PREFERRED INCOME FUND INC, N-30D, 2000-07-17

PREFERRED INCOME FUND INC
N-30D, 2000-07-17

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PREFERRED INCOME FUND
INCORPORATED

Dear Shareholder:

The Preferred Income Fund had to contend with extraordinary market trends
in the first half of fiscal 2000 as both preferreds and Treasury bonds (on which
our hedges are based) moved against us. The total return on the Fund's net asset
value for the six months ended May 31, 2000, when market stresses were close to
the worst seen either before or since, was -4.5%.

The following chart shows the changes since the start of the fiscal year in
the yields of traditional preferreds, hybrid preferreds and long-term Treasury
bonds. The divergence between rising preferred yields and falling rates on
Treasuries has widened the spread between preferred's and Treasuries' yields by
roughly a full percentage point. Preferred yields are more representative of
what has happened to interest rates in the real world. The lower yields (and
higher prices) of Treasuries reflect the developing perception of a scarcity of
those issues as federal budget surpluses are used to retire them.

[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

CHANGES IN YIELDS OF PREFERREDS AND TREASURY BONDS
November 30, 1999 - May 31, 2000

Date Hybrid Traditional 30 Year
Preferreds Preferreds Treasury Bonds
11/30/1999 0 0 0
12/03/1999 -0.019 0 0.03
12/10/1999 -0.121 -0.05 -0.07
12/17/1999 0.112 0.20 0.15
12/24/1999 0.179 0.30 0.25
12/31/1999 0.175 0.30 0.25
01/07/2000 0.202 0.30 0.32
01/14/2000 0.281 0.40 0.46
01/21/2000 0.271 0.40 0.48
01/28/2000 0.098 0.35 0.21
02/04/2000 0.104 0.30 0.02
02/11/2000 0.311 0.50 0.05
02/18/2000 0.167 0.35 -0.08
02/25/2000 0.169 0.40 -0.08
03/03/2000 0.150 0.40 -0.10
03/10/2000 0.367 0.30 -0.06
03/17/2000 0.252 0.25 -0.23
03/24/2000 0.250 0.20 -0.23
03/31/2000 0.187 0.10 -0.39
04/07/2000 0.159 0.10 -0.53
04/14/2000 0.348 0.30 -0.44
04/20/2000 0.384 0.35 -0.41
04/28/2000 0.533 0.55 -0.27
05/05/2000 0.903 0.85 -0.04
05/12/2000 0.969 0.85 -0.03
05/19/2000 1.040 0.85 -0.02
05/31/2000 0.854 0.73 -0.19

These market trends impacted the Fund in three principal areas:

(BULLET) The preferred portfolio produced a small negative total return as
interest rates surged. Strange as it may sound, however, we were
actually pleased that the portfolio performed as well as it did in a
terrible market.

(BULLET) Hedging was a big disappointment. Our hedges are, in effect, a "bet"
against Treasury bonds. Normally, we expect the hedges to help us when
yields rise, but Treasuries turned out to be immune to the latest
general increase in interest rates. As a result, we incurred the cost
of hedging without getting any payoff.

(BULLET) The Fund's leverage magnified the impact of the negative returns from
preferreds and hedging. This is exactly what we should expect.

<PAGE>

"One swallow does not make a spring," but we should note that the coming of
June brought a fairly dramatic improvement in market conditions. Interest rates
have declined a bit. More importantly, though, the preferred market has come to
life and has outperformed Treasuries for the first time in months. In the month
of June, the returns for the Fund's fiscal year-to-date have improved by roughly
4 percentage points compared to the numbers shown in the opening paragraph.

Looking forward, we see some positives, but there are also some questions.
Preferreds seem quite attractive now in relation to the fixed income markets
generally. Treasuries, however, are still groping for their proper place in the
uncharted ground of shrinking national debt. We sense that the strength in
Treasuries over the last several months may have created some excesses, but only
time will tell for sure when Treasuries will settle into a stable relationship
versus other fixed income securities.

We strongly recommend that shareholders read carefully the Questions and
Answers section that follows. It focuses on hedging and related issues that are
of key importance to the Fund now. The discussion covers the recent performance
of the hedge, the outlook for the Treasury market, the impact of hedging on the
Fund's income and possible changes that may be in the works including the use of
alternative hedging vehicles along with Treasuries. We have done our best to
make it educational and understandable.

The pie chart below shows the breakdown of the Fund's portfolio on May 31,
2000. Most of the recent activity has involved opportunities uncovered in
specific securities rather than shifts among the major sectors of the portfolio.
Messy markets often produce neat opportunities for those who are ready. That has
been particularly true lately.

[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
ADJUSTABLE RATES 13.9%
TRADITIONAL FIXED RATES 40.0%
COMMON STOCK 1.4%
HYBRID PREFERREDS 39.9%
CASH & OTHER 4.8%

As a clarification of the pie chart, the distinction between traditional
preferreds and hybrid preferreds is based upon their treatment for tax purposes.
The dividends from traditional preferreds are 70% tax free to qualifying
corporate investors due to the Dividends Received Deduction (the "DRD"). In
contrast, hybrid preferreds do not offer the DRD, are taxed the same as bonds,
and typically yield somewhat more than traditional preferreds. The DRD benefits
the Fund indirectly by holding down the effective cost of its leverage.

<PAGE>

The Fund's shares have continued to sell in the market at a moderate
discount from their net asset value. In recent months, the discount has stayed
fairly consistently in the middle to high single digits.

Many of you are using our web site, WWW.PREFERREDINCOME.COM, to get
up-to-date information on the Fund. It includes current market prices, net asset
values, discounts, yields, dividends, performance, and portfolio holdings. We
also post there all shareholder communications, including this report. It could
be especially helpful to those of you that tell us that your receipt of these
reports is often delayed when they are forwarded to you through brokerage firms
that hold your shares. Please come visit us.

Sincerely,
/S/ SIGNATURE Robert T. Flaherty
Robert T. Flaherty
Chairman of the Board

June 30, 2000

QUESTIONS & ANSWERS

ONCE AGAIN, HOW DOES THE FUND HEDGE?

Generally speaking, we try to smooth out major market swings by making
potentially offsetting "bets" (speaking figuratively, of course). The Fund's
portfolio of preferred stocks represents a bet in favor of preferred stocks. Our
hedges are a bet against Treasury bonds. If the preferred market and the
Treasury market move in the same direction, either up or down, we can reasonably
expect one of our bets to be a winner and the other to be a loser. If it works,
it will smooth out the market bumps.

Naturally, we don't want to lose a whole lot of money when the hedge goes
against us, and we have a way of dealing with that. Our typical hedge involves
purchasing slightly out-of-the-money put options on Treasury bond futures
contracts, which creates something like a "safety net" below the market. To use
an insurance analogy, it is like paying a premium for an insurance policy with a
fairly large deductible. The key is that the Fund cannot lose on the hedges any
more than the price paid for them.

WHY HASN'T THE HEDGE MADE MONEY THIS YEAR?

Our hedging strategy assumes that preferreds and Treasury bonds will march
to the same drumbeat in at least a general sort of way, but that hasn't happened
in fiscal 2000 so far. Preferred yields have increased, reflecting the general
rise in long-term interest rates, which has caused their prices to decline. At
the same time, the yields of Treasury bonds have fallen slightly, causing a
small rise in their prices and eliminating any profit on our "bet" against
Treasuries. Going back to our insurance analogy, we absorbed the cost of the
insurance, but it didn't pay off when we needed it.

3
<PAGE>

We can put all this in perspective by looking at what has happened to the
yields on preferreds compared to those on Treasury bonds. It is a matter of
arithmetic that declining prices make yields go up. Similarly, when preferreds
underperform Treasuries in terms of market price, the yields of preferreds will
rise compared to those of Treasuries. The following graph shows what has
happened to the margin of additional yield (called the "spread") that preferred
stocks provide compared to Treasury bonds.

