PREFERRED INCOME FUND INC, N-30D, 1999-01-27

PREFERRED INCOME FUND INC
N-30D, 1999-01-27

Previous: MERRILL LYNCH GLOBAL UTILITY FUND INC, NSAR-B, 1999-01-27

Next: BALTIA AIR LINES INC, SB-2/A, 1999-01-27

<PAGE>

PREFERRED INCOME FUND
INCORPORATED

Dear Shareholder:

Fiscal 1998 ending on November 30th was a good year. Not great, but good!
The Preferred Income Fund earned a return of 6.9% on the net asset value ("NAV")
of its shares despite market conditions that tried our patience at times.

The following table presents our "report card" on the performance of the
Fund over the last one, three and five years. For perspective, we have also
included in the table the returns on a composite of over 50 higher quality
closed-end bond funds, which typically have investment objectives similar to
those of the Fund. We hope to earn our keep by doing better than the bond funds
over longer holding periods, including both ups and downs in interest rates. In
any single year, however, the impact of interest rate trends on our hedging
strategy will probably have the greatest effect on how we compare to the bond
funds.

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

TOTAL RETURN PER YEAR ON NET ASSET VALUE*
FOR PERIODS ENDED 11/30/98

<TABLE>
<CAPTION>
ONE THREE FIVE
YEAR YEARS YEARS
----- ------ ------
<S> <C> <C> <C>
Preferred Income Fund....................................... 6.7% 10.6% 9.8%
Lipper Higher Quality Bond Fund Composite**................. 7.5% 8.0% 7.2%
</TABLE>

Source: Lipper Inc.

* Distributions are assumed to be reinvested at NAV in accordance with
Lipper's practice, which differs from the procedures used elsewhere in
this report.

** Includes all U.S. Government bond, mortgage bond and term trust, and
investment grade bond funds in Lipper's closed-end fund database.

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

As shown by the table, the Fund's total return on NAV has substantially
outperformed the bond fund composite over the last three years and five years.
For example, the Fund's return of 9.8% per year over five years compares to an
average of 7.2% for the bond funds. In contrast, the return in the last year did
not really distinguish the Fund very much from the composite. Actually, this
rather bland picture of the last year was the net result of considerably more
dramatic, but offsetting, market events.

Economic distress in Asia, Russia and parts of Latin America generally
dominated financial markets in the past year. A "flight to quality" resulted,
reaching near panic this last fall, as investors seeking safety drove up the
prices of U.S. Treasury bonds and reduced the yield on long term Treasuries by

<PAGE>

approximately a full percentage point. Other fixed income markets, particularly
junk bonds and emerging market debt, lagged far behind and, in some cases,
actually declined in value. Better quality preferreds, such as those in which
the Fund invests, walked the line between the two extremes. The serious problems
suffered by a few highly visible "hedge funds" demonstrated how treacherous
these conflicting trends could be.

On the surface, our hedges worked very well in Fiscal 1998. The
appreciation on our portfolio of preferreds offset the losses on our hedges with
a little to spare. However, this came about because our use of purchased put
options kept hedge losses down to manageable levels, not because the
appreciation on our preferreds was all that big. Had the preferred market
performed as well as the Treasury bond market, the Fund would have enjoyed a
really great year. We believe the preferred market is generally undervalued as a
result of these trends, but we are very cautious about predicting when
preferreds might come back into line with Treasuries.

Fortunately, we have had some good opportunities to add to the Fund's
performance by moving money around within the preferred market. Traditional
preferreds eligible for the Dividends Received Deduction ("DRD") available to
corporate investors were the best performers in the preferred market earlier in
the fiscal year, while hybrid preferreds saved their best for last. This gave us
the opportunity to move more than 20% of the Fund's portfolio from some more
fully valued traditional preferreds into undervalued hybrids before hybrids
started to shine. Revolving door investment opportunities like this make a
portfolio manager's day!

[PREFERRED INCOME FUND - PIE CHART]

<TABLE>
<CAPTION>
11/30/97 11/30/98
-------- --------
<S> <C> <C>
Adjustable Rates 32.0% 17.8%
Traditional Fixed Rates 42.1% 35.8%
Common Stock 1.7% 0.8%
Non-DRD Preferreds & Securities (Hybrids) 22.2% 42.2%
Cash & Other 2.0% 3.4%
</TABLE>

The pie charts vividly illustrate the shift from traditional fixed and
adjustable rate preferreds into hybrid preferreds that took place over the
course of the year. Although the small position in common stocks almost slips
below the radar screen, the Fund did benefit from our ventures during the year
in several common stocks. Typically, these instances involved utilities whose
common shares clearly seemed to offer better investment opportunities than their
preferred stocks in which the Fund might otherwise have invested.

<PAGE>

The Fund's income was one of the high points of Fiscal 1998. Despite the
decline in interest rates, the Fund maintained a constant dividend rate of
$0.081 per share throughout the year. In part, this was due to the increase in
our holdings of hybrid preferreds, which yield considerably more than
traditional preferreds. The special distribution of $0.76 per share payable
December 31, 1998, primarily representing capital gains realized by the Fund,
will reduce the Fund's earning assets and necessitate lowering the monthly
dividend rate per share to $0.0785 per share effective January 29, 1999. As
illustrated in the Question and Answer section following this letter, we do not
anticipate that shareholders who reinvest the year-end distribution through the
Fund's Dividend Reinvestment Plan will see much change in their total dividend
income.

The Question and Answer section that follows provides additional important
information on the Fund's accomplishments and operations. It is definitely
"recommended reading"!

Sincerely yours,

/s/ Robert T. Flaherty

Robert T. Flaherty
Chairman of the Board

December 22, 1998

<PAGE>

QUESTIONS AND ANSWERS

HOW HAS THE FUND'S INCOME BEEN AFFECTED BY CHANGES IN INTEREST RATES?

The following chart is one of our favorites. It sends a very simple message
about a very complicated strategy.

