PREFERRED INCOME MANAGEMENT FUND INC, N-30D, 1998-07-28

PREFERRED INCOME MANAGEMENT FUND INC
N-30D, 1998-07-28

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<PAGE>

PREFERRED INCOME MANAGEMENT FUND
INCORPORATED

Dear Shareholder:

The Preferred Income Management Fund's portfolio continues to produce good
results. The returns on net asset value were 6.2% in the first half of fiscal
1998 and 15.8% for the most recent 12 months. However, the numbers make it look
easier than it really was.

The success we have enjoyed in fiscal 1998 so far has been primarily due to
our active management of the Fund's preferred portfolio. Overall market
conditions were of little help at best, and in some ways they were downright
unfavorable. At times we felt a little like a salmon swimming up stream. Being
in the right place at the right time was critical.

All sectors of the Fund's portfolio of hedged preferreds produced good
returns and overcame what we spent for our hedges. The strongest contributor was
traditional preferreds eligible for the Dividends Received Deduction ("DRD")
available to corporate investors. However, adjustable rate preferreds ("ARPs")
and hybrid preferred securities also turned in good results. The best returns of
all were on our holdings of income oriented common stocks, which represent a
very small part of the Fund's portfolio.

The market for traditional preferreds eligible for the DRD has become an
interesting study in contrasts. As a result of the "creeping scarcity" of such
issues (which we have discussed many times before in these letters), many
traditional preferreds have reached prices that offer only "ho hum" investment
value. At the same time, the small number of new issues of traditional
preferreds coming to market has included several extraordinarily attractive
special situations. Are we buyers or sellers of traditional preferreds? The
answer is "Both!", but probably more of the latter.

In the first half of this year, we continued the steady reduction in the
Fund's position in ARPs that began over a year ago. These holdings are also
eligible for the DRD and have benefited from the creeping scarcity phenomenon.
Many of the ARPs that we disposed of were either retired by their issuers at
attractive prices or sold by us at prices that anticipated such retirements.
This has been a very successful reversal of the substantial increase in the
Fund's holdings of ARPs accomplished in 1995 and 1996 when they seemed
particularly cheap.

Our experience with hybrid preferreds is proof of the old adage that "All's
well that ends well." The hybrid market performed rather poorly in the first
half of this year, causing problems for investors who were slow to react. In
contrast, the Fund traded very actively in this sector of the preferred market
and earned a good return on hybrids while the market adjustment was taking
place. The end result: We now own significantly more hybrid preferreds, which
seem quite attractively valued at their current prices. The Question and Answer
Section that follows goes into this in greater detail.

As you can see from the pie charts, there has been a significant shift in
the Fund's portfolio over the last year from traditional fixed rate and
adjustable rate preferreds into hybrid preferreds. It would be nice

<PAGE>

to say that this was the product of a "grand plan." More realistically, it is
just the cumulative result of our efforts each day to buy whatever is cheap and
sell whatever is not. This is how we think money should be managed, and it seems
to work.

[PIE CHARTS]

5/31/97 5/31/98
------- -------

Preferred Income Opportunity Fund

32.4% 22.0%
1.5%
4.0%
3.1%
2.6% 39.4%

18.2%

33.1%

43.7%
--------------------------------------
---- Adjustable Rates
---- Traditional Fixed Rates
---- Non-DRD Preferreds & Securities
(Hybrids)
---- Common Stock
---- Cash & Other
--------------------------------------

While all of the foregoing activity was going on in the trenches of our
preferred portfolio, interest rates were wandering almost aimlessly. A small
decline in interest rates in May represented the only net change for the fiscal
first-half. In this kind of environment, our hedging is analogous to buying
insurance and never making a claim. Nonetheless, we will continue to hedge until
we discover a crystal ball that will tell us in advance when interest rate
trends are going to be this boring.

At the recent Annual Meeting, a group led by Stewart R. Horejsi won the two
seats on the Fund's Board of Directors that had been the subject of a proxy
contest with the Fund's management. Accordingly, Mr. Horejsi and Mr. James G.
Duff are now members of the Board, which has six directors in all. The Horejsi
Group's slate was supported by approximately 46% of the Fund's outstanding
shares. That figure includes the 42% owned by the Horejsi Group, which bought
additional shares during the course of the proxy contest.

I urge you to read the following Question and Answer Section, which
contains additional information about your Fund.

Sincerely yours,

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

June 8, 1998

<PAGE>

QUESTIONS AND ANSWERS

WHAT IS THE DIFFERENCE BETWEEN TRADITIONAL PREFERREDS AND HYBRID PREFERREDS?

It is all basically a matter of taxes. In other respects, the two are
really very similar.

Traditional preferreds are treated for tax purposes just like any other
equity security such as common stock. The issuer receives no deduction for tax
purposes for the dividend payments made to the holders of the preferred. On the
other hand, those dividends are 70% tax free to corporate investors due to the
Dividends Received Deduction ("DRD"). The purpose of the DRD is to eliminate in
part the double taxation of these dollars at the corporate level that would
otherwise occur.

Hybrid preferreds were created about 5 years ago for the purpose of
allowing issuers to get a deduction for the dividend payments on preferreds,
just like they deduct interest payments on debt securities. Since no tax is paid
by the issuer, there is no double tax to avoid and no DRD available to a
corporate holder of hybrids. Initially, hybrids were primarily purchased by
individual investors, but the market has now broadened to include institutions
as well.

WHY HAS THE EMERGENCE OF HYBRIDS CREATED A "CREEPING SCARCITY" OF TRADITIONAL
PREFERREDS?

Since the issuer gets a tax deduction, it can afford to pay investors
higher rates on hybrid preferreds and still be better off after taxes than if it
issued traditional preferreds. At the beginning, the market did not "charge"
enough more for hybrids to offset this tax advantage, so issuers concentrated
new financing in hybrids, both for raising new capital and for refinancing
outstanding issues of traditional preferreds. The following graph highlights
rather dramatically the rapid growth in hybrid securities outstanding compared
to the sluggish growth and, ultimately, the shrinkage of traditional preferreds.