[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

ADDITIONAL YIELD OF "A" PREFERREDS VERSUS U.S. TREASURY BONDS
JANUARY 1, 1997 - MAY 31, 2000

PREFERRED
YIELD
LESS
TREASURY
DATE YIELD
01/03/1997 -0.0004
01/10/1997 -0.0005
01/17/1997 -0.0002
01/24/1997 -0.0003
01/31/1997 -0.0009
02/07/1997 -0.0010
02/14/1997 -0.0007
02/21/1997 -0.0009
02/28/1997 -0.0015
03/07/1997 -0.0022
03/14/1997 -0.0025
03/21/1997 -0.0026
03/28/1997 -0.0024
04/04/1997 -0.0022
04/11/1997 -0.0027
04/18/1997 -0.0025
04/25/1997 -0.0029
05/02/1997 -0.0024
05/09/1997 -0.0024
05/16/1997 -0.0026
05/23/1997 -0.0028
05/30/1997 -0.0030
06/06/1997 -0.0028
06/13/1997 -0.0028
06/20/1997 -0.0021
06/27/1997 -0.0019
07/04/1997 -0.0016
07/11/1997 -0.0013
07/18/1997 -0.0012
07/25/1997 -0.0020
08/01/1997 -0.0020
08/08/1997 -0.0018
08/15/1997 -0.0005
08/22/1997 -0.0010
08/29/1997 -0.0016
09/05/1997 -0.0024
09/12/1997 -0.0033
09/19/1997 -0.0037
09/26/1997 -0.0036
10/03/1997 -0.0039
10/10/1997 -0.0043
10/17/1997 -0.0039
10/24/1997 -0.0032
10/31/1997 -0.0035
11/07/1997 -0.0031
11/14/1997 -0.0029
11/21/1997 -0.0029
11/28/1997 -0.0029
12/05/1997 -0.0029
12/12/1997 -0.0023
12/19/1997 -0.0026
12/26/1997 -0.0025
01/02/1998 -0.0024
01/09/1998 -0.0017
01/16/1998 -0.0021
01/23/1998 -0.0020
01/30/1998 -0.0020
02/06/1998 -0.0022
02/13/1998 -0.0019
02/20/1998 -0.0021
02/27/1998 -0.0027
03/06/1998 -0.0027
03/13/1998 -0.0029
03/20/1998 -0.0028
03/27/1998 -0.0026
04/03/1998 -0.0024
04/10/1998 -0.0023
04/17/1998 -0.0028
04/24/1998 -0.0029
05/01/1998 -0.0028
05/08/1998 -0.0032
05/15/1998 -0.0032
05/22/1998 -0.0030
05/29/1998 -0.0030
06/05/1998 -0.0024
06/12/1998 -0.0027
06/19/1998 -0.0027
06/26/1998 -0.0024
07/03/1998 -0.0025
07/10/1998 -0.0022
07/17/1998 -0.0024
07/24/1998 -0.0023
07/31/1998 -0.0021
08/07/1998 -0.0023
08/14/1998 -0.0014
08/21/1998 0.0001
08/28/1998 0.0016
09/04/1998 0.0023
09/11/1998 0.0037
09/18/1998 0.0045
09/25/1998 0.0043
10/02/1998 0.0051
10/09/1998 0.0054
10/16/1998 0.0047
10/23/1998 0.0048
10/30/1998 0.0045
11/06/1998 0.0039
11/13/1998 0.0035
11/20/1998 0.0033
11/27/1998 0.0034
12/04/1998 0.0041
12/11/1998 0.0048
12/18/1998 0.0049
12/25/1998 0.0053
01/01/1999 0.0051
01/08/1999 0.0043
01/15/1999 0.0039
01/22/1999 0.0027
01/29/1999 0.0033
02/05/1999 0.0020
02/12/1999 0.0021
02/19/1999 0.0021
02/26/1999 0.0010
03/05/1999 0.0008
03/12/1999 0.0006
03/19/1999 0.0004
03/26/1999 0.0004
04/02/1999 -0.0009
04/09/1999 -0.0011
04/16/1999 -0.0017
04/23/1999 -0.0015
04/30/1999 -0.0001
05/07/1999 -0.0011
05/14/1999 -0.0011
05/21/1999 -0.0006
05/28/1999 -0.0007
06/04/1999 -0.0011
06/11/1999 -0.0004
06/18/1999 -0.0002
06/25/1999 -0.0010
07/02/1999 -0.0006
07/09/1999 -0.0005
07/16/1999 0.0001
07/23/1999 0.0013
07/30/1999 0.0010
08/06/1999 0.0028
08/13/1999 0.0045
08/20/1999 0.0047
08/27/1999 0.0043
09/03/1999 0.0038
09/10/1999 0.0026
09/17/1999 0.0035
09/24/1999 0.0033
10/01/1999 0.0026
10/08/1999 0.0016
10/15/1999 0.0022
10/22/1999 0.0030
10/29/1999 0.0029
11/05/1999 0.0031
11/12/1999 0.0032
11/19/1999 0.0024
11/26/1999 0.0027
12/03/1999 0.0024
12/10/1999 0.0029
12/17/1999 0.0032
12/24/1999 0.0032
12/31/1999 0.0032
01/07/2000 0.0025
01/14/2000 0.0021
01/21/2000 0.0020
01/28/2000 0.0041
02/04/2000 0.0055
02/11/2000 0.0072
02/18/2000 0.0070
02/25/2000 0.0075
03/03/2000 0.0077
03/10/2000 0.0063
03/17/2000 0.0075
03/24/2000 0.0071
03/31/2000 0.0076
04/07/2000 0.0090
04/14/2000 0.0101
04/20/2000 0.0103
04/28/2000 0.0109
05/05/2000 0.0116
05/12/2000 0.0115
05/19/2000 0.0114
05/26/2000 0.0119

In the above chart, we have used A-rated traditional preferred stocks to
represent the preferred market. Historically, these preferreds have typically
yielded somewhat less than Treasury bonds (due to the tax advantages that they
provide to certain corporate investors). However, the yields of these preferreds
were roughly 1 1/4% above those of Treasury bonds on May 31st of this year.
Almost all of that yield spread (approximately 1% of the 1 1/4%) has come about
since January of this year. This was the most adverse shift in the market
relationship between preferreds and Treasuries since the mid-1980s. It
translated into substantially better market value performance for Treasuries
compared to preferreds.

WHY HAVEN'T TREASURY BOND YIELDS GONE UP ALONG WITH OTHER INTEREST RATES?

Since January of this year, the Treasury bond market has been dominated by
the expectation that the growing federal budget surplus will be used to
repurchase Treasury bonds in the market and shrink the outstanding supply of
such bonds. This has propped up the market for Treasuries and spared them from
the price declines that have hit just about every other sector of the fixed
income markets as long-term interest rates have surged.

A close look at the preceding chart reveals that this is actually the third
time in the last couple of years that an "event" has caused a rush to Treasuries
and disrupted their normal relationship to preferreds. The first was the hedge
fund/international financial crisis in the fall of 1998, which caused a "flight
to quality". This had faded in investors' minds by the middle of 1999, only to
be replaced by another flight to quality inspired by concerns about the "Y2K
Bug". (Remember that one?) By January of this year, the bug had been

4
<PAGE>

exterminated, and our hedge was starting to look pretty good. Before the market
had fully recovered, however, it was hit rather suddenly by the prospect of a
shrinking supply of Treasury bonds.

IS THE NATIONAL DEBT REALLY GOING TO BE PAID OFF?

