Edgar Filing: PREFERRED INCOME FUND INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES

Investment Company Act file number 811-06179
----------------------------

PREFERRED INCOME FUND INCORPORATED
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(Exact name of registrant as specified in charter)

301 E. Colorado Boulevard, Suite 720
PASADENA, CA 91101
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(Address of principal executive offices) (Zip code)

Donald F. Crumrine
Preferred Income Fund Incorporated
301 E. Colorado Boulevard, Suite 720
PASADENA, CA 91101
-----------------------------------------------------
(Name and address of agent for service)

Registrant's telephone number, including area code: 626-795-7300
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Date of fiscal year end: November 30, 2003
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Date of reporting period: May 31, 2003
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.

ITEM 1. REPORTS TO STOCKHOLDERS.

PREFERRED INCOME FUND INCORPORATED

Dear Shareholder:

Spurred by declining interest rates and increased demand for preferred
securities, the Preferred Income Fund continued to perform well during the
second quarter of fiscal 2003. For the three months ending May 31st, the Fund
produced an 8.7% total return on net asset value ("NAV"). For the first six
months of the Fund's fiscal year, the return was 19.2%.

The return on the market value of the Fund's shares was somewhat lower as
the premium of the market price over the NAV declined during the quarter. For
the period, the total return based upon the market value of the Fund's shares
equaled 3.1%, while the return for the first six months was 15.9%. Please keep
in mind, however, that past performance does not guarantee future results.

Despite a quick and successful outcome to the Iraq war, the domestic
economy has not yet demonstrated that it is on the road to recovery. The Federal
Reserve has kept short-term interest rates at historic lows, and many believe
that further reductions will be necessary. With inflation subdued and
substantial slack in output capacity and labor markets (suggesting that
short-term rates are likely to remain low for an extended period), long-term
interest rates have also declined. Since the start of the Fund's fiscal year,
yields on two-year and ten-year US Treasuries have fallen by approximately
0.75%. Lower short-term interest rates provide a direct benefit by reducing the
variable cost of the Fund's leverage in the form of its Money Market Cumulative
PreferredTM Stock ("MMP(TM)"). Recently, the rates have been running below
1 1/4%.

When long-term interest rates decline, we expect to lose money on the
Fund's hedges and make money on the securities in the portfolio. The hedging
strategy, however, is intended to tilt the playing field in the Fund's favor,
and it has been working! Since the hedge is constructed by purchasing put
options on US Treasury bond futures, the Fund's loss on the hedge is limited to
the cost of the puts. On the other hand, with the right issues in the portfolio,
the gains on our preferred securities have more than offset the cost of the
hedge, and the NAV has increased.

As we have written often in the past, our fundamental investment philosophy
is to own the issues that offer the best value within the preferred securities
universe. While this may seem obvious, it often means that we pass up issues
offering higher yields. If we make sound investments with attractive yields and
avoid serious credit losses, then the Fund will have more money to invest to
generate income over time. This strategy should enable the Fund to meet its
objective of high current income for shareholders.

In recent quarters, we have increased the portfolio's allocation to lower
coupon, traditional preferred stocks. Falling interest rates and new legislation
lowering the tax rate on Qualified Dividend Income ("QDI") to 15% have benefited
these securities more than taxable (or "hybrid") preferreds.

Investors are still evaluating the new tax law and determining how to
incorporate it into investment decisions (more on this in the Q&A section), but
one thing is clear - certain dividend paying securities will be more valuable to
individual investors. Issuers of preferred securities are also assessing the
impact of the new law and we expect to see several new issues of preferred stock
in the months to come. While the market tries to sort it all out, we'll stick to
the basic game plan and keep looking for the best bargains within the various
sectors of the preferred market.

We certainly haven't been perfect, and some of our holdings are on life
support. We have previously mentioned Conseco, Inc. and Farmland Industries, and
there is unfortunately not much new to report on these two. However, we need to
add one additional issue to the short list of problem credits - Touch America
Holdings. Formerly Montana Power Company, management sold off its electric
utility assets to focus on its fiber optic business (i.e., they zigged when they
should have zagged!). The issue we own remained with the fiber optic business
and has not paid a dividend for the past two quarters. (These three issuers now
account for 0.2% of the Fund.)

It is important to remember that the investment objective of the Fund is to
produce high current income consistent with preservation of capital. While no
one will apologize for the returns of the past six months, it would be imprudent
to expect them to be repeated very often. Of course, that doesn't mean we won't
try, but when yields on long-term US Treasuries are well below 5% and money
market funds are earning less than 1%, investors need to keep their expectations
realistic. The Fund is well positioned to participate in a continuation of the
rally in the bond market, but its hedging strategy is there to help protect the
Fund should interest rates rise significantly.

We encourage you to read the Questions and Answers section beginning on the
next page, which contains additional information on the Fund's strategy and
operation, including a description of the new information that we intend to post
to the Fund's web site in the near future, and discussion of a possible change
in the Fund's name.

Sincerely,

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

June 30, 2003

QUESTIONS & ANSWERS

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

The following chart shows the relationship between the market price of the
Fund's shares and its net asset value ("NAV"). Recently, the share price has
been flat while the NAV has been rising. You might expect the share price to
track the NAV, although obviously this is not always the case.

