PREFERRED INCOME MANAGEMENT FUND INC, N-30D, 1999-07-16

PREFERRED INCOME MANAGEMENT FUND INC
N-30D, 1999-07-16

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<PAGE>

PREFERRED INCOME MANAGEMENT FUND
INCORPORATED

Dear Shareholder:

The Preferred Income Management Fund has its blinker on to make a turn.
After the April 21st Board Meeting, a proposal was made to the Board by Stewart
Horejsi to change the investment objective of the Fund from "high current income
consistent with the preservation of capital" to "total return", and to approve
new investment advisers, both of which the Board subsequently approved at a May
1 Board Meeting. In the next several weeks, you should be receiving proxy
materials from the Fund describing each proposal in detail. We expect to hold a
Special Meeting of Shareholders (the "Special Meeting") on August 27, 1999 in
Scottsdale, AZ. If shareholders approve the change, the new objective would
become effective after the Special Meeting.

In case you didn't already know, Flaherty & Crumrine Incorporated, the
Fund's adviser, recently tendered its resignation. The Board met and interviewed
several very qualified investment management companies in May. As a result, we
are pleased to welcome Spectrum Asset Management, Inc. as the Fund's interim
adviser. Spectrum is the largest money manager specializing in the preferred
securities market, with over $2 billion in assets under management. Founded in
1987, Spectrum is now a wholly owned affiliate of United Asset Management, a
Boston based NYSE listed company, and one of the top 10 largest independent
investment management organizations in the world whose subsidiaries manage over
$195 billion. Spectrum begins managing the hedged preferred stocks on July 1,
1999. If shareholder approval is obtained at the Special Meeting, the other
advisers will be Boulder Investment Advisers, LLC, ("BIA") which was recently
formed for the specific purpose of acting as adviser to the Fund and Stewart
Investment Advisers, Ltd. ("SIA"), a Barbados company recently formed by Stewart
Horejsi, also for the specific purpose of acting as a sub-adviser to the Fund.
SIA would primarily oversee the asset allocation of the Fund's assets, and all
of its investments in common stocks.

I'd like to say a quick word about the Fund's expenses. We intend to
closely monitor expenses. In fact, the Fund will no longer incur the economic
advisor expense after August 3rd, as the Board has voted to terminate this
contract. This year, expenses are currently running higher than usual due to
higher legal costs associated with the change in the objective and adviser, but
these are non-recurring expenses for the Fund. The proposal to use BIA and SIA
as advisers to the Fund, if approved, will increase advisory expenses from what
they were last year -- but it will depend on the allocation between preferreds
and commons. The adviser fees paid to Spectrum for managing the preferreds will
actually be less than what we were paying before, while the adviser fees paid to
BIA/SIA will be more. This will be explained in more detail in the proxy
materials.

<PAGE>

As of May 31, 1999, the Fund's Net Asset Value was $15.01 per share, and
the market price was $11.750. For the six months ended May 31, 1999, the Fund's
total return on Net Asset Value was 1.0% (assuming reinvestment at NAV), while
the total return based on market price was -5.5%. We are excited about the
future prospects of the Fund, and we look forward to serving the shareholders.

Sincerely yours,
/s/ STEPHEN C. MILLER

Stephen C. Miller
President

June 30, 1999

REPORT FROM THE ADVISER

Dear Shareholder:

Preferred Income Management Fund earned a positive total return on net
asset value ("NAV") of 1.0% in the first half of fiscal 1999 despite a general
decline in the market prices of preferred stocks. Much of the credit was due to
the Fund's hedges, which helped stabilize the NAV of the Fund's shares (taking
into account the special year-end distribution paid out last December 31st).

The following table shows the Fund's total return on NAV for various
periods over the life of the Fund:

PREFERRED INCOME MANAGEMENT FUND
PERIODS ENDED 5/31/99

<TABLE>
<CAPTION>
SIX ONE THREE LIFE
MONTHS YEAR YEARS* OF FUND*
------ ---- ------ --------
<S> <C> <C> <C> <C>
TOTAL RETURN ON NET ASSET VALUE............................. 1.0% 2.0% 11.0% 10.0%
</TABLE>

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

* Annualized

Hedging seems rather esoteric, but it has been one of the cornerstones of
the Fund's investment strategies. Rising interest rates are expected to cause a
decline in the market value of the Fund's portfolio of preferred stocks. To help
offset that possibility, the Fund needs a way to profit from an increase in
interest rates. It attempts to deal with this by purchasing put options on
Treasury bond futures.

The put option hedges give the Fund the right, for the life of the option,
to sell Treasuries at a fixed price. Typically that price is slightly below the
market at the time the options are purchased, rather like a

<PAGE>

"safety net". When a significant rise in interest rates causes the prices of
Treasury bonds to fall below the "safety net", however, the right to sell at
"yesterday's price" can become quite valuable.

The Fund's hedging strategies work best when interest rates move a lot and
do it fast. This wish was granted! The yield on long term U.S. Treasury bonds
went from just over 5% last November 30th to almost 6% at the end of the Fund's
fiscal first half on May 31, 1999. Next to this, nothing else that happened in
the bond and preferred markets made much difference.