[PREFERRED INCOME DOUBLE LINE CHART]
<TABLE>
<CAPTION>

Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99

<S> <C> <C> <C> <C> <C> <C> <C> <C>
122.5 126.46 127.87 121.76 132.51 117.63 123.32 117.47 118.81
122.5 126.46 127.87 121.76 132.51 117.63 123.32 117.47
122.5 126.46 127.87 121.76 132.51 117.63 123.32 117.47
122.5 126.46 127.87 121.76 132.51 117.63 123.32 117.47
125 126.46 127.87 128.67 132.51 124.39 123.32 117.47
125 126.46 127.87 128.67 125.21 124.39 123.32 117.47
125 126.46 127.87 128.67 125.21 124.39 123.32 117.47
125 126.46 127.87 128.67 125.21 124.39 123.32 117.47
126.46 126.46 127.87 128.67 125.21 124.39 123.32 117.47
126.46 127.87 128.67 125.21 124.39 123.32 117.47
126.46 127.87 133.06 125.21 124.39 123.32 117.47
127.87 121.76 132.51 117.63 123.32 117.47 118.81

</TABLE>

The Fund's income (shown by the solid line) has generally managed to hold
up pretty well when the interest rate on long term Treasury bonds (the dotted
line) has gone down. In contrast, when the Treasury interest rate has increased,
income from the Fund has shared in the increase. Over the life of the Fund,
income has generally moved sideways, with a few bumps here and there, despite a
substantial decline in interest rates (shown on the right hand scale). This is
the way the Fund was designed to work.

The chart is based on a hypothetical investment in 1,000 shares of the Fund
at its inception. It assumes that the regular monthly dividends were taken in
cash and that additional shares were acquired only by reinvesting the portion of
each special year-end distribution that was above and beyond the regular monthly
dividend. We have also projected the impact of the special distribution payable
on December 31, 1998 and the new dividend rate effective in January.

<PAGE>

WHAT ABOUT TOTAL RETURN INCLUDING CHANGES IN NAV? HOW HAS IT RESPONDED TO
CHANGES IN INTEREST RATES?

A great strength of the Preferred Income Fund has been its ability to do
well in down markets. The following bar chart compares the Fund's total return
since inception, including both income and changes in net asset value, to the
average returns on the Lipper composite of higher quality closed-end bond funds.
The historical returns are also broken down between strong and weak markets
based upon whether the bond fund composite, on a month by month basis, managed
to beat the total return on Treasury bills.

PREFERRED INCOME FUND

Lipper Index PFD

Weak Markets -8.9% 1.10%
Strong Markets 18.90% 22.70%
All Markets 8.90% 15.10%

THE DATA, PREPARED BY LIPPER INC., SHOW THE AVERAGE ANNUALIZED TOTAL
RETURNS IN THE 94 MONTHS ENDED 11/30/98, INCLUDING 31 WEAK MARKETS AND 63
STRONG MARKETS.

Naturally, the Fund produced its biggest returns in strong markets
characterized by declining interest rates and rising prices for bonds and
preferreds. In these good times, it had a clear edge over the bond funds, which
also did well. In weak markets, typically caused by rising interest rates that
drove down bond and preferred prices, the Fund distinguished itself by
essentially breaking even when the average return on the bond funds was down
significantly. Doing reasonably well in good times and not giving it back in bad
times has produced outstanding returns for the Fund over its entire history.

This part may not be as obvious. The same strategies that supported the
Fund's income, as described in the preceding Q&A, were also responsible for the
strong showing of the Fund's total return. These include the combination of
hedging and leverage that is unique to the Fund and its sister funds. If income
does well, it is a pretty good bet that total return will also do well.

<PAGE>

HOW DOES THE MARKET PRICE OF THE FUND'S SHARES COMPARE TO THEIR NET ASSET VALUE?

As illustrated by the following chart, the Fund's shares are selling in the
market at a moderate discount from net asset value. For the last two years, that
discount has stayed within a relatively narrow range, and the returns on the
market value of the shares have mirrored those on the net asset value rather
closely.

[GRAPH OF PREMIUM/DISCOUNT OF MARKET PRICE TO NAV]