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

PREFERRED INCOME FUND PREMIUM/DISCOUNT OF MARKET PRICE TO NAV

Date Prem/Disc
12/27/91
1/3/92
1/10/92
1/17/92
1/24/92
1/31/92
2/7/92
2/14/92
2/21/92 0.0726
2/28/92 0.0805
3/6/92 0.0874
3/13/92 0.0980
3/20/92 0.0819
3/27/92 0.0556
4/3/92 0.0538
4/10/92 0.0705
4/17/92 0.0547
4/24/92 0.0590
5/1/92 0.0546
5/8/92 0.0536
5/15/92 0.0306
5/22/92 0.0248
5/29/92 0.0307
6/5/92 0.0181
6/12/92 0.0400
6/19/92 0.0357
6/26/92 0.0442
7/3/92 0.0475
7/10/92 0.0626
7/17/92 0.0800
7/24/92 0.0592
7/31/92 0.0647
8/7/92 0.0613
8/14/92 0.0628
8/21/92 0.0514
8/28/92 0.0539
9/4/92 0.0409
9/11/92 0.0684
9/18/92 0.0572
9/25/92 0.0539
10/2/92 0.0620
10/9/92 0.0675
10/16/92 0.0490
10/23/92 0.0188
10/30/92 0.0474
11/6/92 0.0180
11/13/92 0.0188
11/20/92 0.0408
11/27/92 0.0844
12/4/92 0.0630
12/11/92 0.0515
12/18/92 0.0691
12/25/92 0.0638
1/1/93 0.0621
1/8/93 0.0679
1/15/93 0.0595
1/22/93 0.0434
1/29/93 0.0475
2/5/93 0.0483
2/12/93 0.0284
2/19/93 0.0202
2/26/93 0.0310
3/5/93 0.0473
3/12/93 0.0651
3/19/93 0.0303
3/26/93 0.0360
4/2/93 0.0514
4/9/93 0.0675
4/16/93 0.0570
4/23/93 0.0853
4/30/93 0.0651
5/7/93 0.0513
5/14/93 0.0610
5/21/93 0.0570
5/28/93 0.0441
6/4/93 0.0497
6/11/93 0.0561
6/18/93 0.0497
6/25/93 0.0417
7/2/93 0.0472
7/9/93 0.0425
7/16/93 0.0362
7/23/93 0.0068
7/30/93 0.0306
8/6/93 0.0212
8/13/93 0.0181
8/20/93 0.0008
8/27/93 0.0370
9/3/93 0.0331
9/10/93 0.0401
9/17/93 0.0338
9/24/93 0.0244
10/1/93 0.0214
10/8/93 0.0261
10/15/93 0.0263
10/22/93 0.0246
10/29/93 0.0090
11/5/93 0.0000
11/12/93 -0.0107
11/19/93 -0.0282
11/26/93 -0.0179
12/3/93 -0.0076
12/10/93 -0.0334
12/17/93 -0.0338
12/24/93 -0.0431
12/31/93 0.0249
1/7/94 -0.0036
1/14/94 0.0157
1/21/94 -0.0230
1/28/94 -0.0377
2/4/94 -0.0323
2/11/94 -0.0361
2/18/94 -0.0863
2/25/94 -0.0500
3/4/94 -0.0392
3/11/94 -0.0315
3/18/94 -0.0585
3/25/94 -0.0562
4/1/94 -0.0556
4/8/94 -0.0612
4/15/94 -0.0771
4/22/94 -0.1012
4/29/94 -0.1145
5/6/94 -0.0775
5/13/94 -0.0633
5/20/94 -0.0636
5/27/94 -0.0312
6/3/94 -0.0683
6/10/94 -0.0288
6/17/94 -0.0457
6/24/94 -0.0393
7/1/94 -0.0409
7/8/94 -0.0450
7/15/94 -0.0490
7/22/94 -0.0294
7/29/94 -0.0327
8/5/94 -0.0221
8/12/94 -0.0303
8/19/94 -0.0269
8/26/94 -0.0348
9/2/94 -0.0204
9/9/94 -0.0318
9/16/94 -0.0409
9/23/94 -0.0628
9/30/94 -0.0620
10/7/94 -0.1322
10/14/94 -0.1149
10/21/94 -0.1410
10/28/94 -0.1040
11/4/94 -0.0786
11/11/94 -0.0976
11/18/94 -0.0990
11/25/94 -0.0770
12/2/94 -0.0402
12/9/94 -0.0868
12/16/94 -0.0732
12/23/94 -0.0604
12/30/94 -0.0851
1/6/95 -0.0010
1/13/95 -0.0141
1/20/95 -0.0303
1/27/95 -0.0619
2/3/95 -0.0119
2/10/95 -0.0314
2/17/95 -0.0702
2/24/95 -0.0376
3/3/95 -0.0297
3/10/95 -0.0585
3/17/95 -0.0523
3/24/95 -0.0534
3/31/95 -0.0393
4/7/95 -0.0341
4/14/95 -0.0393
4/21/95 -0.0690
4/28/95 -0.0341
5/5/95 -0.0576
5/12/95 -0.0501
5/19/95 -0.0933
5/26/95 -0.0753
6/2/95 -0.0481
6/9/95 -0.0729
6/16/95 -0.0702
6/23/95 -0.0749
6/30/95 -0.0686
7/7/95 -0.0690
7/14/95 -0.0869
7/21/95 -0.1087
7/28/95 -0.0911
8/4/95 -0.0973
8/11/95 -0.1018
8/18/95 -0.1011
8/25/95 -0.0780
9/1/95 -0.0706
9/8/95 -0.0833
9/15/95 -0.0710
9/22/95 -0.0749
9/29/95 -0.0641
10/6/95 -0.0718
10/13/95 -0.1006
10/20/95 -0.0909
10/27/95 -0.1012
11/3/95 -0.1232
11/10/95 -0.0962
11/17/95 -0.1071
11/24/95 -0.1093
12/1/95 -0.1014
12/8/95 -0.1277
12/15/95 -0.1233
12/22/95 -0.1265
12/29/95 -0.1454
1/5/96 -0.1197
1/12/96 -0.1279
1/19/96 -0.1312
1/26/96 -0.1146
2/2/96 -0.1233
2/9/96 -0.1233
2/16/96 -0.1279
2/23/96 -0.1303
3/1/96 -0.1124
3/8/96 -0.1465
3/15/96 -0.1508
3/22/96 -0.1487
3/29/96 -0.1515
4/5/96 -0.1315
4/12/96 -0.1286
4/19/96 -0.1279
4/26/96 -0.1383
5/3/96 -0.1257
5/10/96 -0.1130
5/17/96 -0.1408
5/24/96 -0.1386
5/31/96 -0.1386
6/7/96 -0.1255
6/14/96 -0.1337
6/21/96 -0.1301
6/28/96 -0.0918
7/5/96 -0.1079
7/12/96 -0.0911
7/19/96 -0.1122
7/26/96 -0.0939
8/2/96 -0.0876
8/9/96 -0.0688
8/16/96 -0.0673
8/23/96 -0.0881
8/30/96 -0.0836
9/6/96 -0.0836
9/13/96 -0.0661
9/20/96 -0.0889
9/27/96 -0.0991
10/4/96 -0.0876
10/11/96 -0.0876
10/18/96 -0.0935
10/25/96 -0.0834
11/1/96 -0.0796
11/8/96 -0.0932
11/15/96 -0.0726
11/22/96 -0.0586
11/29/96 -0.0608
12/6/96 -0.0792
12/13/96 -0.0813
12/20/96 -0.1009
12/27/96 -0.0837
1/3/97 -0.0693
1/10/97 -0.0562
1/17/97 -0.0693
1/24/97 -0.0834
1/31/97 -0.0678
2/7/97 -0.0623
2/14/97 -0.0551
2/21/97 -0.0645
2/28/97 -0.0605
3/7/97 -0.0581
3/14/97 -0.0654
3/21/97 -0.0715
3/28/97 -0.0715
4/4/97 -0.0573
4/11/97 -0.0973
4/18/97 -0.0806
4/25/97 -0.0748
5/2/97 -0.0672
5/9/97 -0.0520
5/16/97 -0.0647
5/23/97 -0.0573
5/30/97 -0.0362
6/6/97 -0.0615
6/13/97 -0.0385
6/20/97 -0.0473
6/27/97 -0.0418
7/4/97 -0.0498
7/11/97 -0.0585
7/18/97 -0.0486
7/25/97 -0.0630
8/1/97 -0.0273
8/8/97 -0.0701
8/15/97 -0.0715
8/22/97 -0.0767
8/29/97 -0.0472
9/5/97 -0.0580
9/12/97 -0.0656
9/19/97 -0.0557
9/26/97 -0.0492
10/3/97 -0.0292
10/10/97 -0.0492
10/17/97 -0.0506
10/24/97 -0.0574
10/31/97 -0.0477
11/7/97 -0.0442
11/14/97 -0.0377
11/21/97 -0.0688
11/28/97 -0.0484
12/5/97 -0.0406
12/12/97 -0.0652
12/19/97 -0.0648
12/26/97 -0.0456
1/2/98 -0.0171
1/9/98 -0.0197
1/16/98 -0.0185
1/23/98 -0.0620
1/30/98 -0.0477
2/6/98 -0.0530
2/13/98 -0.0604
2/20/98 -0.0456
2/27/98 -0.0477
3/6/98 -0.0473
3/13/98 -0.0568
3/20/98 -0.0487
3/27/98 -0.0579
4/3/98 -0.0682
4/10/98 -0.0508
4/17/98 -0.0620
4/24/98 -0.0768
5/1/98 -0.0618
5/8/98 -0.0540
5/15/98 -0.0717
5/22/98 -0.0664
5/29/98 -0.0648
6/5/98 -0.0643
6/12/98 -0.0627
6/19/98 -0.0573
6/26/98 -0.0600
7/3/98 -0.0575
7/10/98 -0.0562
7/17/98 -0.0563
7/24/98 -0.0465
7/31/98 -0.0526
8/7/98 -0.0472
8/14/98 -0.0864
8/21/98 -0.0954
8/28/98 -0.0540
9/4/98 -0.0618
9/11/98 -0.0487
9/18/98 -0.0392
9/25/98 -0.0402
10/2/98 -0.0554
10/9/98 -0.0744
10/16/98 -0.0485
10/23/98 -0.0406
10/30/98 -0.0616
11/6/98 -0.0396
11/13/98 -0.0481
11/20/98 -0.0641
11/27/98 -0.0478
12/4/98 -0.0413
12/11/98 -0.0363
12/18/98 -0.0537
12/25/98 -0.0132
1/1/99 -0.0196
1/8/99 -0.0297
1/15/99 -0.0392
1/22/99 -0.0627
1/29/99 -0.0677
2/5/99 -0.0610
2/12/99 -0.0887
2/19/99 -0.0937
2/26/99 -0.1078
3/5/99 -0.0846
3/12/99 -0.0650
3/19/99 -0.1022
3/26/99 -0.0888
4/2/99 -0.0724
4/9/99 -0.1029
4/16/99 -0.0781
4/23/99 -0.0930
4/30/99 -0.1156
5/7/99 -0.1015
5/14/99 -0.1277
5/21/99 -0.1256
5/28/99 -0.1093
6/4/99 -0.1007
6/11/99 -0.0558
6/18/99 -0.0835
6/25/99 -0.0602
7/2/99 -0.0532
7/9/99 -0.0532
7/16/99 -0.0761
7/23/99 -0.0558
7/30/99 -0.0829
8/6/99 -0.0464
8/13/99 -0.0780
8/20/99 -0.0864
8/27/99 -0.0345
9/3/99 -0.1057
9/10/99 -0.0938
9/17/99 -0.0683
9/24/99 -0.0401
10/1/99 -0.0770
10/8/99 -0.0860
10/15/99 -0.1231
10/22/99 -0.1254
10/29/99 -0.1223
11/5/99 -0.1192
11/12/99 -0.1252
11/19/99 -0.0826
11/26/99 -0.0979
12/3/99 -0.0970
12/10/99 -0.0807
12/17/99 -0.1118
12/24/99 -0.1212
12/31/99 -0.0354
1/7/00 -0.0028
1/14/00 -0.0385
1/21/00 -0.0996
1/28/00 -0.1047
2/4/00 -0.0923
2/11/00 -0.0845
2/18/00 -0.1038
2/25/00 -0.0962
3/3/00 -0.1021
3/10/00 -0.0858
3/17/00 -0.1055
3/24/00 -0.1272
3/31/00 -0.1361
4/7/00 -0.1047
4/14/00 -0.0894
4/21/00 -0.0781
4/28/00 -0.0640
5/5/00 -0.0385
5/12/00 -0.0566
5/19/00 -0.0734
5/26/00 -0.0759
6/2/00 -0.0905
6/9/00 -0.1037
6/16/00 -0.0943
6/23/00 -0.0775
6/30/00 -0.0841
7/7/00 -0.0909
7/14/00 -0.0893
7/21/00 -0.0970
7/28/00 -0.0927
8/4/00 -0.0912
8/11/00 -0.0879
8/18/00 -0.1046
8/25/00 -0.1046
9/1/00 -0.1105
9/8/00 -0.1113
9/15/00 -0.0836
9/22/00 -0.1189
9/29/00 -0.1155
10/6/00 -0.0896
10/13/00 -0.0921
10/20/00 -0.0895
10/27/00 -0.0725
11/3/00 -0.0739
11/10/00 -0.0747
11/17/00 -0.0962
11/24/00 -0.0937
12/1/00 -0.0928
12/8/00 -0.0903
12/15/00 -0.0913
12/22/00 -0.0672
12/29/00 -0.0276
1/5/01 -0.0411
1/12/01 -0.0200
1/19/01 -0.0077
1/26/01 0.0192
2/2/01 -0.0528
2/9/01 -0.0346
2/16/01 -0.0184
2/23/01 -0.0257
3/2/01 -0.0109
3/9/01 -0.0360
3/16/01 -0.0393
3/23/01 -0.0360
3/30/01 -0.0109
4/6/01 0.0200
4/13/01 0.0046
4/20/01 0.0243
4/27/01 -0.0278
5/4/01 -0.0218
5/11/01 0.0037
5/18/01 -0.0228
5/25/01 -0.0111
6/1/01 -0.0345
6/8/01 -0.0325
6/15/01 -0.0654
6/22/01 -0.0623
6/29/01 -0.0379
7/6/01 -0.0307
7/13/01 -0.0098
7/20/01 -0.0264
7/27/01 0.0237
8/3/01 0.0035
8/10/01 -0.0567
8/17/01 -0.0439
8/24/01 -0.0365
8/31/01 -0.0603
9/7/01 -0.0353
9/14/01 -0.0353
9/21/01 0.0000
9/28/01 -0.0414
10/5/01 -0.0433
10/12/01 -0.0114
10/19/01 -0.0191
10/26/01 -0.0138
11/2/01 0.0017
11/9/01 -0.0068
11/16/01 0.0260
11/23/01 0.0304
11/30/01 -0.0284
12/7/01 -0.0009
12/14/01 -0.0201
12/21/01 0.0210
12/28/01 0.0289
1/4/02 0.0297
1/11/02 0.0276
1/18/02 0.0268
1/25/02 0.0677
2/1/02 0.0444
2/8/02 0.0607
2/15/02 0.0457
2/22/02 0.0582
3/1/02 0.0595
3/8/02 0.0124
3/15/02 0.0302
3/22/02 0.0383
3/29/02 0.0400
4/5/02 0.0248
4/12/02 0.0409
4/19/02 0.0394
4/26/02 0.0526
5/3/02 0.0839
5/10/02 0.0595
5/17/02 0.0858
5/24/02 0.0757
5/31/02 0.0766
6/7/02 0.0832
6/14/02 0.0670
6/21/02 0.0743
6/28/02 0.0933
7/5/02 0.1238
7/12/02 0.0692
7/19/02 0.0972
7/26/02 0.1421
8/2/02 0.1372
8/9/02 0.1002
8/16/02 0.1195
8/23/02 0.1206
8/30/02 0.1077
9/6/02 0.1002
9/13/02 0.0965
9/20/02 0.0993
9/27/02 0.1042
10/4/02 0.1141
10/11/02 0.1429
10/18/02 0.0519
10/25/02 0.0741
11/1/02 0.0733
11/8/02 0.0721
11/15/02 0.0664
11/22/02 0.0610
11/29/02 0.0872
12/6/02 0.0972
12/13/02 0.1086
12/20/02 0.1278
12/27/02 0.1558
1/3/03 0.1518
1/10/03 0.0930
1/17/03 0.1092
1/24/03 0.0865
1/31/03 0.1038
2/7/03 0.0983
2/14/03 0.0960
2/21/03 0.1148
2/28/03 0.0969
3/7/03 0.1258
3/14/03 0.1585
3/21/03 0.0897
3/28/03 0.1033
4/4/03 0.1225
4/11/03 0.1477
4/18/03 0.1463
4/25/03 0.1211
5/2/03 0.0989
5/9/03 0.0553
5/16/03 0.0330
5/23/03 0.0145
5/30/03 0.0486