<PAGE>

---------------------------------------------
NET PREFERRED STOCK ISSUANCE/(REDEMPTIONS)
---------------------------------------------

<TABLE>
<CAPTION>
Measurement Period HYBRID NET
(Fiscal Year Covered) DRD NET ISSUANCE ISSUANCE
<S> <C> <C>
1991 3.55 0
1992 7.17 0
1993 3.67 0.55
1994 0.84 3.39
1995 -6.70 10.71
1996 0.04 30.79
1997 -7.07 22.84
1998 -1.74 13.81
</TABLE>

WILL THE CREEPING SCARCITY GO ON INDEFINITELY?

The market has gotten smarter with the passage of time. Corporate investors
interested in the DRD have forced down the yields on the remaining supply of
traditional preferreds (by pushing their prices up). Simultaneously, as more
companies have issued hybrid preferreds, the market has demanded higher yields
for investors to soak up the supply. As a result, the markets have now come into
a balance that reasonably reflects the differences in tax treatment. We believe
we are close to the point where the two types of preferreds can co-exist
"peacefully".

The IRS has recently thrown a wild card into this game. It has audited one
of the original issuers of hybrids and has challenged in court the favorable tax
treatment received by the issuer. The IRS says it cannot see any real difference
between hybrid preferreds and equity financing such as traditional preferreds
and that the two should be treated the same. There is, of course, no way of
knowing now how this dispute might be resolved. A better bet is that Wall Street
will find a way around whatever comes out of this case and that hybrid
preferreds or similar securities are here to stay.

<PAGE>

HOW DID THE FUND DO SO WELL IN SUCH A TOUGH MARKET FOR HYBRIDS?

The hybrid preferred market suffered from a "one-two punch" in the fiscal
first half. First, the financial problems in Asia impacted hybrids along with
the corporate bond market generally. Second, a steady stream of 44 new issues of
hybrids put additional supply pressure on the market. Relative to the Treasury
bond market (which is the basis of our hedges), all 44 new hybrid issues were
cheaper on May 31st than when they were initially offered to the public.

Selectivity is key in a market like this. We participated, at one time or
another, in only 13 of the 44 new hybrid issues and purchased only two in their
initial public offerings. Most of our purchases were designed to take advantage
of temporary market mispricings that we identified. It was essential to move
elsewhere after those opportunities were captured, and we did. Individually,
none of these moves was a "big deal"; but collectively, they added up to
something very worthwhile.

HOW WILL THE GROWTH OF HYBRIDS AFFECT THE PORTION OF THE FUND'S DIVIDENDS
QUALIFYING FOR THE DRD?

The percentage of the Fund's dividends eligible for the DRD will probably
decline as time goes by. This seems like an inevitable result as hybrids account
for an ever larger proportion of the overall preferred market. As of May 31,
1998, however, traditional preferreds that qualify for the DRD still accounted
for almost two-thirds of the Fund's portfolio.

The good news is that increasing the Fund's holdings of hybrids typically
has a positive effect on our income. We expect that, over a period of time, this
will provide a meaningful offset to the reduced availability of the DRD to our
shareholders that are subject to corporate income taxes.

<PAGE>

IS THERE ANYTHING NEW ON THE DISCOUNT OF THE MARKET PRICE OF THE FUND SHARES
FROM NET ASSET VALUE?

Unfortunately, there is something new to report. As shown by the following
graph, the discount from net asset value has expanded considerably from the lows
reached in January. Currently, the discount is at the wide end of its historical
range. The widening of the discount has taken place since Mr. Stewart R.
Horejsi, a director of the Fund and its largest shareholder, proposed
substantial changes in the Fund's objective and fundamental investment policies
and initiated a proxy contest with the Fund's management.

<TABLE>
<CAPTION>
Measurement Period
(Fiscal Year Covered) PREMIUM/DISCOUNT
<S> <C>
Feb-93 7.53
7.88
6.89
4.24
4.31
4.76
3.72
1.95
3.07
4.53
4.61
5.20
3.43
4.54
3.28
3.13
3.65
2.24
4.02
4.31
2.79
2.80
3.22
3.37
2.43
3.23
2.22
0.35
1.44
0.52
-1.72
0.79
-0.62
-0.44
-0.67
-2.48
-1.09
1.28
1.33
-5.73
-1.82
-0.14
-4.25
-5.09
-3.98
-5.49
0.43
-0.75
-3.02
-3.30
-2.20
-4.88
-5.15
Feb-94 -6.32
-2.57
-3.85
-7.21
-7.08
-8.48
-8.32
-12.34
-9.73
-11.11
-9.59
-7.27
-7.30
-8.24
-6.79
-5.35
-3.06
-4.28
-3.56
-3.05
-0.45
-5.09
-3.41
-2.50
-5.09
-4.80
-3.04
-3.41
-4.87
-6.63
-7.34
-6.30
-8.35
-11.68
-14.97
-10.57
-7.48
-10.08
-8.31
-6.12
-5.97
-7.14
-8.36
-9.32
-11.81
-6.69
-4.23
-5.41
-7.11
-3.69
-3.46
-4.91
Feb-95 -2.10
-2.64
-6.18
-6.69
-5.66
-2.56
-2.19
-2.72
-2.11
-2.28
-4.20
-3.85
-7.41
-10.65
-4.18
-7.85
-9.49
-8.14
-6.64
-6.68
-8.41
-9.79
-9.27
-8.89
-9.21
-10.26
-8.21
-6.32
-6.72
-8.52
-7.71
-6.85
-8.71
-10.59
-9.65
-10.53
-11.89
-9.78
-10.47
-10.40
-9.98
-11.21
-11.65
-12.61
-13.52
-12.10
-11.79
-14.06
-12.42
-12.40
-12.40
-12.91
Feb-96 -12.94
-13.00
-15.31
-13.85
-15.19
-15.43
-13.73
-14.31
-13.37
-14.19
-14.13
-13.97
-14.63
-14.63
-13.76
-15.21
-14.28
-13.85
-11.58
-11.22
-11.40
-11.58
-9.03
-8.75
-9.79
-9.61
-8.66
-7.96
-7.89
-3.78
-4.99
-4.99
-4.18
-5.04
-4.04
-4.31
-4.49
-5.18
-6.11
-4.16
-4.47
-3.40
-4.16
-5.12
-4.55
0.90
-4.36
-3.72
-7.35
-4.62
-5.25
-6.50
-3.08
Feb-97 -3.85
-5.09
-4.72
-4.28
-4.97
-3.59
-3.85
-4.97
-5.23
-3.66
-4.16
-5.34
-3.03
-3.85
-3.72
-2.74
-3.54
-3.29
-3.63
-4.48
-3.79
-3.93
-1.30
-3.21
-3.33
-2.85
-2.43
-3.67
-3.97
-2.17
-3.58
-1.60
-1.64
-3.82
-4.17
-4.20
-2.43
-5.02
-6.71
-4.32
-4.76
-7.73
-3.64
-3.04
-0.73
-1.13
-0.14
-2.86
-3.67
-3.61
-4.79
-5.03
Feb-98 -6.37
-7.48
-8.31
-14.11
-13.01
-12.72
-10.82
-12.19
-12.97
-12.42
-13.29
-12.91
-11.59
-11.53
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
</TABLE>

