consolidated Edison Company of
New York, Inc. ................ 263,813
30,000 Nevada Power Company............. 695,625
3,000 New York State Electric and Gas
Corporation.................... 92,063
2,400 Northern States Power Company.... 131,475
32,000 Scana Corporation................ 882,000
47,100 Wisconsin Energy Corporation..... 1,273,172
16,700 WPS Resources Corporation........ 505,175
------------
TOTAL UTILITY COMMON STOCKS
(Cost $3,518,790)................ 3,843,323
------------
MISCELLANEOUS SECURITIES -- 1.7 %
March Put Options on U.S.
Treasury
Bond Futures, expiring
2/20/98+....................... 1,690,469
76,250 New Jersey Economic Development
Authority State Pension Funding
Bonds,
7.60% ($25 par value).......... 1,972,969
------------
TOTAL MISCELLANEOUS SECURITIES
(Cost $4,621,017)................ 3,663,438
------------
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 1)
- ----------- ------------
<C> <S> <C>
REPURCHASE AGREEMENT -- 0.7% (Cost $1,661,000)
$1,661,000 Agreement with UBS Securities
Inc., 5.67% dated 11/28/97, to
be repurchased at $1,661,785
on 12/1/97, collateralized by
$1,633,000 U.S. Treasury Note,
6.25% due 5/31/99
(value $1,696,619)............ $ 1,661,000
------------
TOTAL INVESTMENTS (Cost $202,858,032*)...99.5%
220,960,009
OTHER ASSETS AND LIABILITIES (Net)........ 0.5
1,030,145
---- -----------
NET ASSETS..............................100.0%
$221,990,154
==== ===========
</TABLE>

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

* Aggregate cost for Federal tax purposes $201,914,642.
** Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from registration
to qualified institutional buyers.
+ Non-income producing.

<TABLE>
<S> <C>
ABBREVIATIONS (Note 6):
TOPRS -- Trust Originated Preferred Securities
QUIPS -- Quarterly Income Preferred Securities
MIPS -- Monthly Income Preferred Securities
QUIDS -- Quarterly Income Debt Securities
COPRS -- Canadian Originated Preferred Securities
QUICS -- Quarterly Income Capital Securities

Capital Securities are debt instruments and the amounts
shown in the Shares/Par column are dollar amounts of par
value.
</TABLE>

See Notes to Financial Statements.

<PAGE>

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

Preferred Income Fund Incorporated
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1997
- -------------------------------------------------------------

<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $202,858,032) (Note 1)
See accompanying schedule.................................. $220,960,009
Cash.......................................................... 363
Dividends and interest receivable............................. 1,911,542
Prepaid expenses.............................................. 21,676
------------
Total Assets.......................................... 222,893,590
LIABILITIES:
Payable for securities purchased.............................. $ 337,039
Dividends payable to Common Shareholders...................... 281,632
Investment advisory fee payable (Note 2)...................... 101,513
Accrued expenses and other payables........................... 183,252
-----------
Total Liabilities..................................... 903,436
------------
NET ASSETS...................................................... $221,990,154
============
NET ASSETS consist of:
Undistributed net investment income (Note 1).................. $ 608,618
Accumulated net realized gain on investments sold (Note 1).... 3,925,600
Unrealized appreciation of investments (Note 3)............... 18,101,977
Par value of Common Stock..................................... 98,386
Paid-in capital in excess of par value of Common Stock........ 141,755,573
Money Market Cumulative Preferred(TM) Stock (Note 5).......... 57,500,000
------------
Total Net Assets...................................... $221,990,154
============
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........................................ 203.00 116,725
----------- ------------
$100,203.00 57,616,725
===========
Common Stock (9,838,571 shares outstanding)................... $16.71 164,373,429
------- ------------
-------
TOTAL NET ASSETS................................................ $221,990,154
============
</TABLE>

See Notes to Financial Statements.