There have not been any dramatic moves recently among the broad sectors
within the Fund's preferred portfolio. Traditional preferreds, which are
eligible for the Dividends Received Deduction ("DRD") available to corporate
investors, are relatively scarce; and they have generally performed well. In
particular, redemptions of adjustable rate preferreds ("ARPs") have further
reduced the supply of such issues and boosted their performance.

Flaherty & Crumrine Incorporated has resigned as the investment adviser for
the Preferred Income Management Fund effective June 30, 1999. We wish the Fund
and its shareholders success as we go our separate ways in the future.

Sincerely yours,
/s/ Robert T. Flaherty
Robert T. Flaherty
Flaherty & Crumrine Incorporated

June 22, 1999

<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, 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
June 30, 1998....................................... 0.081 16.49 14.5625 14.63
July 31, 1998....................................... 0.081 16.25 14.5625 14.38
August 31, 1998..................................... 0.081 16.27 14.1875 14.36
September 30, 1998.................................. 0.081 16.16 14.3750 14.26
October 31, 1998.................................... 0.081 15.84 13.5625 13.55
November 30, 1998................................... 0.081 16.06 13.6250 13.48
December 31, 1998................................... 0.820 15.27 13.1250 13.22
January 31, 1999.................................... 0.077 15.17 12.0000 12.08
February 28, 1999................................... 0.077 15.19 12.1875 12.22
March 31, 1999...................................... 0.077 15.11 12.0000 11.97
April 30, 1999...................................... 0.077 15.13 11.8130 11.85
May 31, 1999........................................ 0.077 15.01 11.7500 11.77
</TABLE>

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

(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 Management Fund Incorporated
PORTFOLIO OF INVESTMENTS
MAY 31, 1999 (UNAUDITED)
----------------------------------------------

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES -- 94.7 %
ADJUSTABLE RATE PREFERRED STOCKS -- 12.1 %
UTILITIES -- 2.0 %
174,857 Niagara Mohawk Power Corporation,
Series B, Adj. Rate Pfd. ...... $ 4,420,603
------------
BANKING -- 10.1 %
Bank One Corporation:
26,600 Series B, Adj. Rate Pfd. ........ 2,666,650
17,400 Series C, Adj. Rate Pfd. ........ 1,744,350
Bankers Trust New York
Corporation:
69,500 Series Q, Adj. Rate Pfd. ........ 1,689,719
188,600 Series R, Adj. Rate Pfd. ........ 4,585,337
51,000 Chase Manhattan Corporation,
Series L, Adj. Rate Pfd. ...... 4,927,875
Citigroup Inc.:
138,500 Series Q, Adj. Rate Pfd. ........ 3,324,000
32,300 Series R, Adj. Rate Pfd. ........ 777,218
3,300 Morgan (J.P.) & Company Inc.,
Series A, Adj. Rate Pfd. ...... 298,650
9,050 Republic New York Corporation,
Series D, Adj. Rate Pfd. ...... 220,594
36,000 Wells Fargo & Company,
Series B, Adj. Rate Pfd. ...... 1,806,750
------------
TOTAL BANKING ADJUSTABLE RATE
PREFERRED STOCKS............... 22,041,143
------------
TOTAL ADJUSTABLE RATE PREFERRED
STOCKS......................... 26,461,746
------------
FIXED RATE PREFERRED STOCKS AND SECURITIES -- 82.6 %
UTILITIES -- 29.0 %
Alabama Power Company:
40,700 5.20 % Pfd. ..................... 971,203
67,000 Alabama Power Capital Trust I,
7.375% TOPrS .................. 1,712,687
80,000 Alabama Power Capital Trust II,
7.60% TOPrS ................... 2,055,000
18,460 Appalachian Power Company, 8.00%
QUIDS, Series B ............... 474,191
Baltimore Gas & Electric Company:
29,700 6.70% Pfd., Series 1993 ......... 3,322,687
15,080 6.99% Pfd., Series 1995 ......... 1,743,625
</TABLE>

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
10,000 Boston Edison Company, 4.78%
Pfd. .......................... $ 877,500
17,678 Columbus Southern Power Company,
7.92% Jr. Sub. Debt, Series
B ............................. 449,684
48,000 Consolidated Edison Company of
New York, 7.75% QUICS, Series
A ............................. 1,227,000
131,850 CPL Capital, 8.00% QUIPS, Series
A ............................. 3,370,415
Duke Energy Corporation:
7,134 4.50% Pfd., Series C ............ 595,689
7,934 7.85% Pfd., Series S ............ 898,525
1,297 7.00% Pfd., Series W ............ 143,967
92 6.75% Pfd., Series X ............ 10,189
50,450 Duquesne Capital, 8.375% MIPS,
Series A ...................... 1,283,322
9,400 El Paso Tennessee Pipeline
Company, 8.25% Pfd., Series
A ............................. 522,875
Enterprise:
56,000 Capital Trust I, 7.44% TOPrS,
Series A ...................... 1,378,300
30,000 Capital Trust III, 7.25% TOPrS,
Series C ...................... 720,375
Florida Power & Light Company:
5,000 4.35% Pfd., Series E ............ 396,250
42,350 6.98% Pfd., Series S ............ 4,700,850
12,400 7.05% Pfd., Series T ............ 1,387,250
Georgia Power Company:
22,600 Capital Trust II, 7.75%, Series
T ............................. 577,712
18,400 Capital Trust III, 7.75%, Series
V ............................. 470,350
20,000 Hawaiian Electric Company, Inc.,
HECO Capital Trust I, 8.05%
QUIPS ......................... 511,250
4,837 HL&P Capital Trust I, 8.125%,
Series A ...................... 123,646
</TABLE>

See Notes to Financial Statements.