WHAT HAPPENS NEXT NOW THAT MR. HOREJSI HAS WON THE PROXY CONTEST?

We are involved in discussions with Mr. Horejsi concerning his proposals,
which represent a substantial departure from the investment approach taken by
the Fund since its inception. The situation is complicated and difficult,
however; and we are not able to predict what, if any, action may be considered
appropriate by the Fund's board.

<PAGE>

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

<TABLE>
<CAPTION>
DIVIDEND
DIVIDEND NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE(1)
-------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
December 31, 1996................................... $0.140 $15.07 $14.6250 $14.73
January 31, 1997.................................... 0.087 14.94 14.2500 14.37
February 28, 1997................................... 0.087 15.21 14.6250 14.70
March 31, 1997...................................... 0.087 15.40 14.7500 14.78
April 30, 1997...................................... 0.087 15.30 14.6250 14.66
May 31, 1997........................................ 0.087 15.48 14.8750 14.93
June 30, 1997....................................... 0.087 15.61 15.1250 15.20
July 31, 1997....................................... 0.087 16.08 15.8750 15.91
August 31, 1997..................................... 0.087 15.95 15.5625 15.63
September 30, 1997.................................. 0.087 16.15 15.7500 15.85
October 31, 1997.................................... 0.087 16.31 15.6250 15.73
November 30, 1997................................... 0.087 16.33 15.6250 15.56
December 31, 1997................................... 0.470 16.15 15.9375 16.14
January 31, 1998.................................... 0.081 16.22 15.6250 15.69
February 28, 1998................................... 0.081 16.22 15.1875 15.18
March 31, 1998...................................... 0.081 16.33 14.1875 14.44
April 30, 1998...................................... 0.081 16.27 14.0625 14.19
May 31, 1998........................................ 0.081 16.39 14.5000 14.52
</TABLE>

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

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

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Management Fund Incorporated
PORTFOLIO OF INVESTMENTS
MAY 31, 1998 (UNAUDITED)
- --------------------------------------------

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES -- 94.5 %
ADJUSTABLE RATE PREFERRED STOCKS -- 22.0 %
UTILITIES -- 5.0 %
21,840 Arizona Public Service Company,
Series Q, Adj. Rate Pfd........ $ 2,175,799
200,000 New York State Electric & Gas
Corporation, Series B, Adj.
Rate Pfd. ..................... 4,825,000
180,000 Niagara Mohawk Power Corporation,
Series B, Adj. Rate Pfd. ...... 4,573,125
------------
TOTAL UTILITY ADJUSTABLE RATE
PREFERRED STOCKS............... 11,573,924
------------
BANKING -- 17.0 %
BankAmerica Corporation:
14,361 Series A, Adj. Rate Pfd. ........ 718,948
10,100 Series B, Adj. Rate Pfd. ........ 1,011,263
BankBoston Corporation:
14,100 Series A, Adj. Rate Pfd. ........ 705,000
110,553 Series B, Adj. Rate Pfd. ........ 5,527,650
49,315 Series C, Adj. Rate Pfd. ........ 4,919,171
Bankers Trust New York
Corporation:
215,200 Series Q, Adj. Rate Pfd. ........ 5,339,650
80,000 Series R, Adj. Rate Pfd. ........ 1,985,000
51,000 Chase Manhattan Corporation,
Series L, Adj. Rate Pfd. ...... 5,096,813
Citicorp:
75,300 Series 18, Adj. Rate Pfd. ....... 1,873,088
39,700 Series 19, Adj. Rate Pfd. ....... 987,538
First Chicago NBD:
26,600 Series B, Adj. Rate Pfd. ........ 2,666,650
17,400 Series C, Adj. Rate Pfd. ........ 1,749,788
50,100 Morgan (J.P.) & Company Inc.,
Series A, Adj. Rate Pfd. ...... 4,784,550
13,450 Republic New York Corporation,
Series D, Adj. Rate Pfd. ...... 337,091
36,000 Wells Fargo & Company, Series B,
Adj. Rate Pfd. ................ 1,768,500
------------
TOTAL BANKING ADJUSTABLE RATE
PREFERRED STOCKS............... 39,470,700
------------
TOTAL ADJUSTABLE RATE PREFERRED
STOCKS......................... 51,044,624
------------
</TABLE>