The numbers are pretty powerful if you choose to believe them. About $2
trillion of the total U.S. Treasury debt of slightly over $3 trillion is held by
private investors (excluding the Social Security Trust Fund and various central
banks around the world). If federal budget surpluses continue at the levels
currently projected, all those privately held Treasury securities could be
retired by the latter part of the current decade.

We expect that the Treasury bond market will shrink in size for the
foreseeable future. Nonetheless, we should keep in mind that Treasury bonds have
always been the 800-pound gorilla in the fixed income markets, and that is not
going to change overnight. The idea that the folks in Washington can keep their
fingers out of this fiscal cookie jar strains credibility. Furthermore, the
projections assume away the possibility of recessions that could sharply reduce
the expected surpluses. Before Treasury bonds dry up and blow away, new forces
could easily come into play.

WHAT MIGHT CHANGE THAT WOULD MAKE THE FUND'S HEDGES MORE EFFECTIVE?

It really would not take that much. All we need is for Treasury bonds to
settle into some stable relationship to the rest of the fixed income market that
would result in them tracking more closely swings in interest rates generally
from this point forward. It is not necessary for Treasuries to return to the
relationship to preferreds that we used to consider normal in the "good old
days", which would produce an unexpected windfall for the Fund.

It is worth noting that the holders of Treasury bonds are giving up an
unusually large amount of income compared to other kinds of bonds in which they
might invest. That gap would increase even further if Treasuries continued their
strong performance, which suggests that this trend cannot continue indefinitely.
Eventually, Treasuries will probably settle into a stable relationship with the
fixed income market generally, even if the publicly held supply of Treasury debt
continues to shrink. It is difficult to predict when and where that market
equilibrium might occur.

HAVE HEDGING RESULTS AFFECTED THE FUND'S INCOME?

As shown by the graph on page 6, the general effect of hedging is to cause
the Fund's income to follow significant moves in the yields of long-term
Treasury bonds. The chart shows the monthly dollar income received from an
original investment in 1,000 shares of the Fund (the solid blue line measured on
the left-hand scale) to the yields on long-term Treasury bonds (the dashed blue
line and the right-hand scale). The graph is based on the assumption that the
shareholder spent his or her regular monthly income from the Fund and reinvested
at net asset value just the portion of each special year-end distribution that
was "above and beyond" the monthly distribution.

On the surface, the first half of fiscal 2000 was pretty much a "non-event"
regarding income, but there is more going on behind the scenes.

5
<PAGE>

[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

PREFERRED INCOME FUND MONTHLY DIVIDEND INCOME
On a 1,000 Share ($15,000) Initial Investment

DATE MONTHLY 30 YEAR
DIVIDEND TREASURY
INCOME YIELD

Jan-91 8.16%
Feb-91 8.20%
Mar-91 8.22%
Apr-91 $122.50 8.18%
May-91 $122.50 8.26%
Jun-91 $122.50 8.40%
Jul-91 $122.50 8.34%
Aug-91 $125.00 8.06%
Sep-91 $125.00 7.81%
Oct-91 $125.00 7.91%
Nov-91 $125.00 7.94%
Dec-91 $125.00 7.40%
Jan-92 $126.46 7.76%
Feb-92 $126.46 7.79%
Mar-92 $126.46 7.96%
Apr-92 $126.46 8.03%
May-92 $126.46 7.84%
Jun-92 $126.46 7.78%
Jul-92 $126.46 7.46%
Aug-92 $126.46 7.41%
Sep-92 $126.46 7.38%
Oct-92 $126.46 7.62%
Nov-92 $126.46 7.60%
Dec-92 $126.46 7.39%
Jan-93 $127.87 7.19%
Feb-93 $127.87 6.90%
Mar-93 $127.87 6.92%
Apr-93 $127.87 6.93%
May-93 $127.87 6.98%
Jun-93 $127.87 6.67%
Jul-93 $127.87 6.56%
Aug-93 $127.87 6.09%
Sep-93 $127.87 6.02%
Oct-93 $127.87 5.97%
Nov-93 $127.87 6.30%
Dec-93 $127.87 6.35%
Jan-94 $121.76 6.24%
Feb-94 $121.76 6.66%
Mar-94 $121.76 7.09%
Apr-94 $121.76 7.30%
May-94 $128.67 7.43%
Jun-94 $128.67 7.61%
Jul-94 $128.67 7.39%
Aug-94 $128.67 7.48%
Sep-94 $128.67 7.82%
Oct-94 $128.67 7.96%
Nov-94 $133.06 7.94%
Dec-94 $133.06 7.88%
Jan-95 $132.51 7.73%
Feb-95 $132.51 7.55%
Mar-95 $132.51 7.43%
Apr-95 $132.51 7.33%
May-95 $132.51 6.63%
Jun-95 $125.21 6.54%
Jul-95 $125.21 6.90%
Aug-95 $125.21 6.61%
Sep-95 $125.21 6.50%
Oct-95 $125.21 6.36%
Nov-95 $125.21 6.08%
Dec-95 $117.63 5.95%
Jan-96 $117.63 6.05%
Feb-96 $117.63 6.36%
Mar-96 $117.63 6.67%
Apr-96 $117.63 6.83%
May-96 $124.39 7.00%
Jun-96 $124.39 6.95%
Jul-96 $124.39 7.01%
Aug-96 $124.39 7.12%
Sep-96 $124.39 6.90%
Oct-96 $124.39 6.81%
Nov-96 $124.39 6.51%
Dec-96 $124.39 6.60%
Jan-97 $123.32 6.79%
Feb-97 $123.32 6.80%
Mar-97 $123.32 7.09%
Apr-97 $123.32 6.89%
May-97 $123.32 6.98%
Jun-97 $123.32 6.74%
Jul-97 $123.32 6.45%
Aug-97 $123.32 6.61%
Sep-97 $123.32 6.30%
Oct-97 $123.32 6.15%
Nov-97 $123.32 6.04%
Dec-97 $123.32 5.95%
Jan-98 $117.47 5.90%
Feb-98 $117.47 6.02%
Mar-98 $117.47 5.93%
Apr-98 $117.47 5.95%
May-98 $117.47 5.80%
Jun-98 $117.47 5.62%
Jul-98 $117.47 5.72%
Aug-98 $117.47 5.26%
Sep-98 $117.47 4.98%
Oct-98 $117.47 5.15%
Nov-98 $117.47 5.07%
Dec-98 $117.47 5.09%
Jan-99 $118.77 5.09%
Feb-99 $118.77 5.58%
Mar-99 $118.77 5.62%
Apr-99 $118.77 5.66%
May-99 $118.77 5.82%
Jun-99 $127.85 5.97%
Jul-99 $127.85 6.10%
Aug-99 $127.85 6.06%
Sep-99 $127.85 6.05%
Oct-99 $127.85 6.16%
Nov-99 $127.85 6.29%
Dec-99 $127.85 6.48%
Jan-00 $128.38 6.49%
Feb-00 $128.38 6.15%
Mar-00 $128.38 5.84%
Apr-00 $128.38 5.96%
May-00 $128.38 6.02%

Hedging impacts the Fund's income by increasing or decreasing the Fund's
income producing assets. Normally, we expect hedging gains to have a positive
impact on income at a time like this when interest rates rise significantly.
Instead, the cost of hedging has been a small drain on the Fund's income
producing assets in fiscal 2000 to date. The swing from an expected positive to
even a small negative is a big disappointment for us. We would like to see the
Fund's income go up in markets like this, but that is not in the cards at the
moment.

One of the things we expect hedging to do for us when interest rates rise
is to help offset the higher rates paid on the Money Market Preferred(TRADE
MARK) stock ("MMP") issued by the Fund to create leverage. If short-term
interest rates continue to increase, the rising cost of the MMP will have to
come out of net income available to the common shareholders unless we can find a
way to offset it. Achieving some gains on the Fund's hedges would be the
solution of choice.