<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Management Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 1999 (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)
Indiana Michigan Power Company:
10,000 8.00% Pfd., Series A ............ $ 255,625
20,000 7.60% Pfd., Series B ............ 506,250
6,750 Indianapolis Power & Light
Company, 5.65% Pfd. ........... 699,468
9,100 Jersey Central Power & Light
Company, 7.52% Sinking Fund
Pfd., Series K ................ 952,097
3,640 Kansas City Power & Light
Company, 4.50% Pfd. ........... 302,120
10,000 MidAmerican Energy Financing I,
7.98% QUIPS, Series A ......... 253,125
1,400 Mississippi Power Company, 7.00%
Pfd. .......................... 142,625
8,500 Monongahela Power Company, $7.73
Pfd., Series L ................ 971,125
29,182 Nevada Power Company, NVP Capital
I, 8.20% QUIPS, Series A ...... 745,965
Niagara Mohawk Power Corporation:
12,600 4.10% Pfd. ...................... 874,125
16,705 7.85% Sinking Fund Pfd. ......... 424,933
23,150 9.50% Pfd. ...................... 600,453
5,410 NSP Financing I, 7.875% TOPrS ... 139,646
Ohio Edison Company:
2,700 4.44% Pfd. ...................... 190,687
8,000 4.56% Pfd. ...................... 574,000
28,320 Ohio Power Company, 7.92% QUIDS,
Series B ...................... 727,470
42,365 PECO Energy, $3.80 Pfd., Series
A ............................. 2,886,116
106,925 Pennsylvania Power & Light
Company, PP&L Capital Trust II,
8.10% TOPrS ................... 2,746,636
58,000 PSCO Capital Trust I, 7.60%
TOPrS ......................... 1,475,375
Puget Sound Energy Inc.:
45,905 7.75% Sinking Fund Pfd. ......... 4,814,287
21,800 7.45% Pfd., Series II ........... 610,400
1,250,000 Puget Sound Capital Trust, 8.231%
6/1/27 Capital Security, Series
B ............................. 1,310,937
9,960 Rochester Gas & Electric
Corporation, 4.75% Pfd., Series
I ............................. 857,805
17,050 San Diego Gas & Electric Company,
6.80% Pfd. .................... 476,334
</TABLE>

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
South Carolina Electric & Gas:
12,719 5.125% Purchase Fund Pfd. ....... $ 637,540
100,200 SCE&G Trust I, 7.55%, Series
A ............................. 2,536,312
18,300 Southwestern Public Service
Capital I, 7.85%, Series A .... 460,931
61,700 Transcanada Capital, 8.75%
TOPrS ......................... 1,600,344
Union Electric Power Company:
21,200 $7.64 Pfd. ...................... 2,416,800
2,000,000 7.69% 12/15/36 Capital Security,
Series A ...................... 2,022,500
4,200 Virginia Electric & Power
Company, $6.98 Pfd. ........... 466,725
------------
TOTAL UTILITY FIXED RATE
PREFERRED STOCKS AND
SECURITIES..................... 63,603,298
------------
BANKING -- 23.2 %
2,250 ABN Amro North America, 6.59%
Pfd. 144A** ................... 2,340,000
BankBoston Corporation:
1,300,000 BankBoston Capital Trust I, 8.25%
12/15/26 Capital Security ..... 1,350,375
1,500,000 BankBoston Capital Trust II,
7.75% 12/15/26 Capital
Security, Series B ............ 1,500,000
560,000 Bank of New York, 7.78% 12/1/26
Capital Security 144A** ....... 564,900
</TABLE>

See Notes to Financial Statements.

<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Management Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 1999 (UNAUDITED)
---------------------------------------------------------------