<PAGE>

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

Preferred Income Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 1997
-----------------------------------------------

<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends.................................................... $13,877,873
Interest..................................................... 731,801
-----------
Total Investment Income................................. 14,609,674
EXPENSES:
Investment advisory fee (Note 2)............................. $1,208,201
Administration fee (Note 2).................................. 261,860
Money Market Cumulative Preferred(TM) broker commissions
and Auction Agent fees..................................... 146,156
Shareholder servicing agent fees (Note 2).................... 111,107
Insurance expense............................................ 85,358
Legal and audit fees......................................... 71,431
Directors' fees and expenses (Note 2)........................ 58,068
Economic consulting fee (Note 2)............................. 45,333
Custodian fees (Note 2)...................................... 29,813
Other........................................................ 121,284
----------
Total Expenses.......................................... 2,138,611
-----------
NET INVESTMENT INCOME............................................. 12,471,063
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
(Notes 1 and 3):
Net realized gain on investments sold during the year........ 3,916,069
Change in net unrealized appreciation of investments during
the year.................................................... 5,935,201
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS................... 9,851,270
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............. $22,322,333
===========
</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, 1997 NOVEMBER 30, 1996
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income....................................... $ 12,471,063 $ 13,470,109
Net realized gain on investments sold during the year....... 3,916,069 8,833,647
Change in net unrealized appreciation/(depreciation) of
investments during the year............................... 5,935,201 (2,414,862)
------------- -------------
Net increase in net assets resulting from operations........ 22,322,333 19,888,894
DISTRIBUTIONS:
Dividends paid from net investment income to Money Market
Cumulative Preferred(TM) Stock Shareholders (Note 5)...... (2,117,616) (1,477,504)
Distributions paid from net realized capital gains to Money
Market Cumulative Preferred(TM) Stock Shareholders (Note
5)........................................................ (622,495) (760,850)
Dividends paid from net investment income to Common Stock
Shareholders.............................................. (11,293,196) (10,615,834)
Distributions paid from net realized capital gains to Common
Stock Shareholders........................................ (6,386,813) --
------------- -------------
NET INCREASE IN NET ASSETS FOR THE YEAR.......................... 1,902,213 7,034,706
NET ASSETS:
Beginning of year........................................... 220,087,941 213,053,235
------------- -------------
End of year (including undistributed net investment income
of $608,618 and $1,526,596, respectively)................. $ 221,990,154 $ 220,087,941
============= =============
</TABLE>

See Notes to Financial Statements.

<PAGE>

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

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.

<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of year.............................. $ 16.50 $ 15.80 $ 14.74 $ 18.39 $ 18.59
-------- -------- --------- --------- --------
Net investment income........................................... 1.27 1.37 1.48 1.42 1.48
Net realized and unrealized gain/(loss) on investments.......... 1.00 0.65 2.05 (2.06) 1.37
-------- -------- --------- --------- --------
Net increase/(decrease) in net asset value...................... 2.27 2.02 3.53 (0.64) 2.85
-------- -------- --------- --------- --------
DISTRIBUTIONS:
Dividends paid from net investment income to MMP*
Shareholders................................................... (0.22) (0.15) (0.26) (0.16) (0.12)
Distributions paid from net realized capital gains to MMP*
Shareholders................................................... (0.06) (0.08) (0.01) (0.07) (0.07)
Dividends paid from net investment income to Common Stock
Shareholders................................................... (1.15) (1.08) (1.36) (1.15) (1.34)
Distributions paid from net realized capital gains to Common
Stock Shareholders............................................. (0.65) -- (0.83) (1.64) (1.51)
Change in accumulated undeclared dividends on MMP*.............. 0.02 (0.01) (0.01) 0.01 (0.01)
-------- -------- --------- --------- --------
Total distributions............................................. (2.06) (1.32) (2.47) (3.01) (3.05)
-------- -------- --------- --------- --------
Net asset value, end of year.................................... $ 16.71 $ 16.50 $ 15.80 $ 14.74 $ 18.39
======== ======== ========= ========= ========
Market value, end of year....................................... $ 16.188 $ 15.500 $ 14.125 $ 13.500 $ 18.375
======== ======== ========= ========= ========
Total investment return based on net asset value**.............. 13.65% 12.78% 25.13% (5.22)% 15.54%
======== ======== ========= ========= ========
Total investment return based on market value**................. 17.20% 18.50% 22.14% (13.12)% 9.33%
======== ======== ========= ========= ========
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK
SHAREHOLDERS:
Operating expenses........................................... 1.34% 1.51% 1.55% 1.52% 1.50%
Net investment income***..................................... 6.22% 7.22% 8.33% 7.55% 7.33%
SUPPLEMENTAL DATA:
Portfolio turnover rate...................................... 74% 98% 94% 98% 110%
Net assets, end of year (in 000's)........................... $221,990 $220,088 $213,053 $199,386 $225,896
- ----------------------------------------------------------------
Ratio of operating expenses to Total Average Net Assets
including MMP*................................................. 0.99% 1.10% 1.11% 1.11% 1.11%
</TABLE>