The calculation of total return based upon the NAV is a straightforward
measurement of the job management is doing. The linkage to performance based
upon share price is less direct. While we continually promote the Fund's shares,
the strongest endorsement comes from an evaluation of the NAV performance.

WHAT IS THE OUTLOOK FOR THE DIVIDEND PAID BY THE FUND?

The recent decline in interest rates has had two offsetting impacts. First,
the rate that the Fund is paying on its MMP(TM) shares has declined, saving a
substantial sum. Second, the income earned by the Fund is a bit lower than
projected, as we have purchased securities at lower yields. For now, these two
have roughly offset, and, at this point, we remain comfortable with the Fund's
current dividend rate.

HOW WILL THE NEW TAX LAW TREAT PREFERRED SECURITIES?

On May 28, 2003, President Bush signed the Jobs and Growth Tax Relief
Reconciliation Act of 2003. The cornerstone of the Act is a provision to lower
the maximum rate paid by individuals on certain types of qualified dividend
income ("QDI") to 15%. Prior to this legislation, dividend income was typically
taxed at the same rate as ordinary income.

Back in January, the Bush Administration proposed eliminating the double
taxation of dividends. When a company distributes a dividend to its
shareholders, it does so with income left over after it has already paid taxes.
Prior to the new legislation, shareholders were required to pay taxes at their
maximum tax rate on that same dividend. So a dollar earned by a company could be
taxed twice if it was distributed to the shareholders of the company. By
lowering the tax rate, the new law reduces, but doesn't eliminate, this double
taxation.

To be eligible for the lower tax rate as QDI, the dividend must be paid
from the company's after-tax income. For this reason, it is important to
understand the difference between taxable (or "hybrid") preferred securities and
traditional preferred stock. Hybrid preferreds pay interest, which the issuer
can deduct from revenue in determining its taxable income. Traditional
preferreds pay dividends, which are distributed from income after taxes have
been paid. Because of the different tax treatment, hybrid preferred securities
normally have a higher yield than traditional preferred stocks.

For the investor, interest from hybrids is taxed as ordinary income, while
dividends from traditional preferreds may be taxed at the new, lower rate. As a
result, an investor in a low tax bracket or an IRA investor is more likely to
purchase taxable preferreds for the higher pre-tax income, while an investor in
a high tax bracket may prefer the QDI issue for the higher after-tax income. But
this isn't always the case. The market tends to offset the tax impact pretty
effectively, and securities that pay QDI will usually yield less (before taxes)
than those that pay interest.

HOW WILL THE NEW TAX LAW IMPACT THE FUND?

We take all of this into consideration when making investments for the
Fund. The Fund's investment objective is high current income, but that doesn't
mean we will always own the securities with the highest yields. In recent years,
the portion of the portfolio in traditional preferred stock has been steadily
increasing. Traditional preferreds typically yield less than hybrid preferreds,
but if that differential is small (as it was during this period), traditional
preferreds can be more attractive.

The Fund's cost for its leverage may also be lower if more of the income
from the portfolio comes from traditional preferreds. This is because the Fund
must make additional payments to the holders of its MMP(TM) if some of the
income distributed to them is from hybrid preferreds.

The allocation between traditional and hybrid preferreds is likely to
change over time. Investors should NOT assume that there is a target level for
traditional preferreds or other securities that pay QDI. The Fund will own these
securities when we think they are more attractive than hybrid preferreds, taking
all factors, including taxes, into account (even if the yield is lower). But if
we are right, and relationships move back in line, we are likely to sell the
traditional preferreds and buy hybrid preferreds.

HOW WILL THE FUND REPORT THE BREAKDOWN BETWEEN DIVIDENDS AND INTEREST?

At the end of the year, the Fund will calculate the breakdown according to
the new rules and expects to report it to shareholders on Form 1099. We will
also publish the breakdown on the Fund's web site and in the Annual Report to
Shareholders.

CAN I REINVEST DIVIDENDS DIRECTLY INTO THE FUND?

Yes, the Fund's Dividend Reinvestment Plan (the "DRIP") provides a means of
acquiring additional shares of the Fund without paying the full market premium.
When the market price is at or above NAV, DRIP participants' dividends are
reinvested into new shares acquired directly from the Fund at NAV. The only
limitation is the IRS rule that the purchase cannot be more than 5% below the
market price. If the shares are selling at a discount from NAV, reinvestments
are executed in the market to take advantage of the discount.

More information on the DRIP is available. If your shares are held in a
brokerage account, ask your broker if his/her firm is set up to participate. If
you hold your shares in certificate form, or if you would just like more
information, call the DRIP's agent, PFPC Inc., at 1-800-331-1710.

DOES THE FUND HAVE A WEB SITE?

Once again, we want to put in a plug for www.preferredincome.com, the web
site for the Preferred Income Group of closed-end funds. You can find current
information there on market prices, net asset values, discounts, yields,
dividends, performance and portfolio holdings, as well as news items and general
information about the Fund. In the near future, we intend to post on a monthly
basis the industry concentrations, the percent of the portfolio holdings rated
investment grade by at least one of the rating agencies (Moody's and S&P), and
the month-end NAV. We will also post monthly the Fund's 1940 Act asset coverage
ratio, which calculates the ratio of the liquidation value of the Fund's Money
Market Cumulative Preferred(TM)Stock (MMP(TM)) relative to the Fund's total net
assets. We continue to improve the site, but we need to know what additionally
would be helpful. Please let us hear from you.

IS THE FUND CONSIDERING CHANGING ITS NAME?

Yes. Fund management thinks it is important to have a name that more
effectively distinguishes it from the myriad of other preferred funds. To
minimize the chances of confusion, we are considering changing the name to one
that is more clearly associated with the adviser.

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

TOTAL DIVIDEND
DIVIDENDS NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE (1)
--------- --------- ------------- ------------

December 31, 2002 EXTRA ............... 0.1285 13.65 15.10 14.35
December 31, 2002 ..................... 0.0915 13.65 15.10 14.35
January 31, 2003 ...................... 0.0915 14.45 16.70 15.87
February 28, 2003 ..................... 0.0915 14.55 16.42 15.60
March 31, 2003 ........................ 0.0915 14.64 16.10 15.30
April 30, 2003 ........................ 0.0915 14.83 16.20 15.39
May 31, 2003 .......................... 0.0915 15.54 16.63 15.80

-------------
(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.

The accompanying notes are an integral part of the financial statements.

--------------------------------------------------------------------------------
Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS
MAY 31, 2003 (UNAUDITED)
----------------------------------------
VALUE
SHARES/$PAR (NOTE 2)
----------- -----------

PREFERRED SECURITIES -- 94.2%
ADJUSTABLE RATE PREFERRED SECURITIES -- 9.5%
BANKING -- 9.1%
75,000 Cobank,
Adj. Rate Pfd., Pvt. 144A*** ............ $ 4,125,000*
J.P. Morgan Chase & Co.:
121,675 Series A, Adj. Rate Pfd. ................ 11,984,988*
24,000 Series L, Adj. Rate Pfd. ................ 2,370,000*
129,200 Series N, Adj. Rate Pfd. ................ 3,238,075*
-----------
TOTAL BANKING ADJUSTABLE RATE
PREFERRED SECURITIES ..................... 21,718,063
-----------

FINANCIAL SERVICES -- 0.2%
10,500 Bear Stearns Companies, Inc.,
Series A, Adj. Rate Pfd. ................ 530,906*
-----------

UTILITIES -- 0.2%
7,465 Northern Indiana Public Service Company,
Series A, Adj. Rate Pfd. ................ 370,451*
-----------
TOTAL ADJUSTABLE RATE
PREFERRED SECURITIES ..................... 22,619,420
-----------

FIXED RATE PREFERRED SECURITIES -- 84.2%
BANKING -- 19.8%
ABN AMRO North America, Inc.:
1,375 6.46% Pfd., Pvt., 144A*** ............... 1,524,579*
1,000 6.59% Pfd., Pvt., 144A*** ............... 1,101,305*
BancWest Corporation:
400 BancWest Capital I,
9.50% 12/01/30 QUIPS .................... 11,648
$2,250,000 First Hawaiian Capital I,
8.343% 7/1/27 Capital Security,
Series B ................................ 2,773,935
Bank of America Corporation:
$ 750,000 Barnett Capital II,
7.95% 12/01/26 Capital Security ......... 897,727
$ 674,000 NB Capital Trust II,
7.83% 12/15/26 Capital Security ......... 806,384
Citigroup, Inc.:
151,177 5.864% Pfd., Series M ................... 7,985,169*
12,276 6.213% Pfd., Series G ................... 665,789*
17,850 6.231% Pfd., Series H ................... 970,861*