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
BANKING (CONTINUED)
Bankers Trust New York
Corporation:
2,200,000 BT Capital Trust II, 7.875%
2/25/27 Capital Security ...... $ 2,194,500
1,500,000 BT Capital Trust B, 7.90% 1/15/27
Capital Security .............. 1,500,000
116,450 Chase Manhattan Corporation,
10.84% Pfd., Series C ......... 3,453,470
Citigroup Inc.:
42,500 6.365% Pfd., Series F ........... 2,210,000
74,550 6.231% Pfd., Series H ........... 3,792,731
54,800 5.864% Pfd., Series M ........... 2,692,050
3,500,000 First Hawaiian Capital I, 8.343%
7/1/27 Capital Security, Series
B ............................. 3,556,875
1,500,000 First Union Institutional Capital
II, 7.85% 1/1/27 Capital
Security ...................... 1,526,250
41,000 Fleet Financial Group, Inc.,
6.75% Pfd., Series VI ......... 2,285,750
2,500,000 Greenpoint Capital Trust I, 9.10%
6/1/27 Capital Security ....... 2,578,125
J.P. Morgan & Co. Incorporated:
2,610,000 JPM Capital Trust I, 7.54%
1/15/27 Capital Security ...... 2,564,325
5,240,000 JPM Capital Trust II, 7.95%
2/1/27 Capital Security ....... 5,357,900
250 LaSalle National Corporation,
6.46% Pfd. 144A** ............. 259,218
Republic New York Corporation:
15,800 5.715% Pfd. ..................... 817,650
30,000 7.25% Pfd. ...................... 785,625
1,500,000 Republic NY Capital Trust I,
7.75% 11/15/26 Capital
Security ...................... 1,483,125
5,525,000 Republic NY Capital Trust II,
7.53% 12/4/26 Capital
Security ...................... 5,359,250
</TABLE>

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
1,000,000 Summit Capital Trust I, 8.40%
3/15/27 Capital Security,
Series B ...................... $ 1,043,750
1,500,000 Washington Mutual Inc., 8.206%
2/1/27 Capital Security ....... 1,537,500
------------
TOTAL BANKING FIXED RATE
PREFERRED STOCKS AND
SECURITIES..................... 50,753,369
------------
FINANCIAL SERVICES -- 13.0 %
Bear Stearns Company:
17,000 5.72% Pfd., Series F ............ 767,125
67,800 5.49% Pfd., Series G ............ 2,949,300
Countrywide:
2,500,000 Capital I, 8.00% 12/15/26 Capital
Security ...................... 2,459,375
2,500,000 Capital III, 8.05% 6/15/27
Capital Security, Series B .... 2,600,000
27,000 DLJ Capital Trust, 8.42%......... 693,562
Heller Financial, Inc.:
20,000 6.687% Pfd., Series C ........... 2,087,500
1,500 6.95% Pfd., Series D ............ 162,187
116,850 Household Capital Trust II,
8.70% ......................... 3,045,403
Lehman Brothers Holdings Inc.:
213,150 5.00% Conv. Pfd., Series B ...... 6,501,075
26,300 5.94% Pfd., Series C ............ 1,180,212
22,000 5.67% Pfd., Series D ............ 951,500
Merrill Lynch & Co., Inc.:
33,100 8.00% TOPrS ..................... 883,356
139,200 9.00% Pfd., Series A ............ 4,323,900
------------
TOTAL FINANCIAL SERVICES FIXED
RATE PREFERRED STOCKS AND
SECURITIES..................... 28,604,495
------------
INSURANCE -- 9.7 %
2,750,000 Allstate Financing II, 7.83%
12/1/45 Capital Security ...... 2,777,500
2,450,000 Aon Capital Trust A, 8.205%
1/1/27 Capital Security ....... 2,633,750
79,663 Hartford Capital II, 8.35% QUIPS,
Series B ...................... 2,086,175
</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)
5,200,000 MMI Capital Trust I, 7.625%
12/15/27 Capital Security,
Series B ...................... $ 4,316,000
3,500,000 Orion Capital Trust II, 7.701%
4/15/28 Capital Security ...... 2,957,500
2,405,000 Provident Financing Trust I,
7.405% 3/15/38 Capital
Security ...................... 2,332,850
10 Prudential Human Resources
Management Company, Inc.,
6.30% Private Placement, Sinking
Fund Pfd., Series A ........... 1,032,500
2,000,000 Safeco Capital Trust I, 8.072%
7/15/37 Capital Security ...... 1,960,000
1,100,000 Transamerica Capital III, 7.625%
11/15/37 Capital Security ..... 1,120,625
------------
TOTAL INSURANCE FIXED RATE
PREFERRED STOCKS AND
SECURITIES..................... 21,216,900
------------
MISCELLANEOUS INDUSTRIES -- 7.7 %
13,648 Anadarko Petroleum Corporation,
5.46% Pfd. .................... 1,243,674
45,200 Coastal Finance, 8.375%, TOPrS... 1,155,425
90,000 Cyprus AMAX Minerals Company,
$4.00 Pfd., Series A........... 3,926,250
57,600 Farmland Industries Inc., 8.00%
Pfd. 144A**.................... 2,973,600
2,750,000 KN Energy, Inc., KN Capital Trust
III, 7.63% 4/15/28 Capital
Security....................... 2,760,313
20,000 LASMO America Ltd., 8.15% Pfd.
144A**......................... 2,145,000
20,000 Ocean Spray Cranberries, 6.25%
Pfd. 144A**.................... 2,075,000
9,520 Viad Corporation, $4.75 Sinking
Fund Pfd. ..................... 699,720
------------
TOTAL MISCELLANEOUS FIXED RATE
PREFERRED STOCKS AND
SECURITIES..................... 16,978,982
------------
TOTAL FIXED RATE PREFERRED STOCKS
AND SECURITIES................. 181,157,044
------------
</TABLE>