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
FIXED RATE PREFERRED STOCKS AND SECURITIES -- 72.5 %
UTILITIES -- 34.0 %
Alabama Power Company:
85,700 Class A, 6.40% Pfd. ............. $ 2,190,706
12,000 Series A, 7.125% Sr. Notes....... 295,950
140,000 7.375% TOPRS..................... 3,543,750
80,000 7.60% TOPRS...................... 2,055,000
56,900 Appalachian Power Company, Series
A, 8.25% TOPRS................. 1,482,956
Arizona Public Service Company,
15,450 Series W, 7.25% Pfd. ............ 393,009
Baltimore Gas & Electric Company:
29,700 Series 1993, 6.70% Pfd. ......... 3,370,950
35,750 Series 1995, 6.99% Pfd. ......... 4,205,094
10,000 Boston Edison Company, 4.78%
Pfd. .......................... 872,500
28,000 Columbus Southern Power Company,
Series B, 7.92% Jr. Sub.
Debt........................... 708,750
5,315 Commonwealth Edison Company,
$8.40 Pfd. .................... 547,445
48,000 Consolidated Edison Company of
New York, Series A, 7.75%
QUICS.......................... 1,233,000
72,750 CPL Capital, Series A, 8.00%
QUIPS.......................... 1,868,766
Duke Power Company:
7,134 Series C, 4.50% Pfd. ............ 614,416
7,934 Series S, 7.85% Pfd. ............ 923,319
1,297 Series W, 7.00% Pfd. ............ 146,399
92 Series X, 6.75% Sinking Fund
Pfd. .......................... 10,063
50,450 Duquesne Capital, Series A,
8.375% MIPS.................... 1,302,241
26,000 Duquesne Light, 7.375% QUIBS..... 649,025
20,950 El Paso, Tennessee Pipeline
Company, Series A, 8.25%
Pfd. .......................... 1,188,913
Florida Power & Light Company:
5,000 Series E, 4.35% Pfd. ............ 401,250
30,600 Series S, 6.98% Pfd. ............ 3,442,500
15,800 Series T, 7.05% Pfd. ............ 1,793,300
18,400 Georgia Power, 7.75% TOPRS....... 474,950
</TABLE>

See Notes to Financial Statements.

<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Management Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 1998 (UNAUDITED)
---------------------------------------------------------------

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
UTILITIES (CONTINUED)
Hawaiian Electric Industries:
20,000 8.05% QUIPS...................... $ 511,250
23,500 8.36% TOPRS...................... 612,469
14,250 Indianapolis P & L, 5.65%
Pfd. .......................... 1,494,469
10,000 Jersey Central Power & Light
Company, Series K, 7.52%
Sinking Fund Pfd. ............. 1,045,625
3,640 Kansas City Power & Light
Company, 4.50% Pfd. ........... 308,945
16,710 Long Island Lighting, 7.95%
Sinking Fund Pfd. ............. 439,682
10,000 Midamerican Energy, Series A,
7.98% 12/31/45 QUIPS........... 259,375
1,400 Mississippi Power Company, 7.00%
Pfd. .......................... 146,475
Monongahela Power Company:
24,000 Series A, 8.00% QUIDS............ 625,500
8,500 Series L, $7.73 Pfd. ............ 996,625
5,100 Montana Power Company, $6.875
Pfd. .......................... 578,850
10,000 MP&L Capital, 8.05% QUIPS........ 256,875
6,000 New York State Electric & Gas
Corporation, 6.48% Pfd. ....... 621,750
Niagara Mohawk Power Corporation:
12,600 4.10% Pfd. ...................... 819,000
22,263 7.85% Sinking Fund Pfd. ......... 569,098
23,150 9.50% Pfd. ...................... 614,922
5,410 NSP Financing, 7.875% TOPRS...... 139,646
29,182 NVP Capital, Series A, 8.20%
QUIPS.......................... 749,613
Ohio Edison Company:
2,700 4.40% Pfd. ...................... 194,063
8,000 4.56% Pfd. ...................... 585,000
Ohio Power Company:
83,923 7.375% Sr. Notes................. 2,094,928
28,320 Series B, 7.92% QUIDS............ 716,850
42,365 PECO Energy Company, $3.80
Pfd. .......................... 2,896,707
</TABLE>

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
PP&L Capital Trust:
86,925 8.10% TOPRS...................... $ 2,254,617
15,800 8.20% TOPRS...................... 409,813
48,000 PSCO Capital Trust, 7.60%
TOPRS.......................... 1,203,000
11,750 PSI Energy, Inc.,
6.875% Pfd. ..................... 1,324,813
1,750,000 Puget Sound Energy Capital Trust,
Series B, 8.231% 6/1/27 Capital
Security....................... 1,905,313
Puget Sound Power & Light
Company:
51,305 7.75% Sinking Fund Pfd. ......... 5,451,156
21,800 Series II, 7.45% Pfd. ........... 626,750
9,960 Rochester Gas & Electric
Corporation, Series I, 4.75%
Pfd. .......................... 846,600
25,250 San Diego Gas & Electric Company,
6.80% Pfd. .................... 721,203
43,000 Sierra Pacific Capital, 8.60%
TOPRS.......................... 1,131,438
64,000 South Carolina Electric & Gas,
7.55% TOPRS.................... 1,628,000
30,000 Southwestern Public Service
Company, 7.85% TOPRS........... 766,875
63,200 Transcanada Pipeline Ltd., 8.75%
COPRS.......................... 1,670,850
Union Electric Power Company:
21,200 $7.64 Pfd. ...................... 2,459,200
3,250,000 $7.69 12/15/36 Capital
Security....................... 3,400,313
20,100 Virginia Electric & Power
Company, $6.98 Pfd. ........... 2,263,763
------------
TOTAL UTILITY FIXED RATE
PREFERRED STOCKS AND
SECURITIES..................... 79,055,673
------------
</TABLE>

See Notes to Financial Statements.