* Money Market Cumulative Preferred(TM) Stock.
** Assumes reinvestment of distributions at the price obtained by the Fund's
Dividend Reinvestment Plan.
*** The net investment income ratios reflect income net of operating expenses
and payments to MMP* Shareholders.

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(TM) 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>
11/30/97 575 $ 386,070 $100,000 $100,000
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
</TABLE>

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

(1) Excludes accumulated undeclared dividends.

(2) See Note 5.

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 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 continue 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 and capital gain distributions are determined and characterized in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to (1) differing
treatments of income and gains on various investment securities held by the
Fund, including timing differences, (2) the attribution of expenses against
certain components of taxable investment income, and (3) federal regulations
requiring proportional allocation of income and gains to all classes of
Shareholders.

The Internal Revenue Code of 1986, as amended, imposes a 4% nondeductible
excise tax on the Fund to the extent the Fund does not distribute by the end of
any calendar year at least (1) 98% of the sum of its net investment income for
that year and its capital gains (both long-term and short-term) for its fiscal
year and (2) certain undistributed amounts from previous years.

Other: 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.

<PAGE>

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

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.

Primark Decision Economics Inc. ("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. ("Investor Services Group"), a
wholly owned subsidiary of First Data Corporation, serves as the Fund's
Administrator and Transfer Agent. As Administrator, Investor Services Group
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 Investor
Services Group's services as Administrator, the Fund pays Investor Services
Group a monthly fee at an annual rate of 0.12% 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 0.01% of the Fund's average monthly net
assets. Investor Services Group also serves as the Fund's Common Stock servicing
agent (transfer agent), dividend-paying agent and registrar, and as compensation
for Investor Services Group's services as transfer agent, the Fund pays Investor
Services Group a 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(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, 1997, excluding short-term investments, aggregated $156,338,093 and
$168,938,625, respectively.

At November 30, 1997, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $20,099,298
and aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over value was $1,053,931.

<PAGE>

4. COMMON STOCK

At November 30, 1997, 240,000,000 shares of $0.01 par value Common Stock
were authorized. There were no Common Stock transactions for the years ended
November 30, 1997 and 1996.

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 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 is 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 distributions been eligible for the 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, 1997, 575 shares of Money Market Cumulative Preferred(TM)
Stock were outstanding at the annual rate of 4.06%. 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>

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

6. PORTFOLIO INVESTMENTS, CONCENTRATION AND INVESTMENT QUALITY

The Fund invests primarily in adjustable and fixed rate preferred stocks
and similar hybrid securities. 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 Rating 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. On May 3, 1997, the Fund amended its investment policy to
permit the Fund to invest up to 15% of its assets in common stock. 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 collectively in
the following: Trust Originated Preferred Securities ("TOPRS"), Monthly Income
Preferred Shares ("MIPS"), Quarterly Income Debt Securities ("QUIDS"), Quarterly
Income Preferred Shares ("QUIPS"), Canadian Originated Preferred Securities
("COPRS"), Quarterly Income Capital Shares ("QUICS"), and similarly-structured
instruments commonly referred to as hybrid or taxable preferreds, subject to the
quality standards set forth above. The Fund's investment policy was further
amended on October 17, 1997, to clarify that the foregoing 35% limitation only
applies to such TOPRS, MIPS, QUIDS, QUIPS, COPRS, QUICS and analogous securities
that the Fund's Adviser deems to be debt-like in key characteristics.