VALUE
SHARES/$PAR (NOTE 2)
----------- -----------

Comerica, Inc.:
$ 500,000 Comerica (Imperial) Capital Trust I,
Series B,
9.98% 12/31/26 Capital Security ......... $ 647,710
Deutsche Bank:
$1,000,000 BT Preferred Capital Trust II,
7.875% 2/25/27 Capital Security ......... 1,154,535
2,800 Firstar Realty LLC,
8.875% Pfd., REIT, Pvt., 144A*** ........ 3,741,836
GreenPoint Financial Corporation:
$7,820,000 GreenPoint Capital Trust I,
9.10% 6/1/27 Capital Security ........... 9,460,871
HSBC USA, Inc.:
34,200 $2.8575 Pfd. ............................ 1,800,288*
$2,635,000 Republic New York Capital II,
7.53% 12/4/26
Capital Security, STOPS ................. 2,984,546
$ 270,000 Keycorp Institutional Capital B,
8.25% 12/15/26 Capital Security ......... 327,363
16,500 Regions Financial Trust I,
8.00% 2/28/31 Pfd. ...................... 453,915
Wachovia Corporation:
$1,500,000 First Union Capital II,
7.95% 11/15/29 Capital Security ......... 1,938,743
$2,906,000 First Union Institutional Capital I,
8.04% 12/1/26 Capital Security .......... 3,530,601
$1,820,000 First Union Institutional Capital II,
7.85% 1/1/27 Capital Security ........... 2,182,162
$1,500,000 Wachovia Cap Trust V,
7.965% 6/01/27 Capital Security,
Pvt. 144A*** ............................ 1,811,550
7,500 Wachovia Preferred Funding,
7.25% Pfd., Series A, REIT .............. 207,375
-----------
TOTAL BANKING FIXED RATE
PREFERRED SECURITIES ..................... 46,978,892
-----------

FINANCIAL SERVICES -- 10.5%
Bear Stearns Companies, Inc.:
96,000 5.49% Pfd., Series G .................... 4,932,000*
32,540 5.72% Pfd., Series F .................... 1,725,921*
Lehman Brothers Holdings, Inc.:
65,400 5.67% Pfd., Series D .................... 3,415,188*
151,275 5.94% Pfd., Series C .................... 8,053,125*

The accompanying notes are an intregal part of the financial statements.

--------------------------------------------------------------------------------
Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2003 (UNAUDITED)
--------------------------------------------------------

VALUE
SHARES/$PAR (NOTE 2)
----------- -----------

PREFERRED SECURITIES (CONTINUED)
FIXED RATE PREFERRED SECURITIES (CONTINUED)
FINANCIAL SERVICES (CONTINUED)
123,805 SLM Corporation,
6.97% Pfd., Series A .................... $ 6,909,557*
-----------
TOTAL FINANCIAL SERVICES FIXED
RATE PREFERRED SECURITIES ................ 25,035,791
-----------
INSURANCE -- 9.8%
47,000 ACE Ltd.,
7.80% Pfd., Series C .................... 1,226,465
AON Corporation:
$1,645,000 AON Capital Trust A,
8.205% 1/1/27 Capital Security .......... 1,919,205
Conseco, Inc.:
29,350 Conseco Financing Trust V,
8.70% TOPrS ............................. 4,550+
75,000 Conseco Financing Trust VI,
9.00% TOPrS ............................. 11,625+
14,850 Conseco Financing Trust I,
9.16% TOPrS ............................. 2,450+
1,250 Fortis Funding Trust,
7.68% Pfd., Pvt., 144A*** ............... 1,467,775*
11,200 Hartford Cap I,
7.70% Pfd., Series A 285,544
SAFECO Corporation:
$ 500,000 SAFECO Capital Trust I,
8.072% 7/15/37 Capital Security ........ 592,040
The St. Paul Companies, Inc.:
$5,800,000 MMI Capital Trust I,
7.625% 12/15/27 Capital Security,
Series B ................................ 6,237,465
12,000 St. Paul Capital Trust I,
7.60% Pfd. .............................. 313,320
UnumProvident Corporation:
$4,000,000 Provident Financing Trust I,
7.405% 3/15/38 Capital Security ......... 3,681,980
Zurich RegCaPS Fund Trust I:
6,500 6.01% Pfd., Pvt., 144A*** ............... 6,236,165*
1,200 6.58% Pfd., Pvt., 144A*** ............... 1,165,320*
-----------
TOTAL INSURANCE FIXED RATE
PREFERRED SECURITIES ...................... 23,143,904
-----------

VALUE
SHARES/$PAR (NOTE 2)
----------- -----------

UTILITIES -- 38.7%
Alabama Power Company:
5,734 4.72% Pfd. .............................. $ 545,160*
5 4.95% Pfd. .............................. 554,999*
91,100 5.20% Pfd. .............................. 2,355,390*
4,000 Appalachian Power Company,
5.92% Sinking Fund Pfd. ................. 410,120*
26,125 Avista Corporation,
$6.95 Sinking Fund Pfd., Series K ....... 2,392,136*
10,000 Boston Edison Company,
4.78% Pfd. .............................. 909,150*
10,357 Carolina Power & Light Company,
$5.44 Pfd. .............................. 1,041,811*
CenterPoint Energy, Inc.:
45,000 Houston Light & Power, Capital Trust I,
8.125% QUIPS ............................ 1,120,500
$3,500,000 Houston Light & Power, Capital Trust II,
8.257%, 2/1/37 Capital Security,
Series B ................................ 3,455,777
60,150 REI Trust I,
7.20% TOPrS, Series C ................... 1,439,089
Central Hudson Gas & Electric Corporation:
5,000 4.35% Pfd., Series D, Pvt. .............. 398,525*
750 4.96% Pfd., Series E, Pvt. .............. 68,164*
Central Illinois Light Company:
10,000 4.64% Pfd. .............................. 883,600*
10,000 5.85% Sinking Fund Pfd. ................. 1,049,950*
9,375 Central Vermont Public Service Corporation,
8.30% Pvt. Sinking Fund Pfd. ............ 1,004,625*
Connecticut Light & Power Company:
5,323 $3.24 Pfd. .............................. 274,880*
9,300 5.28% Pfd. .............................. 413,710*
200 6.56% Pfd., Series 1968 ................. 10,120*
2,100 Consolidated Edison Company of New York,
4.65% Pfd., Series C .................... 186,805*
6,870 Dayton Power and Light Company,
3.90% Pfd., Series C .................... 432,157*

The accompanying notes are an intregal part of the financial statements.

PREFERRED SECURITIES (CONTINUED)
FIXED RATE PREFERRED SECURITIES (CONTINUED)
UTILITIES (CONTINUED)
Duke Energy Corporation:
4,556 4.50% Pfd., Series C, Pvt. .............. $ 322,861*
31,965 6.75% Pfd., Series X,
Sinking Fund Pfd. ....................... 3,317,328*
519 7.04% Pfd., Series Y .................... 53,631*
25,762 7.85% Pfd., Series S .................... 2,673,452*
Duquesne Light Company:
5,490 $2.10 Pfd. Series A ..................... 170,547*
7,675 4.10% Pfd. .............................. 232,744*
6,330 4.15% Pfd. .............................. 194,331*
910 4.20% Pfd. .............................. 28,269*
5,000 Energy East Capital Trust I,
8.25% TOPrS ............................. 136,400
Entergy Arkansas, Inc.:
2,800 7.32% Pfd. .............................. 293,090*
11,350 7.40% Pfd. .............................. 1,183,975*
1,322 7.88% Pfd. .............................. 138,142*
30,000 $1.96 Pfd. .............................. 762,000*
4,440 Entergy Gulf States, Inc.,
7.56% Pfd. .............................. 445,110*
Entergy Louisiana, Inc.:
260 7.84% Pfd. .............................. 27,218*
106,138 8.00% Pfd., Series 92 ................... 2,719,256*
8,500 Entergy Mississippi, Inc.,
7.44% Pfd. .............................. 881,832*
Florida Power Company:
4,348 4.58% Pfd. .............................. 377,993*
2,657 4.60% Pfd. .............................. 230,880*
Florida Power & Light Company:
6,000 4.32% Pfd., Series D .................... 493,620*
5,350 4.35% Pfd., Series E, Pvt. .............. 439,075*
170 4.50% Pfd., Series A, Pvt. .............. 14,432*
50,000 Georgia Power Capital Trust V,
7.125% Pfd. ............................. 1,360,000
2,010 Great Plains Energy, Inc.,
4.50% Pfd. .............................. 148,418*
Hawaiian Electric Company, Inc.:
20,000 HECO Capital Trust I,
8.05% QUIPS ............................. 510,300

VALUE
SHARES/$PAR (NOTE 2)
----------- -----------

2,717 Idaho Power Co.,
7.68% Pfd., Series 1 .................... $ 281,277*
8,000 Indiana Michigan Power Company,
6.875% Sinking Fund Pfd. ................ 810,720*
32,650 Indianapolis Power & Light Company,
5.65% Pfd. .............................. 2,627,999*
384,000 Interstate Power & Light Company,
8.375% Pfd., Series B ................... 11,339,520*
4,500 Kentucky Utilities Company,
6.53% Pfd. .............................. 471,128*
5,000 Mississippi Power Company,
7.00% Pfd. .............................. 522,300*
22,000 Monongahela Power Company,
$7.73 Pfd., Series L .................... 1,878,140*
14,250 Narragansett Electric Company,
4.64% Pfd. .............................. 614,674*
3,905 Northern Indiana Public Service Company,
7.44% Pfd. .............................. 399,618*
Northern States Power Company,
11,000 NSP Financing I,
7.875% Pfd., TOPrS ..................... 280,720
6,170 Ohio Edison Company,
4.44% Pfd. .............................. 413,729*
2,500 Ohio Power Company,
5.90% Sinking Fund Pfd. .................. 250,500*
PECO Energy Company:
5,000 $4.40 Pfd., Series C .................... 385,275*
67,500 $7.48 Pfd. .............................. 7,059,488*
5,000 PPL Electric Utilities Corporation,
6.75% Pfd. .............................. 523,625*
9,410 PSI Energy, Inc.,
4.32% Pfd. .............................. 183,166*
PacifiCorp:
1,225 $4.56 Pfd. .............................. 95,072*
6,618 $4.72 Pfd. .............................. 531,657*
2,750 $7.48 Sinking Fund Pfd. ................. 293,838*
86,350 8.25% QUIPS ............................. 2,215,309
Pacific Enterprises:
18,830 $4.50 Pfd. .............................. 1,485,969*
10,000 $4.75 Pfd., Series 53 ................... 833,050*
790 Pennsylvania Power Company,
7.75% Pfd. .............................. 80,165*

The accompanying notes are an intregal part of the financial statements.

