Edgar Filing: PREFERRED INCOME FUND INC

FLAHERTY & CRUMRINE PREFERRED INCOME FUND

Dear Shareholder:
The Flaherty & Crumrine Preferred Income Fund ("PFD") got off to a very
good start in fiscal 2004. The total return on net asset value ("NAV") for
fiscal first quarter ending February 29th was +5.4% 1. For the trailing twelve
month period, the total return was +21.1% 1.
Once again, strength in the preferred securities market was the major
factor in the Fund's performance. With interest rates hovering near all-time
lows, individual investors have increasingly turned to preferred securities as
they try to increase the income from their portfolios. At the same time, the
size of the market has remained fairly stable. There has been a steady stream of
new issues brought to market, but older issues are being redeemed at about the
same pace. As expected, issuers are replacing older high coupon preferred issues
with similar but less expensive ones.
These refinancing transactions are very important to the Fund--if the trend
persists for a long period of time, there may be downward pressure on the income
generated by the portfolio. On the other hand, low interest rates keep the cost
of the Fund's leverage extremely low. So far these two effects have roughly
offset each other.
The Fund's hedging strategy also performed as expected. To refresh your
memory, PFD normally hedges by purchasing put options on U.S. Treasury bond
futures. As interest rates go up or down, the prices of these put options
typically move in the opposite direction of the preferred securities. There is,
however, an important and valuable feature to a put option hedge--in a period of
falling interest rates (as in recent months), the value of the preferred
portfolio usually goes up by more than the drop in the value of the put options.
Although the value of the hedge positions declined during the period, when
compared to appreciation in the preferred positions this loss was small. Of
course, if we knew interest rates were going to fall, the best hedge would have
been no hedge at all, but our crystal ball is a bit too cloudy for that! We
prefer to hedge consistently, knowing that the portfolio should participate in a
rally but be protected if interest rates rise significantly.
The Fund's combination of preferred securities and the put option hedge
creates an unusual investment product and we have yet to find a perfect
benchmark for comparison. When measured against LONG-TERM fixed income
investments, we expect the returns on NAV to lag (but generally only a little!)
during periods of falling interest rates (because the hedge will hurt returns),
and to perform much better if rates rise substantially. In most interest rate
scenarios, the Fund's returns on NAV should out-perform SHORT-TERM investments,
although the Fund's returns on NAV may lag briefly during periods of rising
short-term rates. In any event, investors should always bear in mind that
changes in the Fund's premium or discount to NAV can significantly affect the
performance and volatility of the Fund's common share price.
To provide some comparison of the Fund's performance, the total return on
the Lehman Brothers index of long-term investment grade corporate bonds (a good
proxy for long-term fixed-income investments) was +4.9% during the fiscal
quarter and +10.8% during the twelve months ending February 29th. The Lehman
Brothers index of 3 - 6 month U.S. Treasury Bills (a short-term proxy) earned
0.3% during the quarter and 1.2% for the year. Keep in mind that these indices
do not utilize leverage.
Economic conditions in the United States continue to show signs of
improvement. This rising economic tide has benefited corporate profitability and
enabled companies to improve the quality of their balance sheets. At the same
time, sluggish job formation and subdued inflation have persuaded the Federal
Reserve to keep monetary policy accommodative, which has held down the cost of
the Fund's leverage.
In the coming weeks, the Fund's adviser, Flaherty & Crumrine, will launch a
new web site, WWW.PREFERREDSTOCKGUIDE.COM. The site will contain useful
information about most of the issues that make up the preferred securities
universe. We've tried to make the site informative and easy to use. We hope you
will also continue to visit the Fund's web site at WWW.PREFERREDINCOME.COM.

Sincerely,

/S/DONALD F. CRUMRINE /S/ROBERT M. ETTINGER

Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President

April 12, 2004

(1) Based on monthly data provided by Lipper Inc. Distributions are assumed
to be reinvested at NAV in accordance with Lipper's practice.

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Flaherty & Crumrine Preferred Income Fund
SUMMARY OF INVESTMENTS
FEBRUARY 29, 2004 (UNAUDITED)
--------------------------------------------------

PERCENT
VALUE OF TOTAL
(000'S) NET ASSETS
------- ----------

ADJUSTABLE RATE PREFERRED SECURITIES
Utilities ........................................................................ $ 382 0.1%
Banking .......................................................................... 20,990 8.5
-------- ------
TOTAL ADJUSTABLE RATE ........................................................ 21,372 8.6
-------- ------
FIXED RATE PREFERRED SECURITIES
Utilities ........................................................................ 92,393 37.4
Banking .......................................................................... 52,182 21.2
Financial Services ............................................................... 24,637 10.0
Insurance ........................................................................ 22,281 9.0
Oil and Gas ...................................................................... 9,111 3.7
Miscellaneous Industries ......................................................... 4,217 1.7
-------- ------
TOTAL FIXED RATE ............................................................. 204,821 83.0
-------- ------
INVERSE FLOATING RATE PREFERRED SECURITIES ............................................ 2,133 0.9

TOTAL PREFERRED STOCKS AND SECURITIES ................................................. 228,326 92.5

CORPORATE DEBT SECURITIES ............................................................. 3,224 1.3

COMMON STOCKS AND CONVERTIBLE SECURITIES .............................................. 9,310 3.8
PURCHASED PUT OPTIONS ................................................................. 786 0.3
MONEY MARKET FUNDS .................................................................... 3,612 1.4
-------- ------
TOTAL INVESTMENTS ..................................................................... 245,258 99.3
OTHER ASSETS AND LIABILITIES (NET) .................................................... 1,624 0.7
-------- ------
TOTAL NET ASSETS AVAILABLE TO COMMON AND PREFERRED STOCK ......................... $246,882 100.0%
======== ======

FINANCIAL DATA
PER SHARE OF COMMON STOCK (UNAUDITED)
--------------------------------------------------------
DIVIDEND
DIVIDEND NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE (1)
-------- --------- ------------- ------------

December 31, 2003 - Extra ......................... $0.0400 $15.90 $18.40 $17.48
December 31, 2003 ................................. 0.0950 15.90 18.40 17.48
January 31, 2004 .................................. 0.0950 16.23 18.35 17.43
February 29, 2004 ................................. 0.0950 16.37 18.97 18.02
--------------------

(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.