ARE THERE OTHER WAYS THE FUND COULD HEDGE THAT ARE NOT BASED ON TREASURY BONDS?

There are some alternative hedging instruments, each of which has its own
pluses and minuses. Interest rate swaps, which are not quite as esoteric as they
may sound, are a practical alternative now, as are options on such swaps (cutely
dubbed "swaptions"). Exchange-traded futures contracts on federal government
agency bonds have recently been created, and it would not be surprising to see
liquid markets develop in agency futures and options.

<PAGE>

If the Treasury market actually does shrink in size as projected, various
additional hedging instruments will undoubtedly be introduced. The demand for
effective hedges is enormous, and Wall Street is very inventive when it comes to
filling a need, especially when there is money to be made. It would not be
surprising to see a period of competition among various alternative hedges, with
efficient, liquid markets eventually developing for a few that prove to be most
effective.

The Fund's hedging strategies will evolve as necessary to deal with
changing market conditions. For all the talk, Treasuries are still the most
widely accepted vehicle for hedging. Looking forward, however, it seems quite
possible that our hedging strategies may include a package of some
Treasury-based hedges along with one or more alternative hedging instruments.

Stay tuned! The notion that the Treasury bond market might gradually
disappear only dates back to last January, but times may indeed be changing. Our
hedges may look somewhat different in the future as we see a need to adapt.

WHAT ARE INTEREST RATE SWAPS AND SWAPTIONS?

Although their name sounds rather strange, interest rate swaps are one of
the most widely used forms of derivative contracts. A swaption is simply an
option to enter into an interest rate swap on pre-determined terms if that turns
out to be attractive to do before the option expires. Similar to the put options
on Treasury bond futures contracts that the Fund purchases as hedges, the entire
price paid for the swaption is at risk. However, that is the most that a
purchaser of a swaption can lose on the contract. For this reason, swaptions are
probably more interesting to the Fund than swaps.

At the risk of oversimplification, this is the essence of an interest rate
swap between two parties. Party A makes a "loan" to Party B at an interest rate
that is fixed for the life of the swap. Party B makes a "loan" to Party A for
the identical amount and life at an interest rate that will be variable based on
a market indicator of short-term interest rates, which is often LIBOR(the London
Interbank Offer Rate). Since the amounts of the "loans" offset each other, the
only cash that actually changes hands is the difference between the fixed and
variable interest rates, which will fluctuate over the life of the swap as the
variable interest rate changes.

The structure of interest rate swaps, although it may seem somewhat
contorted, makes them very useful in a wide range of hedging situations. The
market value of existing interest rate swaps will reflect swings in general
interest rates in a reasonably systematic way, which will, depending on how
things turn out, be good for one of the parties to a swap and bad for the other.
In this respect, swaps resemble the Fund's current hedges, but they also differ
since they are not tied specifically to interest rates on Treasury bonds. At any
point in time, they may or may not track preferred stocks closely given the
often-observed idiosyncrasies of the preferred market.

There are various other risks of derivatives involved in interest rate
swaps and swaptions. Even though major financial and broker/dealer organizations
are the usual counterparties, anyone entering into such an agreement must
carefully consider the other party's credit worthiness and its ability to
perform its obligations. Market liquidity may also be a risk at certain times.
Furthermore, legal and operational risks may be a reason to avoid more exotic
derivative contracts. As is the case with the Fund's present hedges, interest
rate swaps and swaptions involve significant economic leverage that could cause
relatively small changes in interest rates to produce disproportionally large
swings in the market value of the swaps or swaptions and a significant risk of
loss.

7
<PAGE>

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

DIVIDEND
DIVIDEND NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE (1)
-------- --------- ------------- ------------
December 31, 1998 ........... $0.7600 $15.73 $15.5625 $15.54
January 31, 1999 ............ 0.0785 15.62 14.7500 14.87
February 28, 1999 ........... 0.0785 15.65 14.0625 14.23
March 31, 1999 .............. 0.0785 15.57 14.3125 14.28
April 30, 1999 .............. 0.0785 15.60 14.1250 14.07
May 31, 1999 ................ 0.0785 15.50 13.8750 13.84
June 30, 1999 ............... 0.0845 15.36 13.6875 13.89
July 31, 1999 ............... 0.0845 15.07 13.9375 13.76
August 31, 1999 ............. 0.0845 14.94 13.7500 13.52
September 30, 1999 .......... 0.0845 14.80 13.6250 13.76
October 31, 1999 ............ 0.0845 14.66 12.5625 12.76
November 30, 1999 ........... 0.0845 14.41 12.7500 12.77

December 31, 1999 ........... 0.5600 13.74 12.2500 12.64
January 31, 2000 ............ 0.0820 13.65 12.0000 12.62
February 29, 2000 ........... 0.0820 13.45 12.5000 12.49
March 31, 2000 .............. 0.0820 13.62 12.1875 12.28
April 30, 2000 .............. 0.0820 13.05 12.0625 12.08
May 31, 2000 ................ 0.0820 12.75 12.0625 12.22

--------------------------------------------------------------------------------
(1) Whenever the net asset value per share of the Fund's common stock is less
than or equal to the market price per share on the payment date, new shares
issued will be valued at the higher of net asset value or 95% of the then
current market price. Otherwise, the reinvestment shares of common stock
will be purchased in the open market.

<PAGE>

--------------------------------------------------------------------------------
Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS
MAY 31, 2000 (UNAUDITED)
----------------------------------

VALUE
SHARES/PAR (NOTE 1)
---------- ------------

PREFERRED STOCKS AND SECURITIES -- 93.8%
ADJUSTABLE RATE PREFERRED STOCKS -- 13.9%
UTILITIES -- 3.4%
Niagara Mohawk Power Corporation:
154,879 Series A, Adj. Rate Pfd. ........... $ 3,291,179*
30,601 Series B, Adj. Rate Pfd. ........... 749,724*
88,745 Series C, Adj. Rate Pfd. ........... 2,174,252*
------------
TOTAL UTILITY ADJUSTABLE RATE
PREFERRED STOCKS .................... 6,215,155
------------

BANKING -- 10.3%
Bank One Corporation:
35,875 Series B, Adj. Rate Pfd. ........... 3,031,437*
3,200 Series C, Adj. Rate Pfd. ........... 288,000*
68,325 Chase Manhattan Corporation, Series L,
Adj. Rate Pfd. ..................... 6,046,762*
Citigroup Inc.:
75,000 Series Q, Adj. Rate Pfd. ........... 1,593,750*
102,850 Series R, Adj. Rate Pfd. ........... 2,185,562*
8,200 HSBC USA, Inc., Series D,
Adj. Rate Pfd. ..................... 170,150*
9,950 J.P. Morgan & Company, Inc., Series A,
Adj. Rate Pfd. ..................... 713,912*
114,400 Wells Fargo & Company, Series B,
Adj. Rate Pfd. ..................... 4,776,200*
------------
TOTAL BANKING ADJUSTABLE RATE
PREFERRED STOCKS .................... 18,805,773
------------

FINANCIAL SERVICES-- 0.2%
9,590 Student Loan Marketing Association,
Series A, Adj. Rate Pfd. ........... 450,730*
------------
TOTAL ADJUSTABLE RATE
PREFERRED STOCKS .................... 25,471,658
------------
FIXED RATE PREFERRED STOCKS AND SECURITIES -- 79.9%
UTILITIES -- 27.2%
Alabama Power Company:
12,000 5.20% Pfd. ......................... 226,260*
55,000 5.83% Pfd. ......................... 1,100,825*
40,000 Alabama Power Capital Trust II,
7.60% TOPrS ........................ 880,200