VALUE
SHARES/$PAR (NOTE 2)
----------- -----------

PREFERRED SECURITIES (CONTINUED)
FIXED RATE PREFERRED SECURITIES (CONTINUED)
UTILITIES (CONTINUED)
14,250 Portland General Electric,
7.75%, Sinking Fund Pfd. ................ $ 1,452,218*
29,500 Public Service Company of Colorado,
Capital Trust I, 7.60% TOPrS ............ 754,315
10,000 Public Service Company of New Mexico,
4.58% Pfd., Pvt. ........................ 617,050*
10,800 Public Service Enterprise Group, Inc.,
Enterprise Capital Trust I,
7.44% TOPrS, Series A ................... 270,162
29,846 Puget Sound Energy, Inc.,
7.75% Sinking Fund Pfd. ................. 3,167,556*
Rochester Gas & Electric Corporation:
4,984 4.10% Pfd., Series H .................... 339,211*
10,000 4.55% Pfd., Series M, Pvt. .............. 755,300*
San Diego Gas & Electric Company:
40,000 $1.70 Pfd ............................... 1,041,000*
23,750 $1.7625 Sinking Fund Pfd. ............... 637,688*
1,200 4.40% Pfd. .............................. 18,606*
South Carolina Electric & Gas Company:
25,373 5.125% Purchase Fund Pfd., Pvt. ......... 1,186,695*
6,703 6.00% Purchase Fund Pfd., Pvt. .......... 336,424*
60,400 Southern Union Company,
Southern Union Financing I,
9.48% TOPrS ............................. 1,569,796
TXU US Holdings Company:
23,500 $6.98, Sinking Fund Pfd. ................ 2,416,858*
$ 750,000 TXU Electric Capital V,
8.175% 1/30/37 Capital Security ......... 824,831
8,150 Union Electric Company,
4.56% Pfd. .............................. 690,590*
Xcel Energy, Inc.:
16,030 $4.08 Pfd., Series B .................... 1,039,065*
26,200 $4.10 Pfd., Series C .................... 1,693,437*
22,000 $4.11 Pfd., Series D .................... 1,425,380*
17,750 $4.16 Pfd., Series E .................... 1,163,956*
10,000 $4.56 Pfd., Series G .................... 697,350*
-----------
TOTAL UTILITIES FIXED RATE
PREFERRED SECURITIES ..................... 91,775,999
-----------

VALUE
SHARES/$PAR (NOTE 2)
----------- -----------

OIL AND GAS -- 3.3%
17,200 Anadarko Petroleum Corporation,
5.46% Pfd. .............................. $ 1,794,562*
36,300 Apache Corporation,
5.68% Pfd., Series B .................... 3,826,564*
1,860 EOG Resources, Inc.,
7.195% Pfd., Series B ................... 2,141,381*
-----------
TOTAL OIL AND GAS FIXED RATE
PREFERRED SECURITIES ..................... 7,762,507
-----------

MISCELLANEOUS INDUSTRIES-- 2.1%
13,600 E.I. Du Pont de Nemours and Company,
$4.50 Pfd., Series B .................... 1,324,096*
36,200 Farmland Industries, Inc.,
8.00% Pfd., Pvt., 144A*** ............... 298,650*+
23,250 Ocean Spray Cranberries, Inc.,
6.25% Pfd., Pvt., 144A*** ............... 2,063,089*
26,000 Touch America Holdings,
$6.875 Pfd. ............................. 627,250*+
9,520 Viad Corporation,
$4.75 Sinking Fund Pfd. ................. 659,450*
-----------
TOTAL MISCELLANEOUS
INDUSTRIES FIXED RATE
PREFERRED SECURITIES ..................... 4,972,535
-----------
TOTAL FIXED RATE
PREFERRED SECURITIES ..................... 199,669,628
-----------
INVERSE FLOATING RATE PREFERRED -- 0.5%
14 Premium Assets, Series A,
Zurich Financial Reg. Capital ........... 1,259,546*
-----------
TOTAL PREFERRED SECURITIES
(Cost $200,062,143) ...................... 223,548,594
-----------

The accompanying notes are an intregal part of the financial statements.

CORPORATE DEBT SECURITIES -- 0.9%
UTILITIES -- 0.9%
45,000 Northern States Power Company,
8.00% PINES ............................. $ 1,229,850
36,200 Ohio Power Company,
7.375% Sr. Notes ........................ 923,824
-----------
TOTAL CORPORATE DEBT SECURITIES
(Cost $1,980,700) ........................ 2,153,674
-----------

COMMON STOCKS AND CONVERTIBLE SECURITIES -- 3.2%
115,000 Allegheny Energy, Inc. .................... 997,625*+
5,000 American Electric Power,
9.25% Pfd., Convertible ................. 215,550
102,500 CenterPoint Energy, Inc. .................. 976,312*
107,500 Duke Energy Corporation ................... 2,077,438*
27,500 FPL Group, Inc.,
8.50% Pfd., Convertible ................. 1,628,413
80,831 Reliant Resources, Inc. ................... 543,588+
40,000 TXU Corporation,
8.75% Pfd., Convertible ................. 1,208,000
-----------

TOTAL COMMON STOCKS AND
CONVERTIBLE SECURITIES
(Cost $8,234,364) ........................ 7,646,926
-----------

OPTION CONTRACTS -- 0.4% (Cost $1,027,972)
1,150 Put Option on US Treasury
Bond September Futures,
Expiring 08/23/2003 ..................... 769,906+
-----------

VALUE
SHARES/$PAR (NOTE 2)
----------- -----------

MONEY MARKET FUND -- 0.7% (Cost $1,602,183)
1,602,183 BlackRock Provident
Institutional TempFund, 1.19% .......... $ 1,602,183
------------

TOTAL INVESTMENTS (Cost $212,907,362**) ... 99.4% $235,721,283
OTHER ASSETS AND LIABILITIES (Net) ........ 0.6% 1,540,096
---- ------------
TOTAL NET ASSETS AVAILABLE TO COMMON
AND PREFERRED STOCK ....................... 100.0%++ $237,261,379
----- ------------
MONEY MARKET CUMULATIVE PREFERRED
STOCK (MMP) REDEMPTION VALUE ......................... (80,000,000)

ACCUMULATED UNDECLARED DISTRIBUTIONS TO MMP .......... (72,001)
------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ........... $157,189,378
============
--------------
* Securities eligible for the Dividends Received Deduction.
** Aggregate cost of securities held.
*** Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration to qualified institutional buyers.
+ Non-income producing.
++ The percentage shown for each investment category is the total value of
that category as a percentage of net assets available to Common and
Preferred Stock.

ABBREVIATIONS (Note 7):
PINES -- Public Income Notes
QUIPS -- Quarterly Income Preferred Securities
REIT -- Real Estate Investment Trust
STOPS -- Semi-Annual Trust Originated Pass Through Securities
TOPRS -- Trust Originated Preferred Securities
PFD. -- Preferred Securities
PVT. -- Private Placement Securities

Capital Securities are treated as debt instruments for financial statement
purposes and the amounts shown in the Shares/$ Par column are dollar amounts of
par value.

The accompanying notes are an integral part of the financial statements.

--------------------------------------------------------------------------------
Preferred Income Fund Incorporated
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2003 (UNAUDITED)
------------------------------------

ASSETS:
Investments, at value (Cost $212,907,362)
(See accompanying schedule) ........................ $235,721,283
Dividends and interest receivable .................... 2,162,048
Prepaid expenses ..................................... 242,564
------------
Total Assets ................................. 238,125,895

LIABILITIES:
Payable for securities purchased ..................... $495,180
Dividends payable to Common Shareholders ............. 157,420
Investment advisory fee payable ...................... 110,181
Professional fees payable ............................ 33,594
Accrued expenses and other payables .................. 68,141
Accumulated undeclared distributions to Money Market
Cumulative Preferred(TM)Stock ...................... 72,001
--------
Total Liabilities ............................ 936,517
------------
MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (800 SHARES
OUTSTANDING) REDEMPTION VALUE ...................... 80,000,000
------------

NET ASSETS AVAILABLE TO COMMON STOCK .................... $157,189,378
============
NET ASSETS AVAILABLE TO COMMON STOCK consist of:
Distributions in excess of net investment income ..... $ (137,122)
Accumulated net realized (loss) on investments sold .. (10,788,659)
Unrealized appreciation of investments ............... 22,813,921
Par value of Common Stock ............................ 101,122
Paid-in capital in excess of par value of Common Stock 145,200,116
------------
Total Net Assets Available to Common Stock ... $157,189,378
============
NET ASSET VALUE PER SHARE OF COMMONS TOCK:
Common Stock (10,112,215 shares outstanding) ......... $ 15.54
============

The accompanying notes are an integral part of the financial statements.