2/08/91 8.42
2/15/91 4.38
2/22/91 3.95
3/1/91 4.24
3/8/91 1.83
3/15/91 1.51
3/22/91 2.01
3/29/91 2.3
4/5/91 1.49
4/12/91 1.96
4/19/91 3.14
4/26/91 2.68
5/3/91 2.3
5/10/91 1.2
5/17/91 1.46
5/24/91 1.39
5/31/91 5.1
6/7/91 4.23
6/14/91 3.37
6/21/91 6.16
6/28/91 6.59
7/5/91 7.26
7/12/91 6.59
7/19/91 6.43
7/26/91 5.49
8/2/91 6.78
8/9/91 4.15
8/16/91 3.72
8/23/91 5.71
8/30/91 3.14
9/6/91 5.7
9/13/91 8.83
9/20/91 5.75
9/27/91 6.06
10/4/91 7.64
10/11/91 7.45
10/18/91 7.19
10/25/91 5.87
11/1/91 6.93
11/8/91 8.27
11/15/91 8.01
11/22/91 6.5
11/29/91 8.07
12/6/91 6.41
12/13/91 7.91
12/20/91 8.39
12/27/91 10.57
1/3/92 11.68
1/10/92 12.67
1/17/92 9.78
1/24/92 9.12
1/31/92 4.17
2/7/92 4.04
2/14/92 6.13
2/21/92 4.9
2/28/92 3.81
3/6/92 3.39
3/13/92 3.75
3/20/92 3.87
3/27/92 3.27
4/3/92 3.57
4/10/92 3.81
4/17/92 4.64
4/24/92 4.93
5/1/92 5.23
5/8/92 3.12
5/15/92 3.47
5/22/92 0.83
5/29/92 0.39
6/5/92 2.34
6/12/92 3.08
6/19/92 2.27
6/26/92 4.91
7/3/92 4.91
7/10/92 5.25
7/17/92 5.7
7/24/92 7.12
7/31/92 5.8
8/7/92 5.34
8/14/92 3.89
8/21/92 3.06
8/28/92 2.5
9/4/92 2.28
9/11/92 3.56
9/18/92 4.89
9/25/92 4.06
10/2/92 7.16
10/9/92 4.83
10/16/92 4.17
10/23/92 3.78
10/30/92 8.4
11/6/92 3.78
11/13/92 5.9
11/20/92 5.51
11/27/92 5.74
12/4/92 6.8
12/11/92 6.01
12/18/92 5.82
12/25/92 6.18
1/1/93 7.39
1/8/93 9.87
1/15/93 11.45
1/22/93 10.21
1/29/93 7.6
2/5/93 6.02
2/12/93 4.52
2/19/93 4.34
2/26/93 6.28
3/5/93 9.09
3/12/93 6.07
3/19/93 2.48
3/26/93 6.38
4/2/93 8.76
4/9/93 7.64
4/16/93 6.71
4/23/93 7.64
4/30/93 6.77
5/7/93 9.18
5/14/93 7.79
5/21/93 7
5/28/93 7.4
6/4/93 4.97
6/11/93 5.26
6/18/93 5.6
6/25/93 7.03
7/2/93 4.51
7/9/93 5.41
7/16/93 4.9
7/23/93 5.76
7/30/93 5.98
8/6/93 7.9
8/13/93 4.84
8/20/93 3.77
8/27/93 4.34
9/3/93 4.5
9/10/93 3.61
9/17/93 4
9/24/93 3.21
10/1/93 2.93
10/8/93 1.1
10/15/93 1.73
10/22/93 0.48
10/29/93 -0.75
11/5/93 0.95
11/12/93 0.19
11/19/93 -3.16
11/26/93 0.3
12/3/93 -1.75
12/10/93 -1.03
12/17/93 3.23
12/24/93 -0.51
12/31/93 -2.87
1/7/94 0.93
1/14/94 0.75
1/21/94 -2
1/28/94 -3.16
2/4/94 -1.96
2/11/94 -2.24
2/18/94 -7.41
2/25/94 -5.39
3/4/94 -0.89
3/11/94 -2.7
3/18/94 -3.79
3/25/94 -5.05
4/1/94 -4.66
4/8/94 -7.13
4/15/94 -5.96
4/22/94 -5.98
4/29/94 -8.63
5/6/94 -5.81
5/13/94 -6.35
5/20/94 -4.09
5/27/94 -3.97
6/3/94 -2.86
6/10/94 1.46
6/17/94 -0.37
6/24/94 1.75
7/1/94 0.06
7/8/94 0.63
7/15/94 1.88
7/22/94 -0.84
7/29/94 -0.79
8/5/94 -1.57
8/12/94 -2.15
8/19/94 -2.63
8/26/94 -4.39
9/2/94 -3.79
9/9/94 -2.32
9/16/94 -2.93
9/23/94 -2.73
9/30/94 -5.65
10/7/94 -11.41
10/14/94 -12.51
10/21/94 -14.16
10/28/94 -7.32
11/4/94 -9.48
11/11/94 -9.12
11/18/94 -9.51
11/23/94 -7.03
12/2/94 -5.93
12/9/94 -5.08
12/16/94 -5.54
12/23/94 -8.22
12/30/94 -7.44
1/6/95 -1.1
1/13/95 -1.34
1/20/95 -5.25
1/27/95 -6.97
2/3/95 0.61
2/10/95 -2.89
2/17/95 -4.19
2/24/95 -0.92
3/3/95 0.35
3/10/95 -3.58
3/17/95 -5.79
3/24/95 -5.68
3/31/95 -2.9
4/7/95 -2.56
4/14/95 -3.04
4/21/95 -4.39
4/28/95 -2.71
5/5/95 -3.98
5/12/95 -2.62
5/19/95 -4.1
5/26/95 -8.7
6/2/95 -2.59
6/9/95 -6.08
6/16/95 -7.59
6/23/95 -8.84
6/30/95 -7.53
7/7/95 -8.44
7/14/95 -9.14
7/21/95 -9.76
7/28/95 -9.17
8/4/95 -8.88
8/11/95 -9.35
8/18/95 -9.42
8/25/95 -8.32
9/1/95 -6.98
9/8/95 -8.16
9/15/95 -9.68
9/22/95 -9.78
9/29/95 -8.97
10/6/95 -8.93
10/13/95 -10.94
10/20/95 -10.48
10/27/95 -12.1
11/3/95 -11.51
11/10/95 -11.46
11/17/95 -11.17
11/24/95 -10.43
12/1/95 -10.71
12/8/95 -11.92
12/15/95 -12.44
12/22/95 -12.56
12/29/95 -13.13
1/5/96 -13.65
1/12/96 -14.35
1/19/96 -14.59
1/26/96 -12.51
2/2/96 -12.44
2/9/96 -12.38
2/16/96 -13.6
2/23/96 -12.81
3/1/96 -11.18
3/8/96 -10.89
3/15/96 -15.21
3/22/96 -15.64
3/29/96 -14.64
4/5/96 -13.43
4/12/96 -14.77
4/19/96 -14.02
4/26/96 -14.88
5/3/96 -14.77
5/10/96 -15.32
5/17/96 -13.63
5/24/96 -14.32
5/31/96 -11.11
6/7/96 -11.8
6/14/96 -10.83
6/21/96 -11.29
6/28/96 -10.49
7/5/96 -10.31
7/12/96 -10.6
7/19/96 -10.71
7/26/96 -10.77
8/2/96 -10.26
8/9/96 -5.74
8/16/96 -7.14
8/23/96 -7.05
8/30/96 -6.69
9/6/96 -8.24
9/13/96 -7.56
9/20/96 -11.06
9/27/96 -11.06
10/4/96 -8.61
10/11/96 -9.41
10/18/96 -9.98
10/25/96 -8.58
11/1/96 -7.01
11/8/96 -8.31
11/15/96 -8.33
11/22/96 -6.53
11/29/96 -6.06
12/6/96 -6.67
12/13/96 -8.31
12/20/96 -7.49
12/27/96 -7.5
1/3/97 -2.42
1/10/97 -2.91
1/17/97 -4.65
1/24/97 -4.1
1/31/97 -4.59
2/7/97 -6.75
2/14/97 -4.64
2/21/97 -5.39
2/28/97 -5.5
3/7/97 -5.84
3/14/97 -6.37
3/21/97 -7.52
3/28/97 -6.62
4/4/97 -5.48
4/11/97 -8.81
4/18/97 -9.76
4/25/97 -8.52
5/02/97 -4.51
5/9/97 -5.78
5/16/97 -6.07
5/23/97 -5.54
5/30/97 -4.63
6/6/97 -5.1
6/13/97 -4.86
6/20/97 -2.54
6/27/97 -4.29
7/4/97 -3.85
7/11/97 -5.37
7/18/97 -5.83
7/25/97 -5.19
8/1/97 -4.98
8/8/97 -5.83
8/15/97 -7.84
8/22/97 -7.39
8/29/97 -4.69
9/5/97 -5.95
9/12/97 -6.23
9/19/97 -6.51
9/26/97 -6.04
10/3/97 -2.24
10/10/97 -3.85
10/17/97 -5.14
10/24/97 -4.83
10/31/97 -5.17
11/7/97 -4.25
11/14/97 -5.54
11/21/97 -6.7
11/28/97 -6.12
12/5/97 -4.31
12/12/97 -4.45
12/19/97 -6.32
12/26/97 -6.21
1/2/98 -0.9
1/9/98 -2.11
1/16/98 -0.12
1/23/98 -4.31
1/30/98 -3.58
2/6/98 -3.64
2/13/98 -4.74
2/20/98 -4.66
2/27/98 -4.46
3/6/98 -4.8
3/13/98 -5.95
3/20/98 -4.37
3/27/98 -5.18
4/3/98 -6.45
4/10/98 -5.09
4/17/98 -5.8
4/24/98 -6.63
5/1/98 -4.22
5/8/98 -5.89
5/15/98 -6.81
5/22/98 -5.52
5/29/98 -4.96
6/5/98 -5.56
6/12/98 -5.49
6/19/98 -5.99
6/26/98 -4.79
7/3/98 -4.22
7/10/98 -5.58
7/17/98 -5.28
7/24/98 -6.83
7/31/98 -5.03
8/7/98 -6.14
8/14/98 -7.79
8/21/98 -7.5
8/28/98 -4.48
9/4/98 -4.48
9/11/98 -3.79
9/18/98 -3.26
9/25/98 -3.67
10/2/98 -3.79
10/9/98 -2.49
10/16/98 -2.28
10/23/98 -1.56
10/30/98 -0.91
11/6/98 -1.4
11/13/98 -4.23
11/20/98 -3.94
11/27/98 -2.67