VALUE
SHARES/PAR (NOTE 1)
---------- ------------

76,450 Appalachian Power Company,
8.00% QUIDS, Series B .............. $ 1,689,545
6,870 Baltimore Gas & Electric Company,
6.99% Pfd., Series 1995 ............ 683,015*
10,000 Boston Edison Company,
4.78% Pfd. ......................... 731,900*
Central Hudson Gas & Electric
Corporation:
5,000 4.35% Pfd., Series D, Pvt. ......... 325,025*
750 4.96% Pfd., Series E, Pvt. ......... 54,795*
Central Power and Light Company:
144,950 CPL Capital I,
8.00% QUIPS, Series A .............. 3,238,183
12,450 Columbus Southern Power Company,
7.92%, Jr. Sub. Debt., Series B .... 272,344
Connecticut Light and Power Company:
885 $2.06 Pfd. ($50 Par) ............... 23,966*
459 $3.24 Pfd. ($50 Par) ............... 19,666*
2,000 4.50% Pfd. ......................... 59,160*
6,870 Dayton Power and Light Company,
3.90% Pfd., Series C ............... 407,666*
Duke Energy Corporation:
5,550 4.50% Pfd., Series C ............... 374,403*
3,412 7.85% Pfd., Series S ............... 351,027*
565 7.00% Pfd., Series W ............... 55,960*
Duquesne Light Company:
20,000 7.375% QIB, Series E ............... 421,800
54,000 Duquesne Capital,
8.375% MIPS, Series A .............. 1,251,720
10,900 El Paso Tennessee Pipeline Company,
8.25% Pfd., Series A ............... 571,596*
Entergy Arkansas, Inc.:
2,800 7.32% Pfd. ......................... 244,244*
3,850 7.40% Pfd. ......................... 339,512*
1,147 7.88% Pfd. ......................... 107,715*
2,940 Entergy Gulf States Inc.,
7.56% Pfd. ......................... 258,926*
260 Entergy Louisiana, Inc.,
7.84% Pfd. ......................... 23,989*
Florida Power & Light Company:
5,350 4.35% Pfd., Series E, Pvt. ......... 341,678*
27,227 6.98% Pfd., Series S ............... 2,692,206*

See Notes to Financial Statements.

9
<PAGE>

--------------------------------------------------------------------------------
Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2000 (UNAUDITED)
------------------------------------

VALUE
SHARES/PAR (NOTE 1)
---------- ------------

PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
UTILITIES (CONTINUED)
Florida Progress Corporation:
71,300 FPC Capital I,
7.10% QUIPS, Series A .............. $ 1,421,722
Hawaiian Electric Company, Inc.:
20,000 HECO Capital Trust I, 8.05% QUIPS .. 440,000
Illinois Power Company:
785 7.75% Pfd. ......................... 39,356*
4,530 4.08% Pfd., Series A ............... 128,946*
8,960 4.42% Pfd., Series D ............... 276,237*
29,370 4.70% Pfd., Series E ............... 962,895*
10,000 Indiana Michigan Power Company,
8.00% Pfd., Series A ............... 218,650
7,538 Jersey Central Power & Light Company,
7.52% Sinking Fund Pfd., Series K .. 775,434*
Metropolitan Edison Company:
1,900 MET-ED Capital Trust, 7.35% ........ 38,855
22,000 MidAmerican Energy Financing I,
7.98% QUIPS, Series A .............. 498,190
8,500 Monongahela Power Company,
$7.73 Pfd., Series L ............... 871,675*
Nevada Power Company:
27,860 NVP Capital I, 8.20% QUIPS, Series A 605,119
30,000 NVP Capital III, 7.75% TIPS ........ 635,400
New Century Energies, Inc.:
48,000 PSCO Capital Trust I, 7.60% TOPrS .. 1,046,880
5,000 Southwestern Public Service Capital I,
7.85%, Series A .................... 110,425
3,500 Northern Indiana Public Service
Company, 7.44% Pfd. ................ 357,543*
14,200 Northern States Power Company,
$4.10 Pfd., Series C ............... 873,016*
6,170 Ohio Edison Company, 4.44% Pfd. 344,286*
Ohio Power Company:
33,600 8.16% Pfd., Series A ............... 745,416
15,500 7.92% QUIDS, Series B .............. 336,583
36,300 7.375% Sr. Notes ................... 751,592
5,000 PacifiCorp, $4.72 Pfd. ............... 347,575*

VALUE
SHARES/PAR (NOTE 1)
---------- ------------

PECO Energy Company:
5,000 $4.40 Pfd., Series C ............... $ 297,250*
1,050,000 Capital Trust III, $7.38 4/6/28
Capital Security, Series D ......... 861,126
7,800 Penelec Capital Trust,
7.34% TOPrS ........................ 161,109
48,250 PP&L Resources, Inc.:
PP&L Capital Trust II,
8.10% TOPrS ........................ 1,090,933
9,410 PSI Energy, Inc., 4.32% Pfd. ......... 143,785*
10,000 Public Service Company of New Mexico,
4.58% Private Pfd. ................. 610,800*
53,500 Public Service Enterprise Group Inc.:
Enterprise Capital Trust I,
7.44% TOPrS, Series A .............. 1,070,803
Puget Sound Energy, Inc.:
92,200 7.45% Pfd., Series II .............. 2,366,313*
11,758 7.75% Sinking Fund Pfd. ............ 1,231,592*
Reliant Energy, Inc.:
45,000 HL&P Capital Trust I,
8.125% QUIPS ....................... 973,350
57,750 REI Trust I, 7.20% TOPrS, Series C . 1,101,293
4,884 Rochester Gas & Electric Corporation,
4.10% Pfd., Series H ............... 288,107*
Sempra Energy:
36,700 San Diego Gas & Electric Company,
6.80% Pfd. ......................... 911,078*
South Carolina Electric & Gas Company:
26,311 5.125% Purchase Fund Pfd. .......... 986,794*
8,000 6.00% Purchase Fund Pfd. ........... 349,120*
86,200 SCE&G Trust I, 7.55%, Series A ..... 1,857,610
5,000 Southern Indiana Gas & Electric Company,
4.75% Pfd. Pvt. .................... 343,750*
Southern Union Company:
65,000 Southern Union Financing I,
9.48% TOPrS ........................ 1,552,525
6,200 Southwestern Electric Power Company:
Swepco Capital I, 7.875%, Series A . 139,345

See Notes to Financial Statements.

10
<PAGE>

VALUE
SHARES/PAR (NOTE 1)
---------- ------------

PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
UTILITIES (CONTINUED)
TransCanada PipeLines Ltd.:
11,300 8.25% .............................. $ 245,436
37,000 TransCanada Capital, 8.75% TOPrS ... 819,735
3,800,000 Union Electric Power Company,
7.69% 12/15/36 Capital Security,
Series A ........................... 3,287,798
1,916 Virginia Electric & Power Company,
$6.98 Pfd. ......................... 188,707*
22,400 Wisconsin Energy Corporation,
WEC Capital Trust I, 6.85% ......... 450,352
------------
TOTAL UTILITY FIXED RATE
PREFERRED STOCKS
AND SECURITIES ...................... 49,901,832
------------
BANKING -- 21.0%
ABN AMRO North America:
105,163 Capital Fund Trust II, 7.125% Pfd. . 2,114,828
1,480 LaSalle National Corporation,
6.46% Pfd. 144A*** ................. 1,339,925*
BancWest Corporation:
6,500,000 First Hawaiian Capital I, 8.343%
7/1/27 Capital Security, Series B .. 5,759,260
Chase Manhattan Corporation:
62,189 10.84% Pfd., Series C .............. 1,694,650*
3,500 10.96% Pfd., Series G .............. 90,562*
Citigroup Inc.:
56,550 6.213% Pfd., Series G .............. 2,467,842*
84,050 5.864% Pfd., Series M .............. 3,481,771*
Deutsche Bank AG:
3,300,000 BT Capital Trust B,
7.90% 1/15/27 Capital Security ..... 2,862,172
First Union Corporation:
1,500,000 First Union Capital II,
7.95% 11/15/29 Capital Security .... 1,324,530
2,500,000 First Union Institutional Capital I,
8.04% 12/1/26 Capital Security ..... 2,186,925