<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Management Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 1998 (UNAUDITED)
- ---------------------------------------------------------------

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
BANKING -- 12.1 %
2,250 ABN AMRO North America, 6.59%
144A**......................... $ 2,491,875
560,000 Bank of New York, 7.78% 12/1/26
Capital Security 144A**........ 592,200
1,500,000 BankBoston Capital Trust, Series
B, 7.75% 12/15/26 Capital
Security....................... 1,573,125
21,000 Bankers Trust New York
Corporation, Series O, 7.625%
Pfd. .......................... 525,000
1,500,000 BNY Capital, Series B, 7.97%
12/31/26 Capital Security...... 1,620,000
1,500,000 BT Preferred Capital Trust,
7.875% 2/25/27 Capital
Security....................... 1,554,375
2,600,000 Chase Capital, 7.67% 12/1/26
Capital Security............... 2,726,750
116,450 Chase Manhattan Corporation,
Series C, 10.84% Pfd. ......... 3,602,672
1,500,000 Citicorp Capital, 8.015% 2/15/27
Capital Security............... 1,629,375
2,500,000 First Hawaiian Capital, Series B,
8.343% 7/1/27 Capital
Security....................... 2,721,875
Fleet Financial Group, Inc.:
41,000 Series G, 6.75% Pfd. ............ 2,331,875
32,100 Series E, 9.35% Pfd. ............ 887,766
750,000 Great Western Financial
Corporation, 8.206% 2/1/27
Capital Security............... 811,875
750 La Salle National Corporation,
6.46% Pfd. .................... 826,875
35,700 NB Capital Trust, 7.84% TOPRS.... 921,506
2,000,000 Republic New York Capital, 7.53%
12/4/26 Capital Security....... 2,082,500
3,800 Republic New York Corporation,
5.715% Pfd. ................... 199,025
1,000,000 Summit Bancorp, 8.40% 3/15/27
Capital Security 144A**........ 1,111,250
------------
TOTAL BANKING FIXED RATE
PREFERRED STOCKS AND
SECURITIES..................... 28,209,919
------------
</TABLE>

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
FINANCIAL SERVICES -- 14.3 %
38,900 Bear Stearns Company, Series E,
6.15% Pfd. .................... $ 2,105,463
27,000 DLJ Capital Trust, 8.42% MIPS.... 707,063
25,000 Heller Financial, 6.687% Pfd.
144A**......................... 2,768,750
116,850 Household Institutional, Inc.,
8.70% TOPRS.................... 3,103,828
Lehman Brothers Holdings Inc.:
89,300 5.00% Conv. Pfd. ................ 3,270,613
65,000 Series A, 8.30% QUICS............ 1,685,938
51,000 Series C, 5.94% Pfd. ............ 2,690,250
Merrill Lynch & Company, Inc.:
33,100 8.00% TOPRS...................... 883,356
139,200 Series A, 9.00% Pfd. ............ 4,463,100
Travelers Group:
7,000 Series G, 6.213% Pfd. ........... 382,375
123,150 Series H, 6.231% Pfd. ........... 6,788,644
80,700 Series M, 5.864% Pfd. ........... 4,256,925
------------
TOTAL FINANCIAL SERVICES FIXED
RATE PREFERRED STOCKS AND
SECURITIES..................... 33,106,305
------------
INSURANCE -- 7.4 %
4,900,000 Allstate Financing, 7.83%
12/01/45 Capital Security...... 5,200,125
200,000 American General Capital, 7.57%
12/1/45 Capital Security
144A**......................... 211,750
79,663 Hartford Capital, Series B, 8.35%
QUIPS.......................... 2,116,048
</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 (CONTINUED)
4,700,000 MMI Capital Trust, Series B,
7.625% 12/15/27 Capital
Security....................... $ 4,835,125
2,500,000 Orion Capital Trust, 7.701%
4/15/28 144A** Capital
Security....................... 2,571,875
1,000,000 Provident Companies Inc., 7.405%
3/15/38 Capital Security....... 1,022,500
10 Prudential Human Resources
Management Company, 6.30%
Private, Sinking Fund Pfd. .... 1,017,500
------------
TOTAL INSURANCE FIXED RATE
PREFERRED STOCKS AND
SECURITIES..................... 16,974,923
------------
MISCELLANEOUS INDUSTRIES -- 4.7 %
128,300 Coastal Finance, 8.375% 6/30/98
TOPRS.......................... 3,215,519
55,000 Farmland Industries, 8.00% Pfd.
144A**......................... 3,478,750
1,000 Time Warner Inc., Series M,
10.25% Pfd. ................... 1,157,000
19,600 Union Texas Petroleum Holdings,
Series A, 7.14% Pfd. .......... 2,418,150
9,520 Viad Corporation, $4.75 Sinking
Fund Pfd. ..................... 754,460
------------
TOTAL MISCELLANEOUS FIXED RATE
PREFERRED STOCKS AND
SECURITIES..................... 11,023,879
------------
TOTAL FIXED RATE PREFERRED STOCKS
AND SECURITIES................. 168,370,699
------------
TOTAL PREFERRED STOCKS AND
SECURITIES
(Cost $199,962,303)............ 219,415,323
------------
</TABLE>

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
COMMON STOCKS -- 4.0 %
UTILITIES -- 4.0 %
18,000 Energy East Corporation.......... $ 733,500
177,900 Nevada Power Company............. 4,264,041
20,000 New England Electric System...... 837,500
11,300 Northern States Power Company.... 641,628
32,000 Scana Corporation................ 924,000
47,200 Wisconsin Energy Corporation..... 1,395,350
15,600 WPS Resources Corporation........ 488,475
------------
TOTAL UTILITY COMMON STOCKS (Cost
$8,173,794).................... 9,284,494
------------
MISCELLANEOUS SECURITIES -- 0.3 % (Cost $1,567,658)
September Put Options on U.S.
Treasury Bond Futures, expiring
8/22/98+....................... 662,500
------------
</TABLE>