--------------------------------------------------------------------------------
Preferred Income Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 2002 (UNAUDITED)
--------------------------------------------------------

INVESTMENT INCOME:
Dividends++ ........................................................ $ 5,952,012
Interest ........................................................... 1,576,743
-----------
Total Investment Income ....................................... 7,528,755

EXPENSES:
Investment advisory fee ............................................ $ 625,821
Administrator's fee ................................................ 112,699
Money Market Cumulative Preferred(TM)broker commissions and
auction agent fees .............................................. 107,163
Professional fees .................................................. 54,293
Insurance expense .................................................. 51,178
Shareholder servicing agent fees and expenses ...................... 41,480
Directors' fees and expenses ....................................... 38,233
Custodian fees and expenses ........................................ 14,944
Other .............................................................. 48,609
----------
Total Expenses ................................................ 1,094,420
-----------
NET INVESTMENT INCOME ................................................... 6,434,335
-----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
Net realized (loss) on investments sold during the period .......... (1,218,969)
Change in unrealized appreciation of investments during the period . 21,450,376
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS ......................... 20,231,407
-----------
DISTRIBUTIONS TO MONEY MARKET CUMULATIVE PREFERRED(TM)
STOCK SHAREHOLDERS:
From net investment income (including changes in
accumulated undeclared distributions) ........................... (590,408)
-----------
NET INCREASE IN NET ASSETS TO COMMON STOCK RESULTING
FROM OPERATIONS ...................................................... 26,075,334
===========

-----------------
++ For Federal income tax purposes, a significant portion of this amount does
NOT qualify for the inter-corporate dividends received deduction ("DRD") or
as Qualified Dividend Income ("QDI") for individuals.

The accompanying notes are an integral part of the financial statements.

--------------------------------------------------------------------------------
Preferred Income Fund Incorporated
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK
-------------------------------------------------------------

SIX MONTHS ENDED
MAY 31, 2003 YEAR ENDED
(UNAUDITED) NOVEMBER 30, 2002
------------- -----------------

OPERATIONS:
Net investment income ..................................................... $ 6,434,335 $ 12,922,272
Net realized (loss) on investments sold during the period ................. (1,218,969) (2,835,267)
Change in net unrealized appreciation/(depreciation)
of investments held during the period .................................. 21,450,376 (7,213,141)
Distributions to Money Market Cumulative Preferred(TM) Stock
Shareholders from net investment income, including changes in
accumulated undeclared distributions ................................... (590,408) (1,253,932)
------------ ------------
Net increase in net assets resulting from operations ...................... 26,075,334 1,619,932

DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock
Shareholders ........................................................... (6,826,662) (10,982,983)
Distributions paid from net realized capital gains to Common Stock
Shareholders ........................................................... -- --
------------ ------------
FUND SHARE TRANSACTIONS:
Increase from Common Stock transactions ................................... 1,190,788 1,963,583
Decrease due to Money Market Cumulative Preferred(TM)
Offering Cost .......................................................... (6,318) (493,959)
------------ ------------
NET INCREASE/(DECREASE)IN NET ASSETS TO
COMMON STOCK FOR THE PERIOD ............................................... 20,433,142 (7,893,427)

NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period ....................................................... 136,756,236 144,649,663
------------ ------------
End of period (including (overdistributed)/undistributed net investment
income of ($137,122) and $845,613, respectively) ....................... $157,189,378 $136,756,236
============ ============

The accompanying notes are an integral part of the financial statements.

--------------------------------------------------------------------------------
Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
--------------------------------------------------------

Contained below is per share operating performance data, total investment
returns, ratios to average net assets and other supplemental data. This
information has been derived from information provided in the financial
statements and market price data for the Fund's shares.

SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
MAY 31, 2003 -------------------------------------------------------------
(UNAUDITED) 2002 2001 2000 1999 1998
------------ -------- -------- -------- ------- --------

PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .................. $ 13.63 $ 14.62 $ 13.41 $ 14.41 $ 16.43 $ 16.71
-------- -------- -------- -------- ------- --------
INVESTMENT OPERATIONS:
Net investment income ................................. 0.64 1.29 1.23 1.32 1.29 1.28
Net realized and unrealized gain/(loss) on investments 2.01 (1.01) 1.19 (0.56) (1.35) 0.05

DISTRIBUTIONS TO MMP* SHAREHOLDERS:
From net investment income ............................ (0.06) (0.12)+ (0.23)+ (0.29)+ (0.23)+ (0.19)
From net realized capital gains ....................... -- -- -- (0.01) (0.08) (0.07)
-------- -------- -------- -------- ------- --------
Total from investment operations ...................... 2.59 0.16 2.19 0.46 (0.37) 1.07
-------- -------- -------- -------- ------- --------
Cost of Issuance of Additional MMP* (Note 6) .......... -- (0.05) -- -- -- --
DISTRIBUTIONS TO COMMON SHAREHOLDERS:
From net investment income ............................ (0.68) (1.10) (0.98) (1.04) (1.12) (1.05)
From net realized capital gains ....................... -- -- -- (0.42) (0.53) (0.30)
-------- -------- -------- -------- ------- --------
Total distributions to Common Shareholders ............ (0.68) (1.10) (0.98) (1.46) (1.65) (1.35)
-------- -------- -------- -------- ------- --------
Net asset value, end of period ........................ $ 15.54 $ 13.63+ $ 14.62+ $ 13.41+ $ 14.41+ $ 16.43
======== ======== ======== ======== ======= ========
Market value, end of period ........................... $ 16.63 $ 15.00 $ 14.47 $ 12.125 $ 12.75 $ 15.938
======== ======== ======== ======== ======= ========
Total investment return based on net asset value** .... 19.20%(2) 0.58% 17.01% 4.55% (1.81)% 6.91%
======== ======== ======== ======== ======= ========
Total investment return based on market value**........ 15.91%(2) 11.84% 28.02% 6.88% (10.43)% 7.05%
======== ======== ======== ======== ======= ========
RATIOS TO AVERAGE NET ASSETS AVAILABLE
TO COMMON STOCK SHAREHOLDERS:
Total net assets, end of year (in 000's) ......... $157,189 $136,756 $144,650 $131,892 $141,802 $161,613
Operating expenses ............................... 1.50%(1) 1.48% 1.42% 1.41% 1.37% 1.32%
Net investment income*** ......................... 8.00%(1) 8.32% 7.21% 7.58% 6.66% 6.13%
----------------------------------------------------
SUPPLEMENTAL DATA:++
Portfolio turnover rate. ......................... 15%(2) 30% 39% 66% 65% 87%
Total net assets available to Common and
Preferred Stock, end of period (in 000's) ...... $237,261 $216,974 $202,412 $189,983 $199,863 $219,398
Ratio of operating expenses to total average
net assets available to Common and Preferred Stock 0.97%(1) 0.99% 1.00% 0.98% 0.99% 0.97%

* Money Market Cumulative Preferred(TM)Stock.
** Assumes reinvestment of distributions at the price obtained by the Fund's
Dividend Reinvestment Plan.
*** The net investment income ratios reflect income net of operating expenses
and payments to MMP* Shareholders.
+ Includes effect of additional distribution available to MMP* Shareholders
($0.00 per Common Share at May 2003, $0.01 per Common Share at November
2002, $0.02 per Common Share at November 2001, $0.03 per Common Share at
November 2000 and $0.05 per Common Share at November 1999). (See Note 6 to
the Financial Statements.)
++ Information presented under heading Supplemental Data includes MMP*.
(1) Annualized.
(2) Not annualized.

The accompanying notes are an integral part of the financial statements.

--------------------------------------------------------------------------------
Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS (CONTINUED)
--------------------------------
The table below sets out information with respect to Money Market
Cumulative Preferred(TM) Stock currently outstanding.

INVOLUNTARY AVERAGE
ASSET LIQUIDATING MARKET
TOTAL SHARES COVERAGE PREFERENCE VALUE
AT PERIOD END OUTSTANDING (1) PER SHARE (3) PER SHARE (2) PER SHARE (1) & (2)
------------- ---------------- -------------- ------------- --------------------

5/31/03* 800 $296,577 $100,000 $100,000
11/30/02 800 271,218 100,000 100,000
11/30/01 575 352,021 100,000 100,000
11/30/00 575 330,404 100,000 100,000
11/30/99 575 347,588 100,000 100,000
11/30/98 575 381,562 100,000 100,000

---------
(1) See Note 6.
(2) Excludes accumulated undeclared dividends.
(3) Calculated by subtracting the Fund's total liabilities (excluding the
MMP(TM)) from the Fund's total assets and dividiNG that amount by the
number of MMP(TM) shares outstanding.
* Unaudited.

The accompanying notes are an integral part of the financial statements.

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

1. ORGANIZATION

Preferred Income Fund Incorporated (the "Fund") was incorporated as a
Maryland corporation on September 28, 1990, and commenced operations on January
31, 1991 as a diversified, closed-end management investment company under the
Investment Company Act of 1940, as amended. The Fund's investment objective is
to provide its Common Shareholders with high current income consistent with the
preservation of capital.

2. SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with accounting principles
generally accepted in the United States of America and requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities in the financial statements and the reported amounts of increases
and decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates.

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, except as described
hereafter. In the absence of sales of listed securities and with respect to (a)
securities for which the most recent sale prices are not deemed to represent
fair market value and (b) 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 in over-the-counter derivative instruments, such as interest rate
swaps and options thereon ("swaptions") are valued at the prices obtained from
the broker/dealer or bank that is the counterparty to such instrument, subject
to comparison of such valuation with one or more valuations obtained from one or
more broker/dealers or banks that are not counterparties to the particular
derivative instrument. Investments for which market quotations are not readily
available or for which management determines that the prices are not reflective
of current market conditions 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 comparable in quality,
maturity and type. Investments in money market instruments, which mature in 60
days or less, are valued at amortized cost. Investments in Money Market Funds
are valued at the net asset value of such funds.

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

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.

The AICPA Audit and Accounting Guide, Audits of Investment Companies,
requires that, for book accounting purposes, the Fund amortize premium and
accrete discount on those fixed-income securities, such as capital securities,
which trade and are quoted on an "accrued income" basis. Prior to December 1,
2001, the Fund was not required to amortize premium and accrete discounts for
these securities. Adopting these accounting principles has not affected the
Fund's net asset value, but changes the classification of certain amounts
between interest income and realized and unrealized gain/loss in the Statement
of Operations. The adoption of this principle was not material to the financial
statements.

The Statement of Changes in Net Assets and Financial Highlights for prior
periods have not been restated to reflect these changes in presentation.

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

REPURCHASE AGREEMENTS: The Fund may engage in repurchase agreement
transactions. The Fund's Investment Adviser reviews and approves the eligibility
of the banks and dealers with which the Fund may enter into repurchase agreement
transactions. The value of the collateral underlying such transactions is at
least equal at all times to the total amount of the repurchase obligations,
including interest. The Fund maintains possession of the collateral through its
custodian 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 capital gains corporate tax rate. Subject to the Fund's 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.