VALUE
SHARES/PAR (NOTE 1)
---------- ------------

1,750,000 First Union Institutional Capital II,
7.85% 1/1/27 Capital Security ...... $ 1,513,181
FleetBoston Financial Corporation:
1,200,000 BankBoston Capital Trust I,
8.25% 12/15/26 Capital Security .... 1,082,322
GreenPoint Financial Corporation:
2,500,000 GreenPoint Capital Trust I,
9.10% 6/1/27 Capital Security ...... 2,158,800
HSBC USA, Inc.:
43,100 $2.8575 Pfd. ....................... 1,774,427*
5,250,000 Republic New York Capital II,
7.53% 12/4/26 STOPS ................ 4,309,279
J. P. Morgan & Company, Inc.:
1,700,000 JPM Capital Trust II,
7.95% 2/1/27 Capital Security ...... 1,497,725
Keycorp:
1,000,000 Keycorp Institutional Capital II,
6.875% 3/17/29 Capital Security .... 762,315
620,000 Keycorp Institutional Capital B,
8.25% 12/15/26 Capital Security,
Series B ........................... 538,873
1,000,000 Summit Bancorp:
Summit Capital Trust I, 8.40%
3/15/27 Capital Security, Series B . 898,295
750,000 Wells Fargo & Company, Capital I,
7.96% 12/15/26 Capital Security .... 669,840
------------
TOTAL BANKING FIXED RATE
PREFERRED STOCKS
AND SECURITIES ...................... 38,527,522
------------
FINANCIAL SERVICES -- 16.7%
Bear Stearns Companies, Inc. The:
44,000 6.15% Pfd., Series E ............... 1,852,400*
45,000 5.72% Pfd., Series F ............... 1,788,300*
115,800 5.49% Pfd., Series G ............... 4,440,930*
4,560,000 Countrywide Credit Capital I,
8.00% 12/15/26 Capital Security .... 3,571,643
19,000 Freddie Mac, 5.10%, Series H ......... 739,955*

See Notes to Financial Statements.

11
<PAGE>

VALUE
SHARES/PAR (NOTE 1)
---------- ------------

PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
FINANCIAL SERVICES (CONTINUED)
Household International, Inc.:
10,000 $4.30 Pfd. ......................... $ 632,750*
2,405 5.00% Pfd. ......................... 86,953*
70,000 Household Capital Trust IV, 7.25% .. 1,333,150
Lehman Brothers Holdings, Inc.:
217,448 5.00% Convertible Pfd., Series B ... 6,093,980*
36,200 5.94% Pfd., Series C ............... 1,454,335*
67,000 7.115% Pfd., Series E .............. 3,306,115*
109,200 SLM Holding Corporation, 6.97% Pfd. .. 5,297,292*
------------
TOTAL FINANCIAL SERVICES FIXED
RATE PREFERRED STOCKS
AND SECURITIES ...................... 30,597,803
------------
INSURANCE -- 7.9%
Allstate Corporation:
1,900,000 Allstate Financing II,
7.83% 12/1/45 Capital Security ..... 1,600,702
AON Corporation:
520,000 AON Capital Trust A,,
8.205% 1/1/27 Capital Security ..... 458,593
Conseco, Inc.:
52,000 Conseco Financing Trust I,
9.16% 11/30/26 ..................... 627,120
15,000 Conseco Financing Trust V,
8.70% 9/30/28 ...................... 180,675
75,000 Conseco Financing Trust VI,
9.00% 12/31/28 ..................... 899,625
Hartford Financial Services Group, Inc.:
55,066 Hartford Capital II,
8.35% QUIPS, Series B .............. 1,314,976
21 Prudential Human Resources
Management Company, Inc.,
6.30% Private Placement, Sinking
Fund Pfd., Series A ................ 2,073,658*
SAFECO Corporation:
2,480,000 SAFECO Capital Trust I,
8.072% 7/15/37 Capital Security .... 2,040,060

VALUE
SHARES/PAR (NOTE 1)
---------- ------------

The St. Paul Companies, Inc.:
4,700,000 MMI Capital Trust I, 7.625%
12/15/27 Capital Security, Series B $ 3,913,949
UnumProvident Corporation:
1,900,000 Provident Financing Trust I,
7.405% 3/15/38 Capital Security .... 1,419,310
------------
TOTAL INSURANCE FIXED RATE
PREFERRED STOCKS
AND SECURITIES ...................... 14,528,668
------------
OIL AND GAS-- 5.8%
43,327 Anadarko Petroleum Corporation,
5.46% Pfd. ......................... 3,304,767*
10,000 Apache Corporation,
5.68% Pfd., Series B ............... 788,850*
3,300 EOG Resources, Inc.,
7.195% Pfd. 144A*** ................ 3,321,467*
30,000 LASMO America Ltd.,
8.15% Pfd. 144A*** ................. 3,192,300*
------------
TOTAL OIL AND GAS FIXED RATE
PREFERRED STOCKS .................... 10,607,384
------------
MISCELLANEOUS INDUSTRIES-- 1.3%
57,600 Farmland Industries, Inc.,
8.00% Pfd. 144A*** ................. 2,009,952*
9,520 Viad Corporation,
$4.75 Sinking Fund Pfd. ............ 515,080*
------------
TOTAL MISCELLANEOUS INDUSTRIES
FIXED RATE PREFERRED STOCKS ......... 2,525,032
------------
TOTAL FIXED RATE
PREFERRED STOCKS
AND SECURITIES ...................... 146,688,241
------------
TOTAL PREFERRED STOCKS
AND SECURITIES
(Cost $185,610,104) ................. 172,159,899
------------

See Notes to Financial Statements.

<PAGE>

VALUE
SHARES/PAR (NOTE 1)
---------- ------------

COMMON STOCKS -- 1.4%
UTILITIES -- 1.4%
25,000 FPL Group, Inc. ...................... $ 1,243,875*
37,500 GPU, Inc. ............................ 1,066,500*
15,000 Public Service Company of New Mexico . 253,125*
------------
Total UTILITY Common Stocks
(Cost $2,420,119) ................... 2,563,500
------------
OPTIONS CONTRACTS -- 1.7% (Cost $3,239,099)
1,194 Put Options on U.S. Treasury Bond
September Futures,
expiring 08/19/00(DAGGER) .......... 3,091,969
------------
Principal
Amount
----------
REPURCHASE AGREEMENT -- 3.1% (Cost $5,723,000)
$5,723,000 Agreement with Warburg Dillon Read,
6.350% dated 05/31/00, to be
repurchased at $5,724,009 on
06/01/00, collateralized by
$4,539,000 U.S. Treasury Note,
9.125% due 05/15/18 (value
$5,838,289) ........................ 5,723,000
------------
TOTAL INVESTMENTS (Cost $196,992,322**) 100.0% 183,538,368
OTHER ASSETS AND LIABILITIES(Net) ..... (0.0) (50,099)
----- ------------
NET ASSETS ............................ 100.0% $183,488,269
===== ============
----------------------
* Securities eligible for the Dividends Received Deduction.