<TABLE>
<C> <S> <C>
COMMERCIAL PAPER -- 0.4 % (Cost $902,000)
$902,000 General Electric Capital
Corporation, 5.66% due
06/01/98....................... 902,000
------------
</TABLE>

<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (Cost
$210,605,755*)...................... 99.2% 230,264,317
OTHER ASSETS AND LIABILITIES (Net).... 0.8 1,822,220
----- ------------
NET ASSETS............................ 100.0% $232,086,537
===== ============
</TABLE>

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

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

<TABLE>
<S> <C>
ABBREVIATIONS (Note 7):
TOPRS -- Trust Originated Preferred Securities
MIPS -- Monthly Income Preferred Securities
QUIDS -- Quarterly Income Debt Securities
QUIPS -- Quarterly Income Preferred Securities
COPRS -- Canadian Originated Preferred Securities
QUICS -- Quarterly Income Capital Securities
QUIBS -- Quarterly Interest Bonds
</TABLE>

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 Management Fund Incorporated
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1998 (UNAUDITED)
- -------------------------------------------------------------

<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $210,605,755) (Note 1)
See accompanying schedule.............................. $230,264,317
Receivable for securities sold............................ 1,695,480
Dividends and interest receivable......................... 1,851,804
Prepaid expenses.......................................... 62,500
------------
Total Assets...................................... 233,874,101

LIABILITIES:
Payable for securities purchased.......................... $ 1,064,531
Dividends payable to Common Shareholders.................. 148,497
Investment advisory fee payable (Note 2).................. 118,603
Accrued expenses and other payables....................... 455,933
-----------
Total Liabilities................................. 1,787,564
------------
NET ASSETS.................................................. $232,086,537
============
NET ASSETS consist of:
Accumulated distributions in excess of net investment
income (Note 1)........................................ $ (175,174)
Accumulated net realized gain on investments sold
(Note 1)............................................... 5,684,303
Unrealized appreciation of investments (Note 3)........... 19,658,562
Par value of Common Stock................................. 94,167
Paid-in capital in excess of par value of Common Stock.... 129,324,679
Money Market Cumulative Preferred(TM) Stock (Note 5)...... 77,500,000
------------
Total Net Assets.................................. $232,086,537
============
PER SHARE
---------
NET ASSETS AVAILABLE TO:
Money Market Cumulative Preferred(TM) Stock (775 shares
outstanding) redemption value.......................... $100,000.00 $ 77,500,000
Accumulated undeclared dividends on Money Market
Cumulative Preferred(TM) Stock......................... 277.78 215,278
----------- ------------
$100,277.78 77,715,278
===========
Common Stock (9,416,743 shares outstanding)............... $16.39 154,371,259
=========== ------------
TOTAL NET ASSETS............................................ $232,086,537
============
</TABLE>

See Notes to Financial Statements.

<PAGE>

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

Preferred Income Management Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 1998 (UNAUDITED)
---------------------------------------------------------------

<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends.............................................. $ 6,386,981
Interest............................................... 1,159,407
-----------
Total Investment Income........................... 7,546,388

EXPENSES:
Investment advisory fee (Note 2)....................... $696,285
Legal fees............................................. 289,456
Administration fee (Note 2)............................ 138,318
Proxy solicitation fees................................ 129,455
Money Market Cumulative Preferred(TM) broker
commissions and Auction Agent fees.................... 98,496
Insurance expense...................................... 38,961
Directors' fees and expenses (Note 2).................. 35,301
Shareholder servicing agent fees (Note 2).............. 32,171
Custodian fees (Note 2)................................ 16,732
Economic consulting fee (Note 2)....................... 22,666
Amortization of deferred organization costs (Note 6)... 2,100
Other.................................................. 124,072
--------
Total Expenses.................................... 1,624,013
-----------
NET INVESTMENT INCOME....................................... 5,922,375
-----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (Notes 1
and 3):
Net realized gain on investments sold during the
period................................................ 4,777,087
Change in net unrealized depreciation of investments
during the period..................................... (18,242)
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS............. 4,758,845
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $10,681,220
===========
</TABLE>

See Notes to Financial Statements.

<PAGE>

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

<TABLE>
<CAPTION>
SIX MONTHS ENDED
MAY 31, 1998 YEAR ENDED
(UNAUDITED) NOVEMBER 30, 1997
---------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income.................................. $ 5,922,375 $ 12,797,992
Net realized gain on investments sold during the
period................................................ 4,777,087 3,866,760
Change in net unrealized appreciation/(depreciation) of
investments during the period......................... (18,242) 6,420,510
------------ ------------
Net increase in net assets resulting from operations... 10,681,220 23,085,262

DISTRIBUTIONS:
Dividends paid from net investment income to Money
Market Cumulative Preferred(TM) Stock Shareholders
(Note 5).............................................. (1,877,410) (2,420,336)
Distributions paid from net realized capital gains to
Money Market Cumulative Preferred(TM) Stock
Shareholders (Note 5)................................. (49,227) (603,412)
Dividends paid from net investment income to Common
Stock Shareholders.................................... (5,504,086) (9,849,882)
Distributions paid from net realized capital gains to
Common Stock Shareholders............................. (2,735,564) (480,383)
------------ ------------
NET INCREASE IN NET ASSETS FOR THE PERIOD................... 514,933 9,731,249

NET ASSETS:
Beginning of period.................................... 231,571,604 221,840,355
------------ ------------
End of period (including accumulated distributions in
excess of net investment income/undistributed net
investment income of $(175,174) and $1,283,947,
respectively)......................................... $232,086,537 $231,571,604
============ ============
</TABLE>

See Notes to Financial Statements.