DOES THE FUND HAVE A YEAR 2000 PROBLEM?

By now, everyone has probably heard about the so-called "Y2K" problem. This
has resulted from too many short cuts taken by computer programmers over the
years, which may cause some systems that are important to our daily lives not
being able to determine that the year 2000 is not really 1900. There is clearly
a significant risk that some systems will fail and cause a chain reaction
affecting other users that depend upon them.

The Fund could suffer interruptions and other material adverse effects
unless the Year 2000 problem is solved properly, not only by the Fund, but also
by others such as our suppliers and service providers, the financial markets in
which Funds operates, and the companies in which we invest. The Fund is taking
what it considers to be reasonable steps to deal with this exposure, but there
are no assurances that the Fund will not be affected by the Y2K problem.

<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, 1997................................... $0.460 $16.43 $16.1250 $16.40
January 31, 1998.................................... 0.081 16.53 15.9375 15.98
February 28, 1998................................... 0.081 16.55 15.8125 15.80
March 31, 1998...................................... 0.081 16.63 15.8125 15.82
April 30, 1998...................................... 0.081 16.64 15.6250 15.68
May 31, 1998........................................ 0.081 16.77 15.9375 15.98
June 30, 1998....................................... 0.081 16.84 16.2500 16.00
July 31, 1998....................................... 0.081 16.65 15.8125 15.74
August 31, 1998..................................... 0.081 16.65 15.8750 15.89
September 30, 1998.................................. 0.081 16.53 15.9375 15.81
October, 31, 1998................................... 0.081 16.21 16.0625 15.87
November 30, 1998................................... 0.081 16.43 15.9375 15.92
</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, 1998
- ----------------------------------------

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES -- 95.8 %
ADJUSTABLE RATE PREFERRED STOCKS -- 17.8 %
UTILITIES -- 6.4 %
24,920 Arizona Public Service Company,
Series Q, Adj. Rate Pfd. ...... $ 2,479,540
196,960 New York State Electric & Gas
Corporation,
Series B, Adj. Rate Pfd. ...... 4,628,560
Niagara Mohawk Power Corporation:
154,879 Series A, Adj. Rate Pfd. ........ 3,954,254
31,528 Series B, Adj. Rate Pfd. ........ 801,994
88,745 Series C, Adj. Rate Pfd. ........ 2,257,451
------------
TOTAL UTILITY ADJUSTABLE RATE
PREFERRED STOCKS............... 14,121,799
------------
BANKING -- 11.4 %
Bank One Corporation:
30,175 Series B, Adj. Rate Pfd. ........ 3,036,359
34,000 Series C, Adj. Rate Pfd. ........ 3,421,250
Bankers Trust New York
Corporation:
153,400 Series Q, Adj. Rate Pfd. ........ 3,643,250
132,900 Series R, Adj. Rate Pfd. ........ 3,189,600
Chase Manhattan Corporation:
72,275 Series L, Adj. Rate Pfd. ........ 6,974,537
10,000 Series N, Adj. Rate Pfd. ........ 222,500
Citigroup Inc.:
80,600 Series Q, Adj. Rate Pfd. ........ 1,841,206
42,400 Series R, Adj. Rate Pfd. ........ 952,675
4,000 Morgan (J.P.) & Company Inc.,
Series A, Adj. Rate Pfd. ...... 360,000
12,200 Republic New York Corporation,
Series D, Adj. Rate Pfd. ...... 305,000
20,000 Wells Fargo & Company,
Series B, Adj. Rate Pfd. ...... 1,003,750
------------
TOTAL BANKING ADJUSTABLE RATE
PREFERRED STOCKS............... 24,950,127
------------
TOTAL ADJUSTABLE RATE
PREFERRED STOCKS............... 39,071,926
------------