--------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)
THREE MONTHS ENDED FEBRUARY 29, 2004 (UNAUDITED)
---------------------------------------------------------------

VALUE
(000'S)
--------

OPERATIONS:
Net investment income ............................................................................ $ 3,218
Net realized gain on investments sold during the period .......................................... 265
Change in net unrealized appreciation of investments held during the period ...................... 5,331
Distributions to Money Market Cumulative PreferredTM Stock Shareholders from net investment
income, including changes in accumulated undeclared distributions ............................ (250)
-----------
Net increase in net assets from operations ................................................... 8,564

DISTRIBUTIONS:
Distributions paid from net investment income to Common Stock Shareholders (2) ................... (3,306)
Distributions paid from net realized capital gains to Common Stock Shareholders .................. 0
-----------
Total Distributions .......................................................................... (3,306)

FUND SHARES TRANSACTIONS:
Increase from Common Stock Transactions .......................................................... 574
-----------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK FOR THE PERIOD ................................... 5,832
NET ASSETS AVAILABLE TO COMMON STOCK:

Beginning of period .............................................................................. 160,924
-----------
End of period .................................................................................... $ 166,756
===========
FINANCIAL HIGHLIGHTS(1)
THREE MONTHS ENDED FEBRUARY 29, 2004 (UNAUDITED)
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD.
-----------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ............................................................. $ 15.85
-----------
INVESTMENT OPERATIONS:
Net investment income ............................................................................ 0.32
Net realized gain and unrealized appreciation on investments ..................................... 0.55
DISTRIBUTIONS TO MMP(R)* SHAREHOLDERS:
From net investment income (including change in accumulated undeclared dividends on MMP(R)*) ..... (0.03)
From net realized capital gains .................................................................. 0.00
-----------
Total from investment operations ................................................................. 0.84
-----------
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
From net investment income ....................................................................... (0.32)
From net realized capital gains .................................................................. 0.00
-----------
Total distributions to Common Shareholders ....................................................... (0.32)
-----------
Net asset value, end of period ................................................................... $ 16.37
===========
Market value, end of period ...................................................................... $ 18.97
===========
Common shares outstanding, end of period ......................................................... 10,186,011
===========
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
Net investment income + .......................................................................... 7.37%**
Operating expenses ............................................................................... 1.49%**

--------------------------------------------------------
SUPPLEMENTAL DATA:++
Portfolio turnover rate fiscal year to date ...................................................... 8%***
Total net assets available to Common and Preferred Stock, end of period (in 000's) ............... $ 246,882
Ratio of operating expenses to total average net assets available to Common and Preferred Stock* . 1.00%**

(1) These tables summarize the three months ended February 29, 2004 and should be read in conjunction with the Fund's
audited financial statements, including footnotes, in its Annual Report dated November 30, 2003.
(2) Includes income earned, but not paid out, in prior fiscal year.
* Money Market Cumulative PreferredTM Stock.
** Annualized.
*** Not Annualized.
+ The net investment income ratios reflect income net of operating expenses and payments to MMP(R)* Shareholders.
++ Information presented under heading Supplemental Data includes MMP(R)*.

DIRECTORS
Martin Brody
Donald F. Crumrine, CFA
Robert M. Ettinger, CFA
David Gale
Morgan Gust
Robert F. Wulf, CFA

OFFICERS
Donald F. Crumrine, CFA
Chairman of the Board
and Chief Executive Officer
Robert M. Ettinger, CFA
President
Peter C. Stimes, CFA
Chief Financial and Accounting
Officer, Vice President
and Treasurer
R. Eric Chadwick, CFA
Vice President and Secretary
Bradford S. Stone
Vice President

INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: flaherty@fin-mail.com

QUESTIONS CONCERNING YOUR SHARES OF FLAHERTY & CRUMRINE PREFERRED INCOME FUND?
o If your shares are held in a brokerage
Account, contact your broker.
o If you have physical possession of your shares
in certificate form, contact the Fund's Transfer
Agent & Shareholder Servicing Agent --
PFPC Inc.
P.O. Box 43027
Providence, RI 02940-3027
1-800-331-1710

THIS REPORT IS SENT TO SHAREHOLDERS OF FLAHERTY & CRUMRINE PREFERRED INCOME FUND
INCORPORATED FOR THEIR INFORMATION. IT IS NOT A PROSPECTUS, CIRCULAR OR
REPRESENTATION INTENDED FOR USE IN THE PURCHASE OR SALE OF SHARES OF THE FUND OR
OF ANY SECURITIES MENTIONED IN THIS REPORT.

[GRAPHIC OMITTED]
LIGHTHOUSE

Flaherty & Crumrine
=====================
PREFERRED INCOME Fund

QUARTERLY
REPORT

FEBRUARY 29, 2004

web site: www.preferredincome.com