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Management 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>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
MAY 31, 1998 -----------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993*
------------ -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period....................... $ 16.33 $ 15.31 $ 14.54 $ 12.22 $ 14.36 $ 13.95
-------- -------- -------- -------- --------- --------
Net investment income...................................... 0.63 1.36 1.41 1.39 1.40 0.83
Net realized and unrealized gain/(loss) on investments..... 0.51 1.10 0.72 2.46 (1.94) 0.54
-------- -------- -------- -------- --------- --------
Net increase/(decrease) in net asset value................. 1.14 2.46 2.13 3.85 (0.54) 1.37
-------- -------- -------- -------- --------- --------
Offering costs and MMP**** underwriting commissions charged
to paid-in capital........................................ -- -- -- -- -- (0.22)
-------- -------- -------- -------- --------- --------
DISTRIBUTIONS:
Dividends paid from net investment income to MMP****
Shareholders.............................................. (0.20) (0.26) (0.34) (0.36) (0.28) (0.09)
Distributions paid from net realized capital gains to
MMP**** Shareholders...................................... (0.01) (0.06) (0.02) -- -- (0.01)
Dividends paid from net investment income to Common Stock
Shareholders.............................................. (0.58) (1.05) (1.02) (1.15) (1.09) (0.61)
Distributions paid from net realized capital gains to
Common Stock Shareholders................................. (0.29) (0.05) -- -- (0.24) --
Change in accumulated undeclared dividends on MMP****...... 0.00# (0.02) 0.02 (0.02) 0.01 (0.03)
-------- -------- -------- -------- --------- --------
Total Distributions........................................ (1.08) (1.44) (1.36) (1.53) (1.60) (0.74)
-------- -------- -------- -------- --------- --------
Net asset value, end of period............................. $ 16.39 $ 16.33 $ 15.31 $ 14.54 $ 12.22 $ 14.36
======== ======== ======== ======== ========= ========
Market value, end of period................................ $ 14.500 $ 15.625 $ 14.625 $ 13.125 $ 11.125 $ 14.250
======== ======== ======== ======== ========= ========
Total investment return based on net asset value***........ 6.15% 14.66% 13.89% 30.38% (5.79)% 7.40%
======== ======== ======== ======== ========= ========
Total investment return based on market value***........... (1.85)% 14.84% 20.50% 29.28% (13.55)% (0.89)%
======== ======== ======== ======== ========= ========
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK
SHAREHOLDERS:
Operating expenses...................................... 2.12%** 1.60% 1.84% 1.89% 1.91% 1.66%**
Net investment income*****.............................. 5.36%** 6.51% 7.44% 7.81% 8.35% 6.59%**
SUPPLEMENTAL DATA:
Portfolio turnover rate................................. 50% 77% 98% 93% 110% 135%
Net assets, end of period (in 000's).................... $232,086 $231,572 $221,840 $212,827 $ 192,795 $212,577
- --------------------------------------------------------
Ratio of operating expenses to Total Average Net Assets
including MMP****......................................... 1.40%** 1.05% 1.17% 1.16% 1.18% 1.15%**
</TABLE>

* The Fund commenced operations on February 19, 1993.
** Annualized.
*** Assumes reinvestment of distributions at the price obtained by the Fund's
Dividend Reinvestment Plan.
**** Money Market Cumulative Preferred(TM) Stock.
***** The net investment income ratios reflect income net of operating expenses
and payments to MMP**** Shareholders.
# Amount represents less than $0.01 per share.

See Notes to Financial Statements.

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Management 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>
05/31/98* 775 $299,440 $100,000 $100,000
11/30/97 775 298,802 100,000 100,000
11/30/96 775 286,246 100,000 100,000
11/30/95 775 277,196 100,000 100,000
11/30/94 775 248,767 100,000 100,000
11/30/93 775 274,293 100,000 100,000
</TABLE>

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

(1) Excludes accumulated undeclared dividends.

(2) See Note 5.

* Unaudited.

See Notes to Financial Statements.

<PAGE>

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

1. SIGNIFICANT ACCOUNTING POLICIES

Preferred Income Management Fund Incorporated (the "Fund") is a
diversified, closed-end management investment company organized as a Maryland
corporation on December 21, 1992 and is registered with the Securities and
Exchange Commission ("SEC") under the Investment Company Act of 1940, as
amended. The Fund commenced operations on February 19, 1993. 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

<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Management Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------

interest. The Fund maintains possession of the collateral and, in the event of
counterparty default, the 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 calender 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
0.675% of the value of the Fund's average monthly net assets up to $100 million
and 0.55% 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 six months
ended May 31, 1998, excluding short-term investments, aggregated $114,316,094
and $120,582,496, respectively.

At May 31, 1998, aggregate gross unrealized appreciation for all securities
in which there is an excess of value over cost was $20,585,361 and aggregate
gross unrealized depreciation for all securities in which there is an excess of
cost over value was $926,799.

4. COMMON STOCK

At May 31, 1998, 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, 1998 and for the year ended November 30, 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. On April 30, 1993, the
Fund received proceeds from the public offering of 775 shares of Money Market
Cumulative Preferred(TM) Stock of $77,500,000 before offering costs of $171,219
and underwriting discounts and commissions paid directly to Lehman Brothers Inc.
of $1,356,250. The Money Market Cumulative Preferred(TM) Stock is senior to the
Common Stock and results in the financial leveraging of the Common Stock. Such
leveraging tends to magnify both the risks and opportunities to Common Stock
Shareholders. Dividends on shares of Money Market Cumulative Preferred(TM) Stock
are cumulative.

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

If the Fund allocates any net gains or income ineligible for the Dividends
Received Deduction to shares of the Money Market Cumulative Preferred(TM) Stock,
the Fund is required to make additional distributions to Money Market Cumulative
Preferred(TM) Stock Shareholders or to pay a higher dividend rate in amounts
needed to provide a return, net of tax, equal to the return had such originally
paid distributions been eligible for the Dividends Received Deduction.