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

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 proportionate allocation of income and gains to all classes of
shareholders.

Distributions from net realized gains for book purposes may include
short-term capital gains, which are included as ordinary income for tax purposes
and may exclude amortization of premium on "accrued income" securities, which
are not reflected in ordinary income for tax purposes. The tax character of
distributions paid, including changes in accumulated undeclared distributions to
MMP(TM) Shareholders, during 2002 and year-to-date was as follows:

DISTRIBUTIONS PAID IN FISCAL YEAR 2003 DISTRIBUTIONS PAID IN FISCAL YEAR 2002
-------------------------------------- --------------------------------------
ORDINARY INCOME LONG-TERM CAPITAL GAINS ORDINARY INCOME LONG-TERM CAPITAL GAINS
--------------- ----------------------- --------------- -----------------------

Common N/A N/A $10,982,983 --
Preferred N/A N/A $1,253,932 --

As of November 30, 2002, the components of distributable earnings (i.e.,
ordinary income and capital gain/(loss)) available to Common and Preferred Stock
Shareholders, on a tax basis were as follows:

UNDISTRIBUTED UNDISTRIBUTED UNREALIZED
CAPITAL (LOSS) CARRYFORWARD ORDINARY INCOME LONG-TERM GAIN APPRECIATION/(DEPRECIATION)
--------------------------- --------------- -------------- --------------------------

$(7,288,104) $1,427,327 -- $(918,040)

At November 30, 2002, the composition of the Fund's $7,288,104 accumulated
realized capital losses was $6,014,198, $513,821 and $760,085 in 2000, 2001 and
2002, respectively. These losses may be carried forward and offset against any
future capital gains through 2008, 2009 and 2010, respectively.

EXCISE TAX: 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. During the fiscal year ending November 30, 2003, the Fund paid $1,812 of
Federal excise taxes attributable to calendar year 2002.

3. INVESTMENT ADVISORY FEE, DIRECTORS' FEES, ADMINISTRATION FEE, TRANSFER
AGENT FEE AND CUSTODIAN FEE

Flaherty & Crumrine Incorporated (the "Adviser") serves as the Fund's
Investment Adviser. The Fund pays the Adviser a monthly fee at an annual rate of
0.625% of the value of the Fund's average monthly total net assets available to
Common and Preferred Stock up to $100 million and 0.50% of the value of the
Fund's average monthly total net assets available to Common and Preferred Stock
in excess of $100 million.

The Fund currently pays each Director who is not a director, officer or
employee of the Adviser a fee of $9,000 per annum, plus $500 for each in-person
meeting of the Board of Directors or any committee and $100 for each telephone
meeting. In addition, the Fund will reimburse all Directors for travel and
out-of-pocket expenses incurred in connection with such meetings.

PFPC Inc., a member of the PNC Financial Services Group, Inc. ("PNC
Financial Services"), serves as the Fund's Administrator and Transfer Agent. As
Administrator, PFPC Inc. calculates the net asset value of the Fund's shares and
generally assists in all aspects of the Fund's administration and operation. As
compensation for PFPC Inc.'s services as Administrator, the Fund pays PFPC Inc.
a monthly fee at an annual rate of 0.10% of the Fund's average monthly total net
assets available to Common and Preferred Stock. PFPC Inc. also serves as the
Fund's Common Stock servicing agent (transfer agent), dividend-paying agent and
registrar and, as compensation for PFPC Inc.'s services as such, the Fund pays
PFPC Inc. a fee at an annual rate of 0.02% of the Fund's average monthly total
net assets available to Common and Preferred Stock plus certain out-of-pocket
expenses.

PFPC Trust Company ("PFPC Trust") serves as the Fund's Custodian. PFPC
Trust is an indirect subsidiary of PNC Financial Services. As compensation for
PFPC Trust's services as custodian, the Fund pays PFPC Trust a monthly fee at
the annual rate of 0.01% of the Fund's average monthly total net assets
available to Common and Preferred Stock.

4. PURCHASES AND SALES OF SECURITIES

Cost of purchases and proceeds from sales of securities for the six months
ended May 31, 2003, excluding short-term investments, aggregated $35,826,294 and
$33,051,679, respectively.

At May 31, 2003, aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost was $31,720,165 and aggregate
gross unrealized depreciation for all securities in which there is an excess of
tax cost over value was $8,906,244.

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

5. COMMON STOCK

At May 31, 2003, 240,000,000 shares of $0.01 par value Common Stock were
authorized.

Common Stock transactions excluding costs of additional MMP(TM) issuance in
June 2002 (See Note 6) were as follows:

SIX MONTHS ENDED YEAR ENDED
5/31/03 11/30/02
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- --------

Issued as reinvestment of dividends under the Dividend
Reinvestment and Cash Purchase Plan ........................ 79,670 $1,190,788 135,557 $1,963,583
------- ---------- -------- ----------

6. MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK

The Fund's Articles of Incorporation authorize the issuance of up to
10,000,000 shares of $0.01 par value preferred stock. The Money Market
Cumulative Preferred(TM) Stock is senior to the Common Stock and results in the
financial leveraging of the Common Stock. Such leveraging tends to magnify both
the risks and opportunities to Common Stock Shareholders. Dividends on shares of
Money Market Cumulative Preferred(TM) Stock are cumulative.

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

Under Emerging Issues Task Force (EITF) promulgation Topic D-98,
Classification and Measurement of Redeemable Securities, which was issued on
July 19, 2001, preferred securities that are redeemable for cash or other assets
are to be classified outside of permanent equity to the extent that the
redemption is at a fixed or determinable price and at the option of the holder
or upon the occurrence of an event that is not solely within the control of the
issuer. Subject to the guidance of the EITF, the Fund's Money Market Cumulative
Preferred(TM) Stock, which was previously classified as a component of total net
assets, has been reclassified outside of permanent equity (net assets available
to common stock) in the accompanying financial statements. Prior year amounts
have also been reclassifed to conform with this presentation. The impact of this
reclassification creates no change to the net assets available to Common
Shareholders.

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.

Prior to November 30, 1999, additional distributions were not reported as
available to Money Market Cumulative Preferred(TM) Stock until declared by the
Board of Directors. The amount of additional distributions payable for any year
may be highly uncertain and will not be known until after a fiscal year has been
completed.

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.

On June 4, 2002, the Fund issued 225 shares of additional Money Market
Cumulative Preferred(TM) Stock with an initial dividend rate equal to 2.04%.
These newly issued shares are identical to the previously outstanding 575 shares
in all respects on and after their first auction date, which was June 5, 2002.
Consequently, the Fund now has 800 shares of Money Market Cumulative
Preferred(TM) Stock now outstanding in one series, which represents a par value
of $80 million.

The newly issued shares were underwritten by Lehman Brothers. The
underwriter's discount of 1.25% of the $22.5 million face value totaled $281,250
and was immediately charged to common equity capital upon completion of the
offering.

Costs of the issue, including legal, printing, registration, rating fees,
etc. of $219,027 were charged against common equity capital. The sum of
underwriters discount and cost of the issue totaled $500,277.

At May 31, 2003, 800 shares of Money Market Cumulative Preferred(TM) Stock
were outstanding at the annual rate of 1.21%. The dividend rate, as set by the
auction process, is generally expected to vary with short-term interest rates.
These rates may vary in a manner unrelated to the income received on the Fund's
assets, which could have either a beneficial or detrimental impact on net
investment income and gains available to Common Stock Shareholders. While the
Fund expects to structure its portfolio holdings and hedging transactions to
lessen such risks to Common Stock Shareholders, there can be no assurance that
such results will be attained.

7. PORTFOLIO INVESTMENTS, CONCENTRATION AND INVESTMENT QUALITY

The Fund invests primarily in traditional DRD-eligible preferred securities
(i.e., adjustable and fixed rate preferred and preference stocks) and similar
hybrid, i.e., fully taxable, preferred securities. Under normal market
conditions, at least 80% of the value of the Fund's net assets will be invested
in preferred securities. Also, 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

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

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 25% of its assets at the time of purchase in
securities rated below investment grade. These securities must be rated at least
either "Ba3" by Moody's Investors Service, Inc. or "BB-" by Standard & Poor's or
judged to be comparable in quality, in either case, at the time of purchase;
however, these securities must be issued by an issuer having a class of senior
debt rated investment grade outstanding. The percentage limitation was raised
from 15% by the Fund's Board of Directors at its regular board meeting on April
19, 2002.

The Fund may invest up to 15% of its assets in common stocks and, under
normal market conditions, up to 20% of its assets in debt securities. Certain of
its investments in hybrid, i.e., fully taxable, preferred securities, such as
TOPrS, TIPS, QUIPS, MIPS, QUIDS, QUICS, QIB's, STOPS, CorTS, REIT, Capital
Securities, and other similar or related investments, will be subject to the
foregoing 20% limitation to the extent that, in the opinion of the Fund's
Investment Adviser, such investments are deemed to be debt-like in key
characteristics. Typically, a security will not be considered debt-like (a) if
an issuer can defer payment of income for eighteen months or more without
triggering an event of default and (b) if such issue is a junior and fully
subordinated liability of an issuer or its ultimate guarantor.

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, interest
rate swaps, options on futures contracts, options on securities and swaptions.
As in the case of when-issued securities, the use of over-the-counter
derivatives, such as interest rate swaps and swaptions, may expose the Fund to
greater credit, operations, and market value risk than is the case with
regulated, exchange traded futures and options. 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, 2003, the Fund owned put options on US 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.

9. SIGNIFICANT SHAREHOLDERS

At July 7, 2003, the Commerce Group, Inc. and its affiliates owned
approximately 19.9% of the Fund's outstanding Common Stock, according to a
Schedule 13G filing dated July 17, 2003.

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

DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN

Under the Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
a shareholder whose Common Stock is registered in his own name will have all
distributions reinvested automatically by PFPC Inc. as agent under the Plan,
unless the shareholder elects to receive cash. Distributions with respect to
shares registered in the name of a broker-dealer or other nominee (that is, in
"street name") may be reinvested by the broker or nominee in additional shares
under the Plan, but only if the service is provided by the broker or nominee,
unless the shareholder elects to receive distributions in cash. A shareholder
who holds Common Stock registered in the name of a broker or other nominee may
not be able to transfer the Common Stock to another broker or nominee and
continue to participate in the Plan. Investors who own Common Stock registered
in street name should consult their broker or nominee for details regarding
reinvestment.