7. 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, 1997, 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>

8. SUBSEQUENT EVENTS

On December 15, 1997, the Fund declared a distribution of $0.46 per share
(of which for tax purposes $0.2129 per share represents a dividend from ordinary
income and $0.2471 per share represents a dividend from realized long term
capital gains) to Common Stock Shareholders of record December 24, 1997, payable
December 31, 1997.

As a result of the gains realized by the Fund, a portion of the
distributions paid to the Fund's Money Market Cumulative Preferred(TM) Stock
Shareholders from January 1, 1997 through November 30, 1997 has been designated
as being from long term capital gains, as required by ruling 89-81 of the
Internal Revenue Code of 1986, as amended. Therefore, on December 15, 1997, the
Fund declared an additional distribution of $193,401 payable December 18, 1997
to Money Market Cumulative Preferred(TM) Stock Shareholders as required by the
Fund's Articles Supplementary. This additional 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, 1997 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. 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, 1997, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our 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, 1997, 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, in conformity with
generally accepted accounting principles.

Boston, Massachusetts Coopers & Lybrand L.L.P.
January 6, 1998

<PAGE>

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

For the fiscal year ended November 30, 1997, the Fund realized and, by
December 31, 1997, had distributed long term capital gains to both Common Stock
Shareholders and Money Market Cumulative Preferred(TM) Stock Shareholders of
$2,909,962. All long term capital gains are subject to taxation at the 28%
maximum tax rate for individual tax payers. 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, 1997, including the Additional Distribution to Money Market
Cumulative Preferred(TM) Stock Shareholders, 73.83% qualified for the Dividends
Received Deduction for eligible corporate investors. (See Note 8).

For the calendar year ended December 31, 1997, 74.33% of all distributions
paid to Common Stock Shareholders qualifies for the Dividends Received Deduction
for eligible corporate investors. Shareholders should refer to Form 1099 and
accompanying additional information and the information contained herein when
preparing their tax returns to determine the appropriate tax characterization of
the distributions they received from the Fund in calendar year 1997.

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

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>
02/28/96 $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
02/28/97 3,461,758 0.35 2,921,492 0.29 366,250 0.04 3,287,742 0.33
05/31/97 3,693,092 0.38 3,207,492 0.33 2,423,903 0.25 5,631,395 0.58
08/31/97 3,698,518 0.38 3,143,252 0.32 4,708,452 0.47 7,851,704 0.79
11/30/97 3,756,306 0.38 3,198,827 0.33 2,352,665 0.24 5,551,492 0.57
</TABLE>

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

* Per share of common stock.

<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 Investor Services Group 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, Investor Services Group 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 Investor Services Group 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, Investor Services
Group 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 Investor
Services Group's open market purchases in connection with the reinvestment of
dividends or capital gains distributions. For the year ended November 30, 1997,
$12,296 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 Investor Services
Group in writing, by completing the form on the back of the Plan account
statement and forwarding it to Investor Services Group or by calling Investor
Services Group directly. A termination will be effective immediately if notice
is received by Investor Services Group 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, Investor Services Group 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 Investor Services Group at
1-800-331-1710.

MEETING OF SHAREHOLDERS

On July 25, 1997, the Fund held its Annual Meeting of Shareholders to (1)
elect three 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, 1997. The results of each proposal are as follows:

PROPOSAL 1: ELECTION OF DIRECTOR.

<TABLE>
<CAPTION>
NAME FOR WITHHELD UNVOTED
- --------------------------------------------------------------- --------- -------- ---------
<S> <C> <C> <C>
Common Stock
Robert F. Wulf.......................................... 8,856,347 90,926 --
David Gale.............................................. 8,854,283 91,991 --
Preferred Stock
Donald F. Crumrine...................................... 450 -- 125
</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..................................................... 8,834,384 28,011 84,329
</TABLE>

<PAGE>

DIRECTORS
Martin Brody
Donald F. Crumrine, CFA
Robert T. Flaherty, CFA
David Gale
Morgan Gust
Robert F. Wulf, CFA

OFFICERS
Robert T. Flaherty, CFA
Chairman of the Board
and President
Donald F. Crumrine, CFA
Vice President
and Secretary
Robert M. Ettinger, CFA
Vice President
Peter C. Stimes, CFA
Vice President
and Treasurer
Carl D. Johns
Assistant Treasurer

INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: [email protected]

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 THIS REPORT.