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

At May 31, 1998, 775 shares of Money Market Cumulative Preferred(TM) Stock
were outstanding at the annual rate of 4.000%. 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. ORGANIZATION COSTS

Costs incurred by the Fund in connection with its organization and initial
public offering of Common Stock and Money Market Cumulative Preferred(TM) Stock
were $32,000 and $31,000, respectively, and were amortized on a straight-line
basis over a five year period beginning February 19, 1993 (the date of the
Fund's commencement of investment operations) and April 30, 1993 (the date of
the issuance of the Fund's Money Market Cumulative Preferred(TM) Stock),
respectively. As of May 31, 1998, all such costs have been fully amortized.

7. 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 also invest up to 15% of its assets in common
stock. The Fund's investment policy regarding debt securities was amended on
July 21, 1995. The amended policy allows the Fund to invest up to 35% of its
assets collectively in the following: Trust Originated Preferred Securities
("TOPRS"), Monthly Income Preferred Shares ("MIPS"), Quarterly Income Debt
Securities ("QUIDS"), Quarterly Income Preferred Shares ("QUIPS"), Canadian
Originated Preferred Securities ("COPRS"), Quarterly Income Capital Securities
("QUICS"), and similarly-structured instruments commonly referred to as hybrid
of taxable preferreds, subject to the quality standards set forth above. The
Fund's investment policy was further amended on October 17, 1997, to clarify
that the foregoing 35% limitation only applies to such TOPRS, MIPS, QUIDS,
QUIPS, COPRS, QUICS and analogous securities that the Fund's Adviser deems to be
debt-like in key characteristics.

8. SPECIAL INVESTMENT TECHNIQUES

The Fund may employ certain investment techniques in accordance with its
fundamental investment policies. These may include the use of when-issued and
delayed delivery transactions. Securities

purchased or sold on a when-issued or delayed delivery basis may be settled
within 45 days after the date of the transaction. Such transactions may expose
the Fund to credit and market valuation risk greater than that associated with
regular trade settlement procedures. The Fund may also enter into transactions,
in accordance with its fundamental investment policies, involving any or all of
the following: lending of portfolio securities, short sales of securities,
futures contracts, options on futures contracts, and options on securities. With
the exception of purchasing securities on a when-issued or delayed delivery
basis or lending portfolio securities, these transactions are used for hedging
or other appropriate risk-management purposes or, under certain other
circumstances, to increase income. As of May 31, 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.

<PAGE>
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
AVAILABLE TO COMMON STOCK SHAREHOLDERS
-------------------------------------------------------------------
NET REALIZED NET INCREASE/
AND UNREALIZED (DECREASE) IN
GAIN/(LOSS) NET ASSETS FROM
INVESTMENT INCOME NET INVESTMENT INCOME ON INVESTMENTS OPERATIONS
------------------- --------------------- -------------------- --------------------
QUARTER PER PER PER PER
ENDED TOTAL SHARE* TOTAL SHARE* TOTAL SHARE* TOTAL SHARE*
- ------- ----- ------ ----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
02/29/96 $3,855,411 $0.41 $2,401,369 $0.26 $(4,640,103) $(0.49) $(2,238,734) $(0.23)
05/31/96 3,977,011 0.42 2,566,419 0.27 2,507,033 0.27 5,073,452 0.54
08/31/96 4,053,096 0.43 2,640,541 0.28 (1,006,421) (0.11) 1,634,120 0.17
11/30/96 3,866,169 0.41 2,630,145 0.28 9,915,487 1.05 12,545,632 1.33
02/28/97 3,553,803 0.38 2,974,735 0.32 (142,290) (0.02) 2,832,445 0.30
05/31/97 3,903,421 0.42 3,350,466 0.36 2,349,591 0.25 5,700,057 0.61
08/31/97 3,846,253 0.41 3,251,894 0.34 4,472,629 0.48 7,724,523 0.82
11/30/97 3,847,062 0.41 3,220,897 0.34 3,607,340 0.39 6,828,237 0.73
02/28/98 3,839,022 0.41 3,246,792 0.35 2,721,186 0.28 5,967,978 0.63
05/31/98 3,707,366 0.39 2,675,583 0.28 2,037,659 0.23 4,713,242 0.51
</TABLE>

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

* Per share of common stock.

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Management 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 six months ended May 31, 1998,
$3,644 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 Management 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>
- --------------------------------------------------------------------------------
Preferred Income Management Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------

MEETING OF SHAREHOLDERS

On April 17, 1998, 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 Coopers & Lybrand L.L.P. as independent accountants for the
Fund for the fiscal year ending November 30, 1998 ("Proposal 2"). The Meeting
was adjourned to allow additional time to tabulate the results of the voting and
reconvened on April 28, 1998 to report the results of the voting. The results of
each proposal are as follows:

PROPOSAL 1: ELECTION OF DIRECTORS.

<TABLE>
<CAPTION>
NAME FOR WITHHELD UNVOTED
- ---- --- -------- -------
<S> <C> <C> <C>
Common Stock
Stewart R. Horejsi........................................ 4,297,057 38,550 --
James G. Duff............................................. 4,297,057 38,550 --
</TABLE>

Donald F. Crumrine, Robert T. Flaherty, Morgan Gust and Robert F. Wulf continue
to serve in their capacities as Directors of the Fund.

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

<TABLE>
<CAPTION>
FOR AGAINST ABSTAINED
--- ------- ---------
<S> <C> <C> <C>
Common Stock and Preferred Stock (voting together as a
single class)
Voted....................................................... 7,543,908 41,070 92,775
</TABLE>

<PAGE>

DIRECTORS
Donald F. Crumrine, CFA
James G. Duff
Robert T. Flaherty, CFA
Morgan Gust
Stewart R. Horejsi
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 MANAGEMENT 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 MANAGEMENT
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.

3203 4/98

[Preferred Income Management]

Semi-Annual
Report

May 31, 1998