<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
FIXED RATE PREFERRED STOCKS AND SECURITIES -- 78.0%
UTILITIES -- 28.4 %
Alabama Power Company:
4,150 5.20 % Pfd. ..................... $ 106,344
36,000 Alabama Power Capital Trust I,
7.375% TOPrS................... 924,750
80,000 Alabama Power Capital
Trust II, 7.60% TOPrS.......... 2,075,000
13,000 Appalachian Power Company,
8.00% QUIDS, Series B.......... 337,188
21,100 Arizona Public Service Company,
7.25% Pfd., Series W........... 527,500
Baltimore Gas & Electric Company:
4,750 6.70% Pfd., Series 1993.......... 541,500
24,950 6.99% Pfd., Series 1995.......... 2,953,456
10,000 Boston Edison Company,
4.78% Pfd. .................... 940,000
5,000 Central Hudson Gas & Electric
Corporation, 4.35% Pfd.,
Series D....................... 421,875
27,000 Columbus Southern Power Company,
7.92% Jr. Sub. Debt,
Series B....................... 696,937
33,800 Consolidated Edison Company of
New York, 7.75% QUICS,
Series A....................... 868,237
139,950 CPL Capital, 8.00% QUIPS,
Series A....................... 3,664,941
6,870 Dayton Power & Light Company,
3.90% Pfd., Series C........... 530,707
Duke Energy Corporation:
5,550 4.50% Pfd., Series C............. 492,563
3,412 7.85% Pfd., Series S............. 396,218
565 7.00% Pfd., Series W............. 64,127
Duquesne Light Company:
20,000 7.375% QIB, Series E............. 501,250
54,000 Duquesne Capital, 8.375%
MIPS, Series A................. 1,393,875
10,900 El Paso Tennessee Pipeline
Company, 8.25% Pfd.,
Series A....................... 600,862
Florida Power & Light Company:
30,250 6.98% Pfd., Series S............. 3,425,813
13,000 7.05% Pfd., Series T............. 1,488,500
</TABLE>

See Notes to Financial Statements.

<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1998
------------------------------------

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
UTILITIES (CONTINUED)
Georgia Power Company:
6,500 Capital Trust III,
7.75% Series V................. $ 169,406
7,500 Capital Trust I, 7.75%
Series T....................... 195,469
3,500 Gulf Power Company, 7.625%
QUIPS, Series A................ 90,781
Hawaiian Electric Company, Inc.:
20,000 HECO Capital Trust I, 8.05%
QUIPS.......................... 518,750
22,100 Hawaiian Electric Industries
Capital Trust I, 8.36% TOPrS... 581,506
24,576 HL&P Capital Trust I, 8.125%,
Series A....................... 637,440
Illinois Power Company:
4,530 4.08% Pfd., Series A............. 173,839
8,960 4.42% Pfd., Series D............. 368,480
29,370 4.70% Pfd., Series E............. 1,284,938
10,000 Indiana Michigan Power Company,
8.00% Pfd., Series A........... 259,375
6,750 Indianapolis Power & Light
Company, 5.65% Pfd. ........... 749,250
8,646 Jersey Central Power & Light
Company, 7.52% Sinking
Fund Pfd., Series K............ 904,588
22,000 MidAmerican Energy Financing I,
7.98% QUIPS, Series A.......... 567,875
Monongahela Power Company:
8,500 $7.73 Pfd., Series L............. 1,006,187
23,500 8% QUIDS, Series A............... 603,656
10,000 MP&L Capital, 8.05% QUIPS........ 259,375
5,000 New York State Electric & Gas
Corporation, 6.30% Sinking
Fund Pfd. ..................... 519,063
Niagara Mohawk Power Corporation:
22,593 7.85% Sinking Fund Pfd. ......... 574,709
58,135 9.50% Pfd. ...................... 1,536,944
3,500 Northern Indiana Public Service
Company, 7.44% Pfd. ........... 359,625
24,000 NSP Financing I, 7.875% TOPrS.... 640,500

<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
Nevada Power Company:
27,860 NVP Capital I 8.20% QUIPS,
Series A....................... $ 729,584
15,000 NVP Capital III 7.75% TIPS..... 379,688
6,170 Ohio Edison Company 4.44%
Pfd. .......................... 461,979
Ohio Power Company:
33,600 8.16%, Series A.................. 867,300
15,500 7.92% QUIDS, Series B............ 398,156
55,300 7.375% Sr. Note.................. 1,406,694
Pennsylvania Power & Light
Company:
124,700 PP&L Capital Trust II
8.10% TOPrS.................... 3,265,581
35,839 PP&L Capital Trust 8.20%
TOPrS.......................... 938,534
48,000 PSCO Capital Trust I, 7.60%
TOPrS.......................... 1,233,000
12,350 PSI Energy, Inc., 6.875% Pfd. ... 1,400,181
10,000 Public Service Company of New
Mexico, 4.58% Private Pfd. .... 745,000
Puget Sound Energy Inc.:
12,988 7.75% Sinking Fund Pfd. ......... 1,366,987
100,200 7.45% Pfd., Series II............ 2,905,800
1,950,000 Puget Sound Capital Trust,
8.231% 6/1/27 Capital Security,
Series B....................... 2,159,625
4,884 Rochester Gas & Electric
Corporation, 4.10% Pfd.,
Series H....................... 382,173
36,700 San Diego Gas & Electric
Company, 6.80% Pfd. ........... 1,057,419
South Carolina Electric & Gas:
12,700 5.125% Purchase Fund Pfd. ....... 622,300
100,200 SCE&G Trust I 7.55%,
Series A....................... 2,598,937
5,000 Southwestern Public Service
Capital I, 7.85%, Series A..... 128,438
37,000 Transcanada Capital, 8.75%
TOPrS.......................... 968,937
2,800,000 Union Electric Company,
7.69% 12/15/36 Capital
Security, Series A............. 3,062,500
1,566 Virginia Electric & Power
Company, $6.98 Pfd. ........... 177,741
------------
TOTAL UTILITY FIXED RATE
PREFERRED STOCKS AND
SECURITIES..................... 62,209,953
------------
</TABLE>

See Notes to Financial Statements.