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
TOTAL PREFERRED STOCKS AND
SECURITIES (Cost
$201,491,669).................. $207,618,790
------------
COMMON STOCKS -- 0.1 % (Cost $226,764)
UTILITIES -- 0.1 %
7,950 WPS Resources Corporation........ 254,151
------------
OPTION CONTRACTS -- 2.3 % (Cost $2,601,436)
September Put Options on U.S.
Treasury Bond Futures, expiring
8/20/99+....................... 4,997,578
------------
PRINCIPAL
AMOUNT
- ---------
REPURCHASE AGREEMENT -- 1.9 % (Cost $4,168,000)
$4,168,000 Agreement with UBS Securities
Inc., 4.78% dated 5/28/99, to
be repurchased at $4,170,214 on
6/1/99, collateralized by
$3,112,000 U.S. Treasury Note,
12.75% due 11/15/10 (value
$4,251,360).................... 4,168,000
------------
</TABLE>

<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (Cost
$208,487,869*)...................... 99.0% 217,038,519
OTHER ASSETS AND LIABILITIES (Net).... 1.0 2,152,527
----- ------------
NET ASSETS............................ 100.0% $219,191,046
===== ============
</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 6):
TOPrS -- Trust Originated Preferred Securities
QUIPS -- Quarterly Income Preferred Securities
MIPS -- Monthly Income Preferred Securities
QUIDS -- Quarterly Income Debt Securities
QUICS -- Quarterly Income Capital Securities
</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, 1999 (UNAUDITED)
-------------------------------------------------------------

<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $208,487,869) (Note 1) See
accompanying schedule.................................. $217,038,519
Cash...................................................... 5,477
Dividends and interest receivable......................... 2,498,757
Receivable for securities sold............................ 919,244
Prepaid expenses.......................................... 241,189
------------
Total Assets...................................... 220,703,186
LIABILITIES:
Payable for securities purchased.......................... $ 1,144,644
Investment advisory fee payable (Note 2).................. 100,042
Dividends payable to Common Shareholders.................. 82,120
Accrued expenses and other payables....................... 185,334
-----------
Total Liabilities................................. 1,512,140
------------
NET ASSETS.................................................. $219,191,046
============
NET ASSETS consist of:
Undistributed net investment income (Note 1).............. $ 776,935
Accumulated net realized gain on investments sold (Note
1)..................................................... 2,944,615
Unrealized appreciation of investments (Note 3)........... 8,550,650
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.................................. $219,191,046
============
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......................... 473.92 367,285
----------- ------------
$100,473.92 77,867,285
===========
Common Stock (9,416,743 shares outstanding)............... $15.01 141,323,761
------- ------------
-------
TOTAL NET ASSETS............................................ $219,191,046
============
</TABLE>

See Notes to Financial Statements.

<PAGE>

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

Preferred Income Management Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 1999 (UNAUDITED)
- ---------------------------------------------------------------