[PREFERRED INCOME FUND]

Annual
Report

November 30, 1997

<PAGE>

The pie charts show the shifts in the composition of the Fund's portfolio
by sectors over the last year.

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

11/30/96 11/30/97
-------- --------

PREFERRED INCOME FUND

Adjustable Rates -- 40.6% Adjustable Rates --32.0%
Traditional Rates -- 51.3% Traditional Rates -- 42.1%
Cash & Other --2.0% Cash & Other -- 2.0%
Non-DRD -- 6.1% Non-DRD -- 22.2%
Common Stock -- 1.7%
- ------------------------------------------------------------------------------
2

<PAGE>

QUESTIONS AND ANSWERS

HOW HAS THE FUND'S DIVIDEND RATE BEEN IMPACTED BY INTEREST RATE CHANGES?

Monthly Dividend Income 30 Year Treasury Yield
"Jan-91" "Jan-91" 8.16
122.5 "Jan-95" 132.51 8.2
122.5 132.51 8.22 "Jan-95" 7.73
122.5 132.51 8.18 7.55
122.5 132.51 8.26 7.43
125 132.51 8.4 7.33
125 125.21 8.34 6.63
125 125.21 8.06 6.54
125 125.21 7.81 6.9
126.46 125.21 7.91 6.61
"Jan-92" 126.46 125.21 7.94 6.5
126.46 125.21 7.4 6.38
126.46 117.63 "Jan-92" 7.76 6.08
126.46 "Jan-96" 117.63 7.79 5.95
126.46 117.63 7.96 "Jan-96" 6.05
126.46 117.63 8.03 6.36
126.46 117.64 7.84 6.67
126.46 124.39 7.78 6.83
126.46 124.39 7.46 7
126.46 124.39 7.41 6.95
126.46 124.39 7.38 7.01
127.87 124.39 7.62 7.12
"Jan-93" 127.87 124.39 7.6 6.9
127.87 124.39 7.39 6.81
127.87 123.32 "Jan-93" 7.19 6.51
127.87 "Jan-97" 123.32 6.9 6.6
127.87 123.32 6.92 "Jan-97" 6.79
127.87 123.32 6.93 6.8
127.87 123.32 6.98 7.09
127.87 123.32 6.67 6.89
127.87 123.32 6.56 6.89
127.87 123.32 6.09 6.74
127.87 123.32 6.02 6.45
121.76 123.32 5.97 6.61
"Jan-94" 121.76 123.32 6.3 6.3
121.76 123.32 6.35 6.15
121.76 "Jan-98" 117.5 "Jan-94" 6.24 6.04
121.76 117.5 6.66 5.95
128.67 7.09
128.67 7.3
128.67 7.43
128.67 7.61
128.67 7.39
128.67 7.48
133.06 7.82
132.51 7.96
7.94
7.88

<PAGE>

WHAT HAS HAPPENED WITH THE DISCOUNT OF THE MARKET PRICE OF THE FUND'S SHARES
FROM THEIR NET ASSET VALUE?

Over the last year, the discount was more moderate, and certainly more
stable, compared to the several previous years. The following graph shows the
history.