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
BANKING -- 21.3 %
2,250 ABN Amro North America,
6.59% Pfd. 144A**.............. $ 2,441,250
BankAmerica Corporation:
3,450,000 BankAmerica Institutional,
7.70% 12/31/26 Capital Security
144A**......................... 3,738,938
35,500 NB Capital Trust I, 7.84%
TOPrS.......................... 942,969
1,900,000 NB Capital Trust II,
7.83% 12/15/26 Capital
Security....................... 2,109,000
1,000,000 BankBoston Capital Trust II,
7.75% 12/15/26 Capital
Security, Series B............. 1,050,000
900,000 Bank of New York,
7.78% 12/1/26 Capital Security
144A**......................... 987,750
2,000,000 BT Capital Trust B, 7.90%
1/15/27 Capital Security....... 2,110,000
Chase Manhattan Corporation:
142,089 10.84% Pfd., Series C............ 4,253,789
5,000 10.96% Pfd., Series G............ 147,500
1,400,000 Chase Capital I, 7.67% 12/1/26
Capital Security, Series A..... 1,522,500
Citigroup Inc.:
20,000 6.365% Pfd., Series F............ 1,072,500
10,000 6.213% Pfd., Series G............ 527,500
46,550 6.231% Pfd., Series H............ 2,507,881
49,800 5.864% Pfd., Series M............ 2,504,006
2,500,000 First Hawaiian Capital I,
8.343% 7/1/27 Capital
Security, Series B............. 2,784,375
1,750,000 First Union Institutional
Capital II, 7.85% 1/1/27
Capital Security............... 1,940,312
38,100 Fleet Financial Group, Inc.,
6.75% Pfd., Series VI.......... 2,152,650
2,500,000 Greenpoint Capital Trust I,
9.10% 6/1/27 Capital
Security....................... 2,681,250
3,200,000 JPM Capital Trust I, 7.54%
1/15/27 Capital Security....... 3,428,000

<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
500,000 Keycorp Institutional Capital,
8.25% 12/15/26 Capital
Security, Series B............. $ 577,500
330 LaSalle National Corporation,
6.46% Pfd. 144A**.............. 353,925
Republic New York Corporation:
6,300 5.715% Pfd. ..................... 323,663
5,050,000 Republic NY Capital Trust II,
7.53% 12/4/26 Capital
Security....................... 5,390,875
1,000,000 Summit Capital Trust I,
8.40% 3/15/27 Capital Security,
Series B....................... 1,133,750
------------
TOTAL BANKING FIXED RATE
PREFERRED STOCKS AND
SECURITIES..................... 46,681,883
------------
FINANCIAL SERVICES -- 10.4 %
Bear Stearns Company:
10,700 5.72% Pfd., Series F............. 501,563
58,200 5.49% Pfd., Series G............. 2,626,275
2,500,000 Countrywide Capital III,
8.05% 6/15/27 Capital Security,
Series B....................... 2,731,250
27,000 DLJ Capital Trust, 8.42%......... 700,313
10,000 Heller Financial, 6.687% Pfd.,
Series C....................... 1,001,250
133,300 Household Capital Trust II,
8.70%.......................... 3,507,456
Lehman Brothers Holdings Inc.:
19,288 8.30% QUICS, Series A............ 488,227
181,248 5.00% Conv. Pfd., Series B....... 5,460,096
26,000 5.94% Pfd., Series C............. 1,163,500
26,700 5.67% Pfd., Series D............. 1,141,425
Merrill Lynch & Co., Inc.:
24,900 8.00% TOPrS...................... 676,969
90,600 9.00% Pfd., Series A............. 2,859,563
------------
TOTAL FINANCIAL SERVICES FIXED
RATE PREFERRED STOCKS AND
SECURITIES..................... 22,857,887
------------
</TABLE>

See Notes to Financial Statements.

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
INSURANCE -- 9.9 %
1,900,000 Allstate Financing II,
7.83% 12/01/45 Capital
Security....................... $ 2,052,000
300,000 American General Institutional
Capital A, 7.57% 12/1/45
Capital Security 144A**........ 322,875
2,200,000 Aon Capital Trust A,
8.205% 1/1/27 Capital
Security....................... 2,530,000
63,481 Hartford Capital II,
8.35% QUIPS, Series B.......... 1,670,344
4,200,000 MMI Capital Trust I,
7.625% 12/15/27 Capital
Security, Series B............. 4,200,000
4,000,000 Orion Capital Trust II,
7.701% 4/15/28 Capital
Security....................... 3,895,000
1,900,000 Provident Financing Trust I,
7.405% 3/15/38 Capital
Security....................... 1,904,750
35 Prudential Human Resources
Management Company, Inc.,
6.30% Private Placement,
Sinking Fund Pfd., Series A.... 3,631,250
1,380,000 Safeco Capital Trust I,
8.072% 7/15/37 Capital
Security....................... 1,511,100
------------
TOTAL INSURANCE FIXED RATE
PREFERRED STOCKS
AND SECURITIES................. 21,717,319
------------
MISCELLANEOUS INDUSTRIES -- 8.0 %
118,300 Coastal Finance,
8.375%, TOPrS.................. 2,947,149
90,000 Cyprus AMAX Minerals Company,
$4.00 Pfd., Series A........... 3,566,250
57,600 Farmland Industries Inc.,
8.00% Pfd. 144A**.............. 3,434,400
30,000 LASMO America Ltd.,
8.15% Pfd. 144A**.............. 3,101,250

<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
30,000 Ocean Spray Cranberries,
6.25% Pfd. 144A**.............. $ 3,150,000
625 Time Warner Inc.,
10.25% Pfd., Series M.......... 701,953
9,520 Viad Corporation, $4.75
Sinking Fund Pfd. ............. 725,900
------------
TOTAL MISCELLANEOUS FIXED RATE
PREFERRED STOCKS AND
SECURITIES..................... 17,626,902
------------
TOTAL FIXED RATE PREFERRED STOCKS
AND SECURITIES................. 171,093,944
------------
TOTAL PREFERRED STOCKS
AND SECURITIES
(Cost $196,964,188)............ 210,165,870
------------
COMMON STOCKS -- 0.8 %
UTILITIES -- 0.8 %
9,000 Nevada Power Company............. 213,187
14,000 New England Electric System...... 585,375
20,100 Wisconsin Energy Corporation..... 621,845
10,900 WPS Resources Corporation........ 365,491
------------
TOTAL UTILITY COMMON STOCKS
(Cost $1,590,752)................ 1,785,898
------------
OPTION CONTRACTS -- 0.5 % (Cost $2,138,370)
March Put Options on U.S.
Treasury Bond Futures,
expiring 2/20/99+.............. 988,125
------------
</TABLE>

See Notes to Financial Statements.

