FLAHERTY & CRUMRINE PREFERRED INCOME FUND
To the Shareholders of the Flaherty & Crumrine Preferred Income Fund ("PFD"):
During the Fund's first fiscal quarter ended February 28, 2007, the Fund
performed well in choppy, but ultimately little-changed, fixed-income markets by
earning a total return of 1.7% on its net asset value (NAV). These three months
saw the Fund continue its recent strong performance.
Interest rates were unchanged to slightly higher over the quarter, as the
Federal Reserve left the federal funds rate unchanged and long-term Treasury
rates rose only slightly. Corporate credit spreads also ended the quarter little
changed, while the Fund's interest-rate hedge had only a minimal impact. Both
the recent quarter and trailing twelve-month periods delivered what the Fund is
intended to produce - current income and stability of principal.
As you can see on the following pages detailing actual holdings in the
Fund's portfolio, the Fund invests in a relatively small number of industries,
including utilities and insurers, banks and other finance companies. In fact,
the Fund has an investment mandate to concentrate at least 25% of its assets in
each of the banking and utilities industries. In terms of the industries the
Fund's assets are in, its portfolio is no different than the overall preferred
securities market. Because of the preferred securities market's overall emphasis
in financial services, a portfolio of preferred securities, including the
Fund's, can be at risk if the U.S. economy goes into recession.
One important area of recent concern for the U.S. economy in general, and
U.S. credit markets in particular, is subprime mortgage lending, which has
experienced increasing default and delinquency rates in recent months. The
numbers here are large in an absolute sense, but they are small relative to a
$13 trillion U.S. economy and to the mortgage market as a whole. Because of
this, while we cannot entirely rule it out, we currently do not believe that
problems in subprime mortgages will push the economy into recession.
The Fund holds no positions in securities issued by mortgage brokers or
subprime specialty lenders. Nonetheless, many of the banks and insurance
companies in which we have invested do have some exposure to subprime mortgages
in their lending or investment portfolios. While we are examining these
companies very closely, the lack of detailed disclosure about subprime mortgages
makes it impossible for us to make definitive statements about the Fund's
potential exposure to the problem. However, given what we now know and can infer
about the companies in which we invest, we expect that EARNINGS (which flow to
the companies' common shareholders) will be reduced at some of the companies we
hold as a result of the problems in subprime lending. However, we currently do
not expect that they will suffer losses large enough to cut meaningfully into
CAPITAL (which support the debt and preferred securities owned by the Fund).
Although we cannot rule out the possibility - despite our best judgment to the
contrary - that some of the Fund's investments could be seriously affected, we
do not currently see any serious subprime credit problems in the holdings of the
Fund.
The Fund's website at WWW.PREFERREDINCOME.COM has more information about
Fund performance and a more complete discussion of the state of the economy (in
our First Quarter Economic Update) and of subprime mortgages and their potential
impact on the economy and the Fund's portfolio (in the "Frequently Asked
Questions" section). We encourage you to explore the website for a wide range of
additional information about your Fund.
Sincerely,
/S/ DONALD F. CRUMRINE /S/ ROBERT M. ETTINGER
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
April 20, 2007
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OVERVIEW
FEBRUARY 28, 2007 (UNAUDITED)
------------------------------------------------------
FUND STATISTICS ON 02/28/07
----------------------------------------------
Net Asset Value $ 15.80
Market Price $ 17.25
Premium 9.18%
Yield on Market Price 5.98%
Common Stock Shares
Outstanding 10,488,187
INDUSTRY CATEGORIES % OF PORTFOLIO
------------------------------------------------------
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS
REITs 3%
Other 2%
Banks 37%
Utilities 31%
Insurance 14%
Financial Services 7%
Energy 6%
MOODY'S RATINGS % OF PORTFOLIO
---------------------------------------------
AAA 0.0%
AA 4.6%
A 19.9%
BBB 52.2%
BB 11.7%
Not Rated 10.3%
---------------------------------------------
Below Investment Grade* 15.1%
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND
S&P.
TOP 10 HOLDINGS BY ISSUER % OF PORTFOLIO
---------------------------------------------------------
Interstate Power & Light 5.0%
Capital One Financial 4.3%
Liberty Mutual Group 4.1%
FBOP Corporation 3.8%
Banco Santander 3.8%
HSBC 3.7%
First Republic Bank 3.4%
RenaissanceRe Holdings 3.2%
SLM Corp 3.1%
Xcel Energy 3.1%
% OF PORTFOLIO**
----------------------------------------------------------------------------------------------------------------------
Holdings Generating Qualified Dividend Income (QDI) for Individuals 63%
Holdings Generating Income Eligible for the Corporate Dividend Received Deduction (DRD) 53%
----------------------------------------------------------------------------------------------------------------------
** THIS DOES NOT REFLECT YEAR-END RESULTS OR ACTUAL TAX CATEGORIZATION OF
FUND DISTRIBUTIONS. THESE PERCENTAGES CAN, AND DO, CHANGE, PERHAPS
SIGNIFICANTLY, DEPENDING ON MARKET CONDITIONS. INVESTORS SHOULD CONSULT
THEIR TAX ADVISOR REGARDING THEIR PERSONAL SITUATION.