Preferred Income Fund
Premium/Discount of Market Price to NAV

[GRAPH OF THE DISCOUNT FROM NAV]
<TABLE>
<S> <C> <C> <C> <C> <C>
Feb-91 8.42 3.47 5.76 -3.79 -11.92 Feb-97 -6.75
4.38 0.83 5.98 -2.32 -12.44 -4.64
3.95 0.39 7.9 -2.93 -12.56 -5.39
4.24 2.34 4.84 -2.73 -13.13 -5.5
1.83 3.08 3.77 -5.65 -13.65 -5.84
1.51 2.27 4.34 -11.41 -14.35 -6.37
2.01 4.91 4.5 -12.51 -14.59 -7.52
2.3 4.91 3.61 -14.16 -12.51 -6.62
1.49 5.25 4 -7.32 Feb-96-12.44 -5.48
1.96 5.7 3.21 -9.48 -12.38 -8.81
3.14 7.12 2.93 -9.12 -13.6 -9.76
2.68 5.8 1.1 -9.51 -12.81 -8.52
2.3 5.34 1.73 -7.03 -11.18 -4.51
1.2 3.89 0.48 -5.93 -10.89 -5.78
1.46 3.06 -0.75 -5.08 -15.21 -6.07
1.39 2.5 0.95 -5.54 -15.64 -5.54
5.1 2.28 0.19 -8.22 -14.64 -4.63
4.23 3.56 -3.16 -7.44 -13.43 -5.1
3.37 4.89 0.3 -1.1 -14.77 -4.86
6.16 4.06 -1.75 -1.34 -14.02 -2.54
6.59 7.16 -1.03 -5.25 -14.88 -4.29
7.26 4.83 3.23 -6.97 -14.77 -3.85
6.59 4.17 -0.51 Feb-95 0.61 -15.32 -5.37
6.43 3.78 -2.87 -2.89 -13.63 -5.83
5.49 8.4 0.93 -4.19 -14.32 -5.19
6.78 3.78 0.75 -0.92 -11.11 -4.98
4.15 5.9 -2 -0.35 -11.8 -5.83
3.72 5.51 -3.16 -3.58 -10.83 -7.84
5.71 5.74 Feb-94 -1.96 -5.79 -11.29 -7.39
3.14 6.8 -2.24 -5.68 -10.49 -4.69
5.7 6.01 -7.41 -2.9 -10.31 -5.95
8.83 5.82 -5.39 -2.56 -10.6 -6.23
5.75 6.18 -0.89 -3.04 -10.71 -6.51
6.06 7.39 -2.7 -4.39 -10.77 -6.04
7.64 9.87 -3.79 -2.71 -10.26 -2.24
7.45 11.45 -5.05 -3.98 -5.74 -3.85
7.19 10.21 -4.66 -2.62 -7.14 -5.14
5.87 7.6 -7.13 -4.1 -7.05 -4.83
6.93 Feb-93 6.02 -5.96 -8.7 -6.69 -5.17
8.27 4.52 -5.98 -2.59 -8.24 -4.25
8.01 4.34 -8.63 -6.08 -7.56 -5.54
6.5 6.28 -5.81 -7.59 -11.06 -6.7
8.07 9.09 -6.35 -8.84 -11.06 -6.12
6.41 6.07 -4.09 -7.53 -8.61 -4.31
7.91 2.48 -3.97 -8.44 -9.41 Nov-97 -4.45
8.39 6.38 -2.86 -9.14 -9.98
10.57 8.76 1.46 -9.76 -8.58
11.68 7.64 -0.37 -9.17 -7.01
12.67 6.71 1.75 -8.88 -8.31
9.78 7.64 0.06 -9.35 -8.33
9.12 6.77 0.63 -9.42 -6.53
4.17 9.18 1.88 -8.32 -6.06
Feb-92 4.04 7.79 -0.84 -0.98 -6.67
6.13 7 -0.79 -8.16 -8.31
4.9 7.4 -1.57 -9.68 -7.49
3.81 4.97 -2.15 -9.78 -7.5
3.39 5.26 -2.63 -8.97 -2.42
3.75 5.6 -4.39 -8.93 -2.91
3.87 7.03 -10.94 -4.65
3.27 4.51 -10.48 -4.1
3.57 5.41 -12.1 -4.59
3.81 4.9 -11.51
4.64 -11.46
4.93 -11.17
5.23 -10.43
3.12 -10.71
</TABLE>
One very positive effect of the stabilization of the discount was that the
market price of the shares fully reflected the excellent performance of the Fund
based on its net asset value. The returns to shareholders based on market price
were actually slightly better than the returns on NAV.

DOES THE FUND HAVE TO BE SO DARN COMPLICATED?