<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 1)
- --------- --------
<C> <S> <C>
REPURCHASE AGREEMENT -- 1.7% (Cost $3,821,000)
$3,821,000 Agreement with UBS Securities
Inc., 5.25% dated 11/30/98, to
be repurchased at $3,821,557
on 12/1/98, collateralized by
$3,335,000 U.S. Treasury Note,
6.50% due 11/15/26
(value $3,897,781)............ $ 3,821,000
------------
TOTAL INVESTMENTS (Cost $204,514,310*)..98.8% 216,760,893
OTHER ASSETS AND LIABILITIES (Net)...... 1.2 2,637,031
----- ------------
NET ASSETS.............................100.0% $219,397,924
===== ============
</TABLE>

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

* Aggregate cost for Federal tax purposes is $203,384,007.
** 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.

ABBREVIATIONS (Note 6):
TOPrS -- Trust Originated Preferred Securities
TIPS -- Trust Issued Preferred Securities
QUIPS -- Quarterly Income Preferred Securities
MIPS -- Monthly Income Preferred Securities
QUIDS -- Quarterly Income Debt Securities
QUICS -- Quarterly Income Capital Securities
QIB -- Quarterly Interest Bonds

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

See Notes to Financial Statements.

<PAGE>

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

Preferred Income Fund Incorporated
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1998
-----------------------------------

<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $204,514,310) (Note 1)
See accompanying schedule.............................. $216,760,893
Cash...................................................... 428
Dividends and interest receivable......................... 2,092,544
Receivable for securities sold............................ 1,574,210
Prepaid expenses.......................................... 23,210
------------
Total Assets...................................... 220,451,285
LIABILITIES:
Payable for securities purchased.......................... $ 542,550
Dividends payable to Common Shareholders.................. 232,647
Investment advisory fee payable (Note 2).................. 99,748
Accrued expenses and other payables....................... 178,416
-----------
Total Liabilities................................. 1,053,361
------------
NET ASSETS.................................................. $219,397,924
============
NET ASSETS consist of:
Undistributed net investment income (Note 1).............. $ 1,254,377
Accumulated net realized gain on investments sold
(Note 1)............................................... 6,548,727
Unrealized appreciation of investments (Note 3)........... 12,246,583
Par value of Common Stock................................. 98,386
Paid-in capital in excess of par value of Common Stock.... 141,749,851
Money Market Cumulative Preferred(TM) Stock (Note 5)...... 57,500,000
------------
Total Net Assets.................................. $219,397,924
============
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......................... 495.33 284,817
----------- ------------
$100,495.33 57,784,817
===========
Common Stock (9,838,571 shares outstanding)............... $16.43 161,613,107
====== ------------

TOTAL NET ASSETS............................................ $219,397,924
============
</TABLE>

See Notes to Financial Statements.

<PAGE>

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

Preferred Income Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 1998
- ------------------------------------

<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends.............................................. $11,518,033
Interest............................................... 3,227,029
-----------
Total Investment Income........................... 14,745,062
EXPENSES:
Investment advisory fee (Note 2)....................... $1,230,382
Administration fee (Note 2)............................ 266,974
Money Market Cumulative Preferred(TM) broker
commissions and Auction Agent fees.................... 158,656
Shareholder servicing agent fees (Note 2).............. 117,688
Legal and audit fees................................... 84,379
Insurance expense...................................... 77,922
Directors' fees and expenses (Note 2).................. 58,473
Economic consulting fee (Note 2)....................... 45,333
Custodian fees (Note 2)................................ 31,800
Other.................................................. 81,331
----------
Total Expenses.................................... 2,152,938
-----------
NET INVESTMENT INCOME....................................... 12,592,124
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
(Notes 1 and 3):
Net realized gain on investments sold during the
year.................................................. 6,366,022
Change in net unrealized appreciation/(depreciation)
of investments during the year........................ (5,855,394)
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS............. 510,628
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $13,102,752
===========
</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, 1998 NOVEMBER 30, 1997
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income.................................. $ 12,592,124 $ 12,471,063
Net realized gain on investments sold during the
year................................................. 6,366,022 3,916,069
Change in net unrealized appreciation/(depreciation)
of investments during the year....................... (5,855,394) 5,935,201
------------ ------------
Net increase in net assets resulting from operations... 13,102,752 22,322,333
DISTRIBUTIONS:
Dividends paid from net investment income to Money
Market Cumulative Preferred(TM) Stock Shareholders
(Note 5)............................................. (1,660,954) (2,117,616)
Distributions paid from net realized capital gains to
Money Market Cumulative Preferred(TM) Stock
Shareholders (Note 5)................................ (742,118) (622,495)
Dividends paid from net investment income to Common
Stock Shareholders................................... (10,376,977) (11,293,196)
Distributions paid from net realized capital gains to
Common Stock Shareholders............................ (2,914,933) (6,386,813)
------------ ------------
NET INCREASE/(DECREASE) IN NET ASSETS FOR THE YEAR.......... (2,592,230) 1,902,213
NET ASSETS:
Beginning of year...................................... 221,990,154 220,087,941
------------ ------------
End of year (including undistributed net investment
income of $1,254,377 and $608,618, respectively)..... $219,397,924 $221,990,154
============ ============
</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,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of year.......................... $ 16.71 $ 16.50 $ 15.80 $ 14.74 $ 18.39
-------- -------- -------- -------- --------
Net investment income....................................... 1.28 1.27 1.37 1.48 1.42
Net realized and unrealized gain/(loss) on investments...... 0.05 1.00 0.65 2.05 (2.06)
-------- -------- -------- -------- --------
Total from investment operations............................ 1.33 2.27 2.02 3.53 (0.64)
-------- -------- -------- -------- --------
DISTRIBUTIONS:
Dividends paid from net investment income to MMP*
Shareholders............................................... (0.17) (0.22) (0.15) (0.26) (0.16)
Distributions paid from net realized capital gains to MMP*
Shareholders............................................... (0.07) (0.06) (0.08) (0.01) (0.07)
Dividends paid from net investment income to Common Stock
Shareholders............................................... (1.05) (1.15) (1.08) (1.36) (1.15)
Distributions paid from net realized capital gains to
Common Stock Shareholders.................................. (0.30) (0.65) -- (0.83) (1.64)
Change in accumulated undeclared dividends on MMP*.......... (0.02) 0.02 (0.01) (0.01) 0.01
-------- -------- -------- -------- --------
Total distributions......................................... (1.61) (2.06) (1.32) (2.47) (3.01)
-------- -------- -------- -------- --------
Net asset value, end of year................................ $ 16.43 $ 16.71 $ 16.50 $ 15.80 $ 14.74
======== ======== ======== ======== ========
Market value, end of year................................... $ 15.938 $ 16.188 $ 15.500 $ 14.125 $ 13.500
======== ======== ======== ======== ========
Total investment return based on net asset value**.......... 6.91% 13.65% 12.78% 25.13% (5.22)%
======== ======== ======== ======== ========
Total investment return based on market value**............. 7.05% 17.20% 18.50% 22.14% (13.12)%
======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK
SHAREHOLDERS:
Operating expenses....................................... 1.32% 1.34% 1.51% 1.55% 1.52%
Net investment income***................................. 6.13% 6.22% 7.22% 8.33% 7.55%
SUPPLEMENTAL DATA:
Portfolio turnover rate.................................. 87% 74% 98% 94% 98%
Net assets, end of year (in 000's)....................... $219,398 $221,990 $220,088 $213,053 $199,386