<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends.............................................. $5,242,956
Interest............................................... 2,289,625
----------
Total Investment Income........................... 7,532,581
EXPENSES:
Investment advisory fee (Note 2)....................... $629,878
Administration fee (Note 2)............................ 175,135
Legal fees............................................. 155,592
Money Market Cumulative Preferred(TM) broker
commissions and Auction Agent fees.................... 112,496
Insurance expense...................................... 64,786
Directors' fees and expenses (Note 2).................. 41,170
Shareholder servicing agent fees (Note 2).............. 27,045
Economic consulting fee (Note 2)....................... 22,667
Audit fees............................................. 20,700
Custodian fees (Note 2)................................ 15,431
Other.................................................. 4,595
--------
Total Expenses.................................... 1,269,495
----------
NET INVESTMENT INCOME....................................... 6,263,086
----------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS (Notes 1 and 3):
Net realized gain on investments sold during the
period................................................ 1,817,496
Change in net unrealized appreciation of investments
during the period..................................... (4,502,520)
----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS............. (2,685,024)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $3,578,062
==========
</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, 1999 YEAR ENDED
(UNAUDITED) NOVEMBER 30, 1998
---------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income.................................. $ 6,263,086 $ 12,507,859
Net realized gain on investments sold during the
period................................................ 1,817,496 7,865,119
Change in net unrealized appreciation of investments
during the period..................................... (4,502,520) (6,623,634)
------------ ------------
Net increase in net assets resulting from operations... 3,578,062 13,749,344
DISTRIBUTIONS:
Dividends paid from net investment income to Money
Market Cumulative Preferred(TM) Stock Shareholders
(Note 5).............................................. (1,614,642) (2,354,735)
Distributions paid from net realized capital gains to
Money Market Cumulative Preferred(TM) Stock
Shareholders (Note 5)................................. (254,263) (1,320,962)
Dividends paid from net investment income to Common
Stock Shareholders.................................... (5,299,492) (10,080,323)
Distributions paid from net realized capital gains to
Common Stock Shareholders............................. (6,047,683) (2,735,864)
------------ ------------
NET DECREASE IN NET ASSETS FOR THE PERIOD................... (9,638,018) (2,742,540)
NET ASSETS:
Beginning of period.................................... 228,829,064 231,571,604
------------ ------------
End of period (including undistributed net investment
income of $776,935 and $1,427,983, respectively)...... $219,191,046 $228,829,064
============ ============
</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, 1999 -----------------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994
------------ -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period....................... $ 16.06 $ 16.33 $ 15.31 $ 14.54 $ 12.22 $ 14.36
-------- -------- -------- -------- -------- ---------
Net investment income...................................... 0.66 1.33 1.36 1.41 1.39 1.40
Net realized and unrealized gain/(loss) on investments..... (0.28) 0.13 1.10 0.72 2.46 (1.94)
-------- -------- -------- -------- -------- ---------
Total from investment operations........................... 0.38 1.46 2.46 2.13 3.85 (0.54)
-------- -------- -------- -------- -------- ---------
DISTRIBUTIONS:
Dividends paid from net investment income to MMP*
Shareholders.............................................. (0.17) (0.25) (0.26) (0.34) (0.36) (0.28)
Distributions paid from net realized capital gains to MMP*
Shareholders.............................................. (0.03) (0.14) (0.06) (0.02) -- --
Dividends paid from net investment income to Common Stock
Shareholders.............................................. (0.56) (1.07) (1.05) (1.02) (1.15) (1.09)
Distributions paid from net realized capital gains to
Common Stock Shareholders................................. (0.64) (0.29) (0.05) -- -- (0.24)
Change in accumulated undeclared dividends on MMP*......... (0.03) 0.02 (0.02) 0.02 (0.02) 0.01
-------- -------- -------- -------- -------- ---------
Total distributions........................................ (1.43) (1.73) (1.44) (1.36) (1.53) (1.60)
-------- -------- -------- -------- -------- ---------
Net asset value, end of period............................. $ 15.01 $ 16.06 $ 16.33 $ 15.31 $ 14.54 $ 12.22
======== ======== ======== ======== ======== =========
Market value, end of period................................ $ 11.750 $ 13.625 $ 15.625 $ 14.625 $ 13.125 $ 11.125
======== ======== ======== ======== ======== =========
Total Investment return based on net asset value***........ 2.56% 7.65% 14.66% 13.89% 30.38% (5.79)%
======== ======== ======== ======== ======== =========
Total Investment return based on market value***........... (5.46)% (4.55)% 14.84% 20.50% 29.28% (13.55)%
======== ======== ======== ======== ======== =========
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK
SHAREHOLDERS
Operating expenses...................................... 1.79%** 1.83%+ 1.60% 1.84% 1.89% 1.91%
Net investment income****............................... 5.77%** 5.92%+ 6.51% 7.44% 7.81% 8.35%
SUPPLEMENTAL DATA:
Portfolio turnover rate................................. 26% 86% 77% 98% 93% 110%
Net assets, end of period (in 000's).................... $219,191 $228,829 $231,572 $221,840 $212,827 $ 192,795
- --------------------------------------------------------
Ratio of operating expenses to Total Average Net Assets
including MMP*............................................ 1.15%** 1.22%+ 1.05% 1.17% 1.16% 1.18%
</TABLE>

* Money Market Cumulative Preferred(TM) 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.
+ Ratios for operating expenses, net investment income and operating expenses
including MMP* for fiscal 1998 would be 1.56%, 6.19% and 1.03%,
respectively, without inclusion of certain non-recurring legal and proxy
solicitation expenses incurred in connection with the proxy contest in the
first half of fiscal 1998.

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>
05/31/99*.. 775 $282,827 $100,000 $100,000
11/30/98.. 775 295,263 100,000 100,000
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
</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 and is registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, as amended. The policies
described below are followed consistently by the Fund in the preparation of its
financial statements in conformity with generally accepted accounting
principles.

Portfolio valuation: The net asset value of the Fund's Common Stock is
determined by the Fund's administrator no less frequently than on the last
business day of each week and month. It is determined by dividing the value of
the Fund's net assets attributable to common shares by the number of shares of
Common Stock outstanding. The value of the Fund's net assets attributable to
common shares is deemed to equal the value of the Fund's total assets less (i)
the Fund's liabilities, (ii) the aggregate liquidation value of the outstanding
Money Market Cumulative Preferred(TM) Stock and (iii) accumulated and unpaid
dividends on the outstanding Money Market Cumulative Preferred(TM) Stock.
Securities listed on a national securities exchange are valued on the basis of
the last sale on such exchange on the day of valuation. In the absence of sales
of listed securities and with respect to securities for which the most recent
sale prices are not deemed to represent fair market value and unlisted
securities (other than money market instruments), securities are valued at the
mean between the closing bid and asked prices when quoted prices for investments
are readily available. Investments for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Fund, including reference to
valuations of other securities which are considered comparable in quality,
maturity and type. Investments in money market instruments, which mature in 60
days or less, are valued at amortized cost.

Securities transactions and investment income: Securities transactions are
recorded as of the trade date. Realized gains and losses from securities sold
are recorded on the identified cost basis. Dividend income is recorded on
ex-dividend dates. Interest income is recorded on the accrual basis.