** Aggregate cost of securities held.
*** Securities 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.
(DAGGER) Non-income producing.
ABBREVIATIONS (Note 6):
MIPS -- Monthly Income Preferred Securities
QUIDS -- Quarterly Income Debt Securities
QUIPS -- Quarterly Income Preferred Securities
STOPS -- Semi-Annual Trust Originated Pass Through Securities
TIPS -- Trust Issued Preferred Securities
TOPrS -- Trust Originated Preferred Securities

Capital Securities are considered debt instruments for financial statement
purposes 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
MAY 31, 2000 (UNAUDITED)
-----------------------------------

<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $196,992,322) (Note 1)
See accompanying schedule ................................. $183,538,368
Cash ........................................................ 296
Dividends and interest receivable ........................... 1,890,615
Prepaid expenses ............................................ 94,086
------------
Total Assets ........................................ 185,523,365
LIABILITIES:
Payable for securities purchased ............................ $ 1,650,920
Dividends payable to Common Shareholders .................... 188,947
Investment advisory fee payable (Note 2) .................... 88,073
Accrued expenses and other payables ......................... 107,156
------------
Total Liabilities ................................... 2,035,096
------------
NET ASSETS ..................................................... $183,488,269
============
NET ASSETS consist of:
Undistributed net investment income (Note 1) ................ $ 391,171
Accumulated net realized loss on investments sold (Note 1) .. (2,797,185)
Unrealized depreciation of investments (Note 3) ............. (13,453,954)
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(TRADE MARK) Stock (Note 5) 57,500,000
------------
Total Net Assets .................................... $183,488,269
============
PER SHARE
-----------
NET ASSETS AVAILABLE TO:
Money Market Cumulative Preferred(TRADE MARK) Stock (575 shares
outstanding) redemption value ............................. $100,000.00 $ 57,500,000
Accumulated undeclared dividends on Money Market
Cumulative Preferred(TRADE MARK) Stock (Note 5) ........... 940.14 540,583
----------- ------------
$100,940.14 58,040,583
===========
Common Stock (9,838,571 shares outstanding) ................. $12.75 125,447,686
====== ------------
TOTAL NET ASSETS ............................................... $183,488,269
============
</TABLE>

See Notes to Financial Statements.
14

<PAGE>

--------------------------------------------------------------------------------
Preferred Income Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 2000 (UNAUDITED)
-------------------------------------------------

<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends ........................................................ $ 5,007,063
Interest ......................................................... 2,259,192
------------
Total Investment Income ..................................... 7,266,255
EXPENSES:
Investment advisory fee (Note 2) ................................. $538,111
Administration fee (Note 2) ...................................... 114,140
Money Market Cumulative Preferred(TRADE MARK) broker commissions
and Auction Agent fees ........................................ 72,874
Insurance expense ................................................ 49,668
Professional fees ................................................ 34,050
Directors' fees and expenses (Note 2) ............................ 21,901
Shareholder servicing agent fees and expenses (Note 2) ........... 26,696
Economic consulting fee (Note 2) ................................. 12,500
Custodian fees and expenses (Note 2) ............................. 14,057
Other ............................................................ 38,771
--------
Total Expenses .............................................. 922,768
------------
NET INVESTMENT INCOME ................................................. 6,343,487
------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(Notes 1 and 3):
Net realized loss on investments sold during the period .......... (1,485,531)
Change in net unrealized depreciation of investments
during the period ............................................. (10,209,150)
------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS ....................... (11,694,681)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS .................. $ (5,351,194)
============
</TABLE>

See Notes to Financial Statements.
15

<PAGE>

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

<TABLE>
SIX MONTHS ENDED
MAY 31, 2000 YEAR ENDED
(UNAUDITED) NOVEMBER 30, 1999
---------------- -----------------

<S> <C> <C>
INCREASE / (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income ..................................................... $ 6,343,487 $ 12,684,165
Net realized gain (loss) on investments sold during the period ............ (1,485,531) 2,426,942
Change in net unrealized depreciation of investments
during the period ...................................................... (10,209,150) (15,491,387)
------------ ------------
Net decrease in net assets resulting from operations ...................... (5,351,194) (380,280)

DISTRIBUTIONS:
Dividends paid from net investment income to Money Market
Cumulative Preferred(TRADE MARK) Stock Shareholders (Note 5) ........... (1,328,665) (2,011,963)
Distributions paid from net realized capital gains to Money
Market Cumulative Preferred(TRADE MARK) Stock Shareholders (Note 5) .... (151,753) (815,122)
Dividends paid from net investment income to Common Stock
Shareholders ........................................................... (5,428,265) (11,066,234)
Distributions paid from net realized capital gains to Common Stock
Shareholders ........................................................... (4,115,149) (5,261,030)
------------ ------------
Total Distributions ....................................................... (11,023,832) (19,154,349)
------------ ------------

NET DECREASE IN NET ASSETS FOR THE PERIOD ...................................... (16,375,026) (19,534,629)

NET ASSETS:
Beginning of period ....................................................... 199,863,295 219,397,924
------------ ------------
End of period (including undistributed net investment income of
$391,171 and $804,614, respectively) ................................... $183,488,269 $199,863,295
============ ============
</TABLE>

See Notes to Financial Statements.
16

<PAGE>

--------------------------------------------------------------------------------
Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
------------------------------------------------------
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>
SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
MAY 31, 2000 ---------------------------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
------------ -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ................ $ 14.41 $ 16.43 $ 16.71 $ 16.50 $ 15.80 $ 14.74
-------- -------- -------- -------- -------- --------
INVESTMENT OPERATIONS:
Net investment income. .............................. 0.64 1.29 1.28 1.27 1.37 1.48
Net realized and unrealized gain/(loss) on investments (1.18) (1.35) 0.05 1.00 0.65 2.05
-------- -------- -------- -------- -------- --------
Total from investment operations .................... (0.54) (0.06) 1.33 2.27 2.02 3.53
-------- -------- -------- -------- -------- --------
DISTRIBUTIONS:
Dividends paid from net investment income to
MMP* Shareholders. ................................ (0.14) (0.20) (0.17) (0.22) (0.15) (0.26)
Distributions paid from net realized capital gains to
MMP* Shareholders ................................. (0.01) (0.08) (0.07) (0.06) (0.08) (0.01)
Dividends paid from net investment income to Common Stock
Shareholders. ..................................... (0.55) (1.12) (1.05) (1.15) (1.08) (1.36)
Distributions paid from net realized capital gains to Common
Stock Shareholders ................................ (0.42) (0.53) (0.30) (0.65) -- (0.83)
Change in accumulated undeclared dividends on MMP* .. (0.00)(DAGGER) (0.03)(DAGGER) (0.02) 0.02 (0.01) (0.01)
-------- -------- -------- -------- -------- --------
Total distributions ................................. (1.12) (1.96) (1.61) (2.06) (1.32) (2.47)
-------- -------- -------- -------- -------- --------
Net asset value, end of period. ..................... $ 12.75 (DAGGER)$ 14.41 (DAGGER) $ 16.43 $ 16.71 $ 16.50 $ 15.80
======== ======== ======== ======== ======== ========
Market value, end of period ......................... $ 12.063 $ 12.750 $ 15.938 $ 16.188 $ 15.500 $ 14.125
======== ======== ======== ======== ======== ========
Total investment return based on net asset value*** . (4.49%) (1.81)% 6.91% 13.65% 12.78% 25.13%
======== ======== ======== ======== ======== ========
Total investment return based on market value***. ... 2.11% (10.43)% 7.05% 17.20% 18.50% 22.14%
======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS AVAILABLE
TO COMMON STOCK SHAREHOLDERS:
Operating expenses ............................. 1.39%** 1.37% 1.32% 1.34% 1.51% 1.55%
Net investment income**** ...................... 7.36%** 6.66% 6.13% 6.22% 7.22% 8.33%
SUPPLEMENTAL DATA:
Portfolio turnover rate. ....................... 29% 65% 87% 74% 98% 94%
Net assets, end of period (in 000's) ........... $183,488 $199,863 $219,398 $221,990 $220,088 $213,053

------------------------------------------------------------------------------------------------------------------------------------
Ratio of operating expenses to total average net assets
including MMP* .................................... 0.97%** 0.99% 0.97% 0.99% 1.10% 1.11%
<FN>
* Money Market Cumulative Preferred(TRADE MARK) Stock.
** Annualized.
*** 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.
(DAGGER) Includes effect of additional distribution available to MMP* Shareholders ($0.02 per Common Share in 2000 and $0.05
per Common Share in 1999). (See Note 5 to the Financial Statements.)
</FN>
</TABLE>

See Notes to Financial Statements.
17
<PAGE>

-------------------------------------------------------------------------------
Preferred Income Fund Incorporated
FINANCIALHIGHLIGHTS (CONTINUED)
----------------------------------
The table below sets out information with respect to Money Market
Cumulative Preferred(TRADE MARK) Stock currently outstanding. (See Note 5 to the
Financial Statements.)