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

Ratio of operating expenses to Total Average Net Assets
including MMP*............................................. 0.97% 0.99% 1.10% 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>
11/30/98 575 $381,562 $100,000 $100,000
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
</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 and
is registered with the Securities and Exchange Commission ("SEC") under the
Investment Company Act of 1940, as amended. 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. Subject to the Fund qualifying as a regulated
investment company, 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.

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.

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, 1998, excluding short-term investments, aggregated $188,819,800 and
$201,485,296, respectively.

At November 30, 1998, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $14,424,067
and aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over value was $1,047,181.

4. COMMON STOCK

At November 30, 1998, 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, 1998 and 1997.

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. 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, 1998, 575 shares of Money Market Cumulative Preferred(TM)
Stock were outstanding at the annual rate of 4.458%. 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.

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. The Fund may invest up to 15% of its assets
in common stock. Under normal conditions, the Fund may invest up to 35% of its
assets in debt securities. Certain of its investments in hybrid or taxable
preferred securities, such as TOPrS, TIPS, QUIPS, MIPS, QUIDS, QUICS, QIB's,
Capital Securities, and other similar or related investments, will be subject to
the foregoing 35% limitation to the extent that, in the opinion of the Fund's
Adviser, such investments are deemed 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, 1998, 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.

8. SIGNIFICANT SHAREHOLDERS

At November 30, 1998, the Commerce Group, Inc. owned approximately 20% of
the total Common Stock Fund shares.

9. SUBSEQUENT EVENTS

On December 14, 1998, the Fund declared a distribution of $0.76 per share
(of which for tax purposes $0.2952 per share represents a dividend from ordinary
income and $0.4648 per share represents a dividend from realized long term
capital gains) to Common Stock Shareholders of record December 24, 1998, payable
December 31, 1998.

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, 1998 through November 30, 1998 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. On December 21, 1998, the Fund
declared an additional distribution of $370,070 payable December 23, 1998 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:

In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Preferred Income Fund Incorporated
(the "Fund") at November 30, 1998, 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.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
November 30, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.

Boston, Massachusetts PricewaterhouseCoopers LLP
January 15, 1999

<PAGE>

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

For the fiscal year ended November 30, 1998, the Fund realized and, by
December 31, 1998, had distributed long term capital gains to both Common Stock
Shareholders and Money Market Cumulative Preferred(TM) Stock Shareholders of
$5,295,737. 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, 1998, including
the Additional Distribution to Money Market Cumulative Preferred(TM) Stock
Shareholders, 47.59% qualified for the Dividends Received Deduction for eligible
corporate investors. (See Note 9).

For the calendar year ended December 31, 1998, 47.39% of all distributions
paid to Common Stock Shareholders qualified for the Dividends Received Deduction
for eligible corporate investors. Shareholders should refer to Form 1099
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 1998.

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

<TABLE>
<CAPTION>
AVAILABLE TO COMMON STOCK SHAREHOLDERS
----------------------------------------------------------------------
NET REALIZED
AND UNREALIZED
GAIN/(LOSS) NET INCREASE IN NET
INVESTMENT INCOME NET INVESTMENT INCOME ON INVESTMENTS ASSETS FROM OPERATIONS
------------------- --------------------- -------------------- -----------------------
QUARTER PER PER PER PER
ENDED TOTAL SHARE* TOTAL SHARE* TOTAL SHARE* TOTAL SHARE*
------- ----- ------ ----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
02/28/97 $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
02/28/98 3,722,217 0.38 3,172,006 0.32 2,143,192 0.22 5,315,198 0.54
05/31/98 3,552,938 0.36 2,989,093 0.31 2,184,997 0.22 5,174,090 0.53
08/31/98 3,681,286 0.37 3,113,722 0.31 (1,373,765) (0.14) 1,739,957 0.17
11/30/98 3,788,621 0.39 3,317,303 0.34 (2,443,796) (0.25) 873,507 0.09
</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, 1998,
$7,811 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.

<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 LOGO]

Annual
Report

November 30, 1998