Option accounting principles: Upon the purchase of a put option by the
Fund, the total purchase price paid is recorded as an investment. The market
valuation is determined as set forth in the second preceding paragraph. When the
Fund enters into a closing sale transaction, the Fund will record a gain or loss
depending on the difference between the purchase and sale price. The risks
associated with purchasing options and the maximum loss the Fund would incur are
limited to the purchase price originally paid.

Repurchase Agreements: The Fund may engage in repurchase agreement
transactions. The Fund's Board of Directors reviews and approves periodically
the eligibility of the banks and dealers with which the Fund enters into
repurchase agreement transactions. The value of the collateral underlying such
transactions is at least equal at all times to the total amount of the
repurchase obligations, including interest. The Fund maintains possession of the
collateral and, in the event of counterparty default, the

<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Management 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(TM) Stock are entitled to receive
cumulative cash dividends as declared by the Fund's Board of Directors.
Distributions to shareholders are recorded on the ex-dividend date. Any net
realized short-term capital gains will be distributed to shareholders at least
annually. Any net realized long-term capital gains may be distributed to
shareholders at least annually or may be retained by the Fund as determined by
the Fund's Board of Directors. Capital gains retained by the Fund are subject to
tax at the corporate tax rate. Subject to the Fund qualifying as a regulated
investment company, any taxes paid by the Fund on such net realized long-term
gains may be used by the Fund's Shareholders as a credit against their own tax
liabilities.

Federal income taxes: The Fund intends to continue to qualify as a
regulated investment company by complying with the requirements under subchapter
M of the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and intends to distribute substantially all of its taxable
net investment income to its shareholders. Therefore, no Federal income tax
provision is required.

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

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

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

2. INVESTMENT ADVISORY FEE, CO-ADMINISTRATION 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 as
follows:

<TABLE>
<CAPTION>
FEES ON
NET ASSETS
EQUAL TO
OR LESS THAN FEES ON NET ASSETS
$100 MILLION EXCEEDING $100 MILLION
------------ ----------------------
<S> <C> <C>
(12/01/98 to 01/31/99)...................................... .675% .550%
(02/01/99 to 05/31/99)...................................... .580% .500%
</TABLE>

Boulder Administrative Services LLC ("BAS"), serves as the Fund's
Co-Administrator. On March 22, 1999, the Fund entered into a co-administration
agreement with BAS (the "Co-Administration Agreement"). Under the
Co-Administration Agreement, BAS provides certain administrative and executive
management services to the Fund including: providing the Fund's principal
offices and executive officers, overseeing and administering all contracted
service providers, making recommendations to the Board regarding policies of the
Fund, conducting shareholder relations, authorizing expenses and numerous other
tasks. Under the Co-Administration Agreement, the Fund pays BAS a monthly fee,
calculated at an annual rate of 0.10% of the value of the Fund's average monthly
net assets.

The Fund currently pays each Director who is not a director, officer or
employee of the Adviser or Co-Administrator a fee of $6,000 per annum, plus
$2,000 for each in-person meeting of the Board of Directors and $1,000 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, 1999, excluding short-term investments, aggregated $54,167,602 and
$57,267,571, respectively.

At May 31, 1999, aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost was $12,785,191 and aggregate
gross unrealized depreciation for all securities in which there is an excess of
tax cost over value was $4,234,541.

4. COMMON STOCK

At May 31, 1999, 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, 1999 and for the year ended November 30, 1998.

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, 1999, 775 shares of Money Market Cumulative Preferred(TM) Stock
were outstanding at the annual rate of 3.630%. The dividend rate, as set by the
auction process, is generally expected to vary with short-term interest rates.
These rates may vary in a manner unrelated to the income received on the Fund's
assets, which could have either a beneficial or detrimental impact on net
investment income and gains available to Common Stock Shareholders. While the
Fund expects to structure the portfolio holdings and hedging transactions to
lessen such risks to Common Stock Shareholders, there can be no assurance that
such results will be attained.

6. PORTFOLIO INVESTMENTS, CONCENTRATION AND INVESTMENT QUALITY

The Fund invests primarily in adjustable and fixed rate preferred stocks
and similar hybrid securities. Under normal market conditions, the Fund invests
at least 25% of its assets in securities issued by utilities and at least 25% of
its assets in securities issued by companies in the banking industry. The Fund's
portfolio may therefore be subject to greater risk and market fluctuation than a
portfolio of securities representing a broader range of investment alternatives.
The risks could adversely affect the ability and inclination of companies in
these industries to declare and pay dividends or interest and the ability of
holders of securities of such companies to realize any value from the assets of
the issuer upon liquidation or bankruptcy. The Fund may invest up to 15% of its
assets at the time of purchase in securities rated below investment grade,
provided that no such investment may be rated below both "Ba" by Moody's
Investors Service, Inc. and "BB" by Standard & Poor's Rating Group or judged to
be comparable in quality at the time of purchase; however, any such securities
must be issued by an issuer having an outstanding class of senior debt rated
investment grade. The Fund may also invest up to 15% of its assets in common
stock. Under normal conditions, the Fund may invest up to 35% of its assets in
debt securities. Certain of its investments in hybrid or taxable preferred
securities, such as TOPrS, TIPS, QUIPS, MIPS, QUIDS, QUICS, QIBS, Capital
Securities, and other similar or related investments, will be subject to the
foregoing 35% limitation to the extent that, in the opinion of the Fund's
Adviser, such investments are deemed to be debt-like in key characteristics.