INVOLUNTARY AVERAGE
ASSET LIQUIDATING MARKET
TOTAL SHARES COVERAGE PREFERENCE VALUE
OUTSTANDING PER SHARE PER SHARE (1) PER SHARE (1) & (2)
------------ --------- ------------- -------------------
05/31/00* 575 319,110 $100,000 $100,000
11/30/99 575 347,588 100,000 100,000
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
--------------------
(1) Excludes accumulated undeclared dividends.
(2) See Note 5.
* Unaudited.

See Notes to Financial Statements.
18
<PAGE>

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

1. SIGNIFICANT ACCOUNTING POLICIES

Preferred Income Fund Incorporated (the "Fund") is a diversified,
closed-end management invest- ment 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(TRADE MARK) Stock and (iii) accumulated and
unpaid dividends on the outstanding Money Market Cumulative Preferred(TRADE
MARK) 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 Investment Adviser reviews and approves the eligibility
of the banks and dealers with which the Fund may enter 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 (UNAUDITED) (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(TRADE MARK) 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

<PAGE>

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.

PFPC Inc. (formerly known as First Data Investor Services Group, Inc.), a
member of the PNC Financial Services Group (formerly known as PNC Bank Corp.),
serves as the Fund's Administrator and Transfer Agent. As Administrator, PFPC
Inc. 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
PFPC Inc.'s services as Administrator, the Fund pays PFPC Inc. 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. PFPC Inc. also
serves as the Fund's Common Stock servicing agent (transfer agent),
dividend-paying agent and registrar, and as compensation for PFPC Inc.'s
services as such, the Fund pays PFPC Inc. a fee at an annual rate of 0.02% of
the Fund's average monthly net assets plus certain out-of-pocket expenses.

Bankers Trust Company, a wholly-owned subisidiary of Deutsche Bank, AG
("Auction Agent"), has served as the Fund's Money Market Cumulative
Preferred(TRADE MARK) Stock transfer agent, registrar, dividend disbursing agent
and redemption agent since December 1, 1999. Prior to December 1, 1999, Chase
Manhattan Bank served as the Auction Agent.

Primark Decision Economics Inc. ("Primark") serves as the Fund's Economic
Consultant and receives an annual fee equal to $25,000 for services provided.

3. PURCHASE AND SALES OF SECURITIES

Cost of purchases and proceeds from sales of securities for the period
ended May 31, 2000, excluding short-term investments, aggregated $51,886,744 and
$54,128,945, respectively.

At May 31, 2000, aggregate gross unrealized appreciation for all securities
in which there is an excess of value over cost was $2,863,765 and aggregate
gross unrealized depreciation for all securities in which there is an excess of
cost over value was $16,317,719.

<PAGE>

4. COMMON STOCK

At May 31, 2000, 240,000,000 shares of $0.01 par value Common Stock were
authorized. There were no Common Stock transactions for the six months ended May
31, 2000 and for the year ended November 30, 1999.

5. MONEY MARKET CUMULATIVE PREFERRED(TRADE MARK) 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(TRADE MARK) 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(TRADE MARK) Stock are cumulative.

The Fund is required to meet certain asset coverage tests with respect to
the Money Market Cumulative Preferred(TRADE MARK) 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(TRADE
MARK) 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(TRADE
MARK) Stock, the Fund is required to make additional distributions to Money
Market Cumulative Preferred(TRADE MARK) 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. Net assets available to Money Market Cumulative
Preferred(TRADE MARK) Stock at May 31, 2000 include an accrued additional
distribution of $184,091. Prior to November 30, 1999, additional distributions
were not reported as available to Money Market Cumulative Preferred(TRADE MARK)
Stock until declared by the Board of Directors. The amount of additional
distributions ultimately payable, if any, is highly uncertain and will not be
known until after the fiscal year has been completed.

An auction of the Money Market Cumulative Preferred(TRADE MARK) 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(TRADE MARK) Stock Shareholders may also trade shares in the
secondary market between auction dates.

<PAGE>

At May 31, 2000, 575 shares of Money Market Cumulative Preferred(TRADE
MARK) Stock were outstanding at the annual rate of 4.95%. 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 its 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, i.e., fully taxable, preferred 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 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, i.e., fully taxable, preferred securities, such as TOPrS, TIPS, QUIPS,
MIPS, QUIDS, QUICS, QIB's, STOPS, 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

<PAGE>

of May 31, 2000, 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 May 31, 2000, the Commerce Group, Inc. owned approximately 26.7% of the
Fund's outstanding 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 PFPC Inc. 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, PFPC Inc. 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 PFPC Inc. 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, PFPC Inc. 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 PFPC
Inc.'s open market purchases in connection with the reinvestment of dividends or
capital gains distributions. For the six months ended May 31, 2000, $5,549 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 PFPC Inc. in
writing, by completing the form on the back of the Plan account statement and
forwarding it to PFPC Inc. or by calling PFPC Inc. directly. A termination will
be effective immediately if notice is received by PFPC Inc. 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, PFPC Inc. 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 PFPC Inc. at
1-800-331-1710.

<PAGE>

MEETING OF SHAREHOLDERS

On April 21, 2000, the Fund held its Annual Meeting of Shareholders (the
"Meeting") to (1) elect two Directors of the Fund ("Proposal 1") and (2) ratify
the selection of PricewaterhouseCoopers LLP as independent accountants for the
Fund for the fiscal year ending November 30, 2000 ("Proposal 2"). The results of
each proposal are as follows:

PROPOSAL 1: ELECTION OF DIRECTORS.

NAME FOR WITHHELD
---- --- --------
Common Stock
Robert F. Wulf 8,651,486 102,030
Preferred Stock
Donald F. Crumrine 447 --

Martin Brody, Robert T. Flaherty, David Gale and Morgan Gust continue to serve
in their capacities as Directors of the Fund.

PROPOSAL 2: RATIFY THE SELECTION OF PRICEWATERHOUSECOOPERS LLP AS INDEPENDENT
AUDITORS.

FOR WITHHELD ABSTAINED
--- -------- ----------
Common Stock and Preferred Stock
(voting together as a single class)
Voted 8,656,983 27,381 69,629

<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

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

QUESTIONS CONCERNING YOUR SHARES OF PREFERRED
INCOME FUND?
(BULLET) If your shares are held in a brokerage account, contact your broker.
(BULLET) If you have physical possession of your shares in certificate form,
contact the Fund's Transfer Agent & Shareholder Servicing Agent --
PFPC 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.

[GRAPHIC OMITTED]
PREFERRED INCOME FUND

SEMI-ANNUAL
REPORT

MAY 31, 2000
web site: www.preferredincome.com