The number of shares of Common Stock distributed to participants in the
Plan in lieu of a cash dividend is determined in the following manner. Whenever
the market price per share of the Fund's Common Stock is equal to or exceeds the
net asset value per share on the valuation date, participants in the Plan will
be issued new shares valued at the higher of net asset value or 95% of the then
current market value. Otherwise, PFPC Inc. will buy shares of the Fund's Common
Stock in the open market, on the New York Stock Exchange or elsewhere, on or
shortly after the payment date of the dividend or distribution and continuing
until the ex-dividend date of the Fund's next distribution to holders of the
Common Stock or until it has expended for such purchases all of the cash that
would otherwise be payable to the participants. The number of purchased shares
that will then be credited to the participants' accounts will be based on the
average per share purchase price of the shares so purchased, including brokerage
commissions. If PFPC Inc. commences purchases in the open market and the then
current market price of the shares (plus any estimated brokerage commissions)
subsequently exceeds their net asset value most recently determined before the
completion of the purchases, PFPC Inc. will attempt to terminate purchases in
the open market and cause the Fund to issue the remaining dividend or
distribution in shares. In this case, the number of shares received by the
participant will be based on the weighted average of prices paid for shares
purchased in the open market and the price at which the Fund issues the
remaining shares. These remaining shares will be issued by the Fund at the
higher of net asset value or 95% of the then current market value.

Plan participants are not subject to any charge for reinvesting dividends
or capital gains distributions. Each Plan participant will, however, bear a
proportionate share of brokerage commissions incurred with respect to PFPC
Inc.'s open market purchases in connection with the reinvestment of dividends or
capital gains distributions. For the period ended May 31, 2003, no brokerage
commissions were incurred.

--------------------------------------------------------------------------------
Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
---------------------------------------------

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
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 by PFPC Inc. under the Plan.

A shareholder whose Common Stock is registered in his or her own name may
terminate participation in the Plan at any time by notifying PFPC Inc. in
writing, by completing the form on the back of the Plan account statement and
forwarding it to PFPC Inc. or by calling PFPC Inc. directly. A termination will
be effective immediately if notice is received by PFPC Inc. not less than 10
days before any dividend or distribution record date. Otherwise, the termination
will be effective, and only with respect to any subsequent dividends or
distributions, on the first day after the dividend or distribution has been
credited to the participant's account in additional shares of the Fund. Upon
termination and according to a participant's instructions, PFPC Inc. will either
(a) issue certificates for the whole shares credited to the shareholder's Plan
account and a check representing any fractional shares or (b) sell the shares in
the market. Shareholders who hold common stock registered in the name of a
broker or other nominee should consult their broker or nominee to terminate
participation.

The Plan is described in more detail in the Fund's Plan brochure.
Information concerning the Plan may be obtained from PFPC Inc. at
1-800-331-1710.

--------------------------------------------------------------------------------
Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED)(CONTINUED)
---------------------------------------------

MEETING OF SHAREHOLDERS

On April 25, 2003, the Fund held its Annual Meeting of Shareholders (the
"Meeting") to elect three Directors of the Fund ("Proposal 1"). The results of
the proposal are as follows:

PROPOSAL 1: ELECTION OF DIRECTORS.

NAME FOR WITHHELD
---- ---- --------
COMMON STOCK
Robert M. Ettinger .......................... 9,468,259 72,806
Robert F. Wulf .............................. 9,470,416 70,649

FOR WITHHELD
---- --------
PREFERRED STOCK
Donald F. Crumrine .......................... 646 --

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

INFORMATION ABOUT FUND DIRECTORS AND OFFICERS

The business and affairs of the Fund are managed under the direction of the
Fund's Board of Directors. Information pertaining to the Directors and officers
of the Fund is set forth below.

PRINCIPAL NUMBER OF FUNDS
TERM OF OFFICE OCCUPATION(S) IN FUND COMPLEX
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST OVERSEEN OTHER DIRECTORSHIPS
AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS BY DIRECTOR HELD BY DIRECTOR
-------------- -------------- -------------- ------------- --------------- -------------------
NON-INTERESTED
DIRECTORS:
----------

MARTIN BRODY Director Class I Director Retired 3 Director, Jaclyn, Inc.
c/o HMK Associates since 1991 (luggage and
30 Columbia Turnpike accessories). Director
Florham Park, NJ 07932 Emeritus, Smith Barney
Age: 81 Mutual Funds (18 Funds).

DAVID GALE Director Class I Director President & CEO of 3 Director, Golden State
Delta Dividend Group, Inc. since 1997 Delta Dividend Vintners, Inc.
220 Montgomery Street Group, Inc. (investments).
Suite 426
San Francisco, CA 94104
Age: 54

MORGAN GUST+ Director Class III Director Since March 2002, 3 --
Giant Industries, Inc. since 1991 President and previously
23733 N. Scottsdale Road held other officerships of
Scottsdale, AZ 85255 Giant Industries, Inc.
Age: 56 (petroleum refining and
marketing)

ROBERT F. WULF Director Class II Director Financial Consultant; 3 --
3560 Deerfield Drive South since 1991 Trustee, University of
Salem, OR 97302 Oregon Foundation;
Age: 66 Trustee, San Francisco
Theological Seminary.

--------------------------
* The Fund's Board of Directors is divided into three classes, each class
having a term of three years. Each year the term of office of one class
expires and the successor or successors elected to such class serve for a
three year term. The three year term for each class expires as follows:

CLASS I DIRECTORS - three year term expires at
the Fund's 2005 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS II DIRECTORS - three year term expires at
the Fund's 2006 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS III DIRECTORS - three year term expires
at the Fund's 2004 Annual Meeting of
Shareholders; directors may continue in office
until their successors are duly elected and
qualified.

+ As a Director, represents holders of shares of the Fund's Money Market
Cumulative Preferred(TM) Stock.

--------------------------------------------------------------------------------
Preferred Income Fund Incorporated

ADDITIONAL INFORMATION (UNAUDITED)(CONTINUED)
---------------------------------------------

DONALD F. CRUMRINE+, ++ Director, Class II Director Chairman of the Board, 3 --
301 E. Colorado Boulevard Chairman since 1991 Director of Flaherty &
Suite 720 of the Board Crumrine Incorporated.
Pasadena, CA 91101 and Chief
Age: 55 Executive Officer

ROBERT M. ETTINGER++ Director, Class III Director President and Director of 2 --
301 E. Colorado Boulevard President since 2002 Flaherty & Crumrine
Suite 720 Incorporated.
Pasadena, CA 91101
Age: 44

OFFICERS:
---------
PETER C. STIMES Chief Financial Since 1991 Vice President of -- --
301 E. Colorado Boulevard Officer, Chief Flaherty & Crumrine
Suite 720 Accounting Officer, Incorporated.
Pasadena, CA 91101 Vice President, Treasurer,
Age: 47 and Assistant Secretary

R. ERIC CHADWICK Vice President, Since Since August 2001, -- --
301 E. Colorado Boulevard Secretary and October 2002 Vice President of
Suite 720 Assistant Flaherty & Crumrine
Pasadena, CA 91101 Treasurer Incorporated, from January
Age: 28 1997 through November
1998, portfolio manager of
Koch Industries, Inc.

-------------------------------
* The Fund's Board of Directors is divided into three classes, each class
having a term of three years. Each year the term of office of one class
expires and the successor or successors elected to such class serve for a
three year term. The three year term for each class expires as follows:

+ As a Director, represents holders of shares of the Fund's Money Market
Cumulative Preferred(TM) Stock.

++ "Interested person" of the Fund as defined in the Investment Company Act of
1940. Messrs. Crumrine and Ettinger are each considered an "interested
person" because of their affiliation with Flaherty & Crumrine Incorporated
which acts as the Fund's investment adviser.

[This page intentionally left blank]

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 Officer,
Chief Accounting Officer,
Vice President, Treasurer,
and Assistant Secretary
Robert E. Chadwick, CFA
Vice President, Secretary and
Assistant Treasurer

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

QUESTIONS CONCERNING YOUR SHARES OF 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 PREFERRED INCOME FUND INCORPORATED FOR
THEIR INFORMATION. IT IS NOT A PROSPECTUS, CIRCULAR OR REPRESENTATION INTENDED
FOR USE IN THE PURCHASE OR SALE OF SHARES OF THE FUND OR OF ANY SECURITIES
MENTIONED IN THIS REPORT.

[GRAPHIC OMITTED]
PREFERRED INCOME LOGO ART

SEMI-ANNUAL
REPORT

MAY 31, 2003

web site: www.preferredincome.com

ITEM 2. CODE OF ETHICS.

Not applicable.

ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.

Not applicable.

ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Not applicable.

ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.

Not applicable.

ITEM 6. [RESERVED]

ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.

Not applicable.

ITEM 8. [RESERVED]

ITEM 9. CONTROLS AND PROCEDURES.

(a) The registrant's principal executive officer or officers and principal
financial officer or officers, or persons performing similar functions,
have concluded that the registrant's disclosure controls and procedures
(as defined in Rule 30a-3(c) under the Investment Company Act of 1940
(17 CFR 270.30a-3(c))) are effective, based on their evaluation of
these controls and procedures as of a date within 90 days of the filing
date of the report that includes the disclosure required by this
paragraph.

(b) There were no significant changes in the registrant's internal controls
or in other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.

ITEM 10. EXHIBITS.

(a)(1) Not applicable.

(a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 are attached hereto.

(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 are attached hereto.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

(registrant) PREFERRED INCOME FUND INCORPORATED

By (Signature and Title)* /S/ DONALD F. CRUMRINE
------------------------------------------------------
Donald F. Crumrine, Director, Chairman of the Board
and Chief Executive Officer
(principal executive officer)

Date JULY 30, 2003
----------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

Date JULY 30, 2003
----------------------------------------------------------------------------
By (Signature and Title)* /S/ PETER C. STIMES
------------------------------------------------------
Peter C. Stimes, Chief Financial and Accounting Officer,
Vice President, Treasurer & Assistant Secretary
(principal financial officer)

Date JULY 30, 2003
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.