7. SPECIAL INVESTMENT TECHNIQUES

The Fund may employ certain investment techniques in accordance with its
fundamental investment policies. These may include the use of when-issued and
delayed delivery transactions. Securities purchased or sold on a when-issued or
delayed delivery basis may be settled within 45 days after the

date of the transaction. Such transactions may expose the Fund to credit and
market valuation risk greater than that associated with regular trade settlement
procedures. The Fund may also enter into transactions, in accordance with its
fundamental investment policies, involving any or all of the following: lending
of portfolio securities, short sales of securities, futures contracts, options
on futures contracts, and options on securities. With the exception of
purchasing securities on a when-issued or delayed delivery basis or lending
portfolio securities, these transactions are used for hedging or other
appropriate risk-management purposes or, under certain other circumstances, to
increase income. As of May 31, 1999, 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, 1999, the Horejsi family group owned 3,945,550 shares of Common
Stock of the Fund, representing approximately 42% of the total Fund shares.

9. SUBSEQUENT EVENTS

On May 1, 1999, the Board of Directors approved, subject to shareholder
approval (i) a change in the Fund's investment objective from "high current
income consistent with the preservation of capital" to "total return", (ii)
changes in the Fund's investment management arrangements to include a new
investment adviser and two separate sub-advisers, one responsible for common
stock investments and asset allocation for the Fund and the other responsible
for the Fund's preferred stock, hybrid or taxable preferred securities and
related hedging instruments and (iii) the modification or elimination of certain
fundamental investment restrictions. The above mentioned changes will be
presented to shareholders for approval at a Special Meeting of Shareholders to
be held in August, 1999 (the "Special Meeting").

In addition, on May 18, 1999, the Fund announced that Flaherty & Crumrine
Incorporated notified the Fund of its intention to resign as investment adviser
to the Fund. Subsequently, on June 3, 1999, the Fund's Board of Directors
approved Spectrum Asset Management, Inc. to act as the Fund's interim investment
adviser. Flaherty & Crumrine Incorporated will cease acting as the Fund's
investment adviser after June 30, 1999, and Spectrum Asset Management, Inc. will
begin acting as interim adviser on July 1, 1999. At the Special Meeting,
shareholders will be asked to approve Spectrum Asset Management, Inc. to
continue as the Fund's sub-adviser for the portion of the Fund's assets
allocated to preferred stocks, hybrid or taxable preferred securities and
related hedging instruments.

The Board also voted on June 3, 1999 to terminate the Fund's Economic
Consulting Agreement with Primark Decision Economics, Inc., effective August 3,
1999.

<PAGE>

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

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

<TABLE>
<CAPTION>
AVAILABLE TO COMMON STOCK SHAREHOLDERS
------------------------------------------------------------------
NET REALIZED
AND UNREALIZED NET INCREASE 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>
02/28/97 $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 0.34 2,675,583 0.28 2,037,659 0.23 4,713,242 0.51
08/31/98 3,838,602 0.41 3,228,666 0.34 (1,295,868) (0.14) 1,932,798 0.20
11/30/98 3,929,356 0.42 3,356,818 0.36 (2,221,492) (0.24) 1,135,326 0.12
02/28/99 3,777,944 0.40 3,206,852 0.34 (803,986) (0.08) 2,402,866 0.26
05/31/99 3,754,637 0.40 3,056,234 0.32 (1,881,038) (0.20) 1,175,196 0.12
</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, 1999,
$4,235 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 21, 1999, the Fund held its Annual Meeting of Shareholders (the
"Meeting") to (1) elect three 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, 1999 ("Proposal 2"). The
results of each proposal are as follows:

PROPOSAL 1: ELECTION OF DIRECTORS.

<TABLE>
<CAPTION>
NAME FOR WITHHELD
- ---- --- --------
<S> <C> <C>
Common Stock
Stephen C. Miller......................................... 8,238,480 176,234
Preferred Stock
Alfred G. Aldridge, Jr.................................... 462 --
Richard I. Barr........................................... 462 --
</TABLE>

James G. Duff and Stewart R. Horejsi continue to serve in their capacities as
Directors of the Fund.

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

<TABLE>
<CAPTION>
FOR AGAINST ABSTAINED
--- ------- ---------
<S> <C> <C> <C>
Common Stock and Preferred Stock (voting together as a
single class)
Voted....................................................... 8,255,640 57,729 101,808
</TABLE>

<PAGE>

DIRECTORS
Alfred G. Aldridge, Jr.
Richard I. Barr
James G. Duff
Stewart R. Horejsi
Stephen C. Miller

OFFICERS
Stephen C. Miller
President
Carl D. Johns
Vice President
and Treasurer
Laura Rhodenbaugh
Secretary
Stephanie Kelley
Assistant Secretary

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.

[PREFERRED INCOME MANAGEMENT FUND LOGO]

Semi-Annual
Report

May 31, 1999