3
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 2007 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------- ---------
PREFERRED SECURITIES -- 94.5%
BANKING -- 36.8%
-------------------------------------------------------------------------------------------------------------------------
$ 3,000,000 Astoria Capital Trust I, 9.75% 11/01/29 Capital Security, Series B............... $ 3,451,992
Auction Pass-Through Trust, Cl. B:
11 Series 2006-5, Variable Rate Pfd., 144A****.................................... 360,800*
11 Series 2006-6, Variable Rate Pfd., 144A****.................................... 360,800*
54,700 BAC Capital Trust I, 7.00% Pfd. 12/15/31......................................... 1,393,143
7,700 BAC Capital Trust II, 7.00% Pfd. 02/01/32........................................ 194,185
Banco Santander:
295,000 6.50% Pfd., 144A****........................................................... 7,522,500**(1)
69,400 6.80% Pfd., 144A****........................................................... 1,781,498**(1)
$ 1,500,000 Barclays Bank PLC, 6.278% Pfd.................................................... 1,509,300**(1)
$ 800,000 Barnett Capital II, 7.95% 12/01/26 Capital Security.............................. 832,419
$ 2,000,000 Capital One Capital III, 7.686% Pfd.............................................. 2,264,300
71,300 Citigroup Capital VIII, 6.95% Pfd. 09/15/31...................................... 1,813,694
19,648 Citizens Funding Trust I, 7.50% Pfd. 09/15/66.................................... 512,076
Cobank, ACB:
50,000 7.00% Pfd., 144A****........................................................... 2,644,100*
75,000 7.814% Pfd., 144A****.......................................................... 4,020,075*
Comerica (Imperial) Capital Trust I:
5,000 7.60% Pfd. 07/01/50............................................................ 126,875
$ 500,000 9.98% 12/31/26 Capital Security, Series B...................................... 531,130
$ 1,500,000 Dime Capital Trust I, 9.33% 05/06/27 Capital Security, Series A.................. 1,578,522
9,000 FBOP Corporation, Adj. Rate Pfd., 144A****....................................... 9,337,500*
$ 2,250,000 First Hawaiian Capital I, 8.343% 07/01/27 Capital Security, Series B............. 2,356,879(1)
First Republic Bank:
200,000 6.25% Pfd...................................................................... 5,181,260*
53,700 6.70% Pfd...................................................................... 1,401,237*
1,000 First Republic Preferred Capital Corporation, 10.50% Pfd., 144A****.............. 1,107,940
22,500 First Republic Preferred Capital Corporation II, 8.75% Pfd., Series B, 144A****.. 607,050
$ 1,500,000 First Union Capital II, 7.95% 11/15/29 Capital Security.......................... 1,889,211
5,000 Fleet Capital Trust VIII, 7.20% Pfd. 03/15/32.................................... 127,188
$ 7,820,000 GreenPoint Capital Trust I, 9.10% 06/01/27 Capital Security...................... 8,217,201
HBOS Capital Funding LP:
$ 3,000,000 6.85% Pfd...................................................................... 3,038,700(1)
$ 2,000,000 6.413% Pfd.,144A****........................................................... 2,079,634**(1)
5,000 HSBC Series II, Variable Inverse Pfd., Pvt....................................... 5,695,000*
4
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2007 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------- ---------
PREFERRED SECURITIES -- (CONTINUED)
BANKING -- (CONTINUED)
-------------------------------------------------------------------------------------------------------------------------
HSBC USA, Inc.:
120,000 6.50% Pfd., Series H........................................................... $ 3,266,256*
2,500 $2.8575 Pfd.................................................................... 125,825*
100,000 Keycorp Capital IX, 6.75% Pfd. 12/15/66.......................................... 2,590,630
$ 1,000,000 Lloyds TSB Group PLC, 6.267%, Capital Security, 144A****......................... 1,010,059**(1)
15,000 National City Capital Trust II, 6.625% Pfd. 11/15/36............................. 380,157
$ 674,000 NB Capital Trust II, 7.83% 12/15/26 Capital Security............................. 701,079
16,000 PFGI Capital Corporation, 7.75% Pfd.............................................. 416,320
$ 650,000 RBS Capital Trust B, 6.80% Pfd................................................... 669,500**(1)
10 Roslyn Real Estate, 8.95% Pfd., Series C, 144A****............................... 1,104,156
77,600 Sovereign Bancorp, 7.30% Pfd., Series C.......................................... 2,160,679*
30,600 Sovereign Capital Trust V, 7.75% Pfd. 05/22/36................................... 816,638
$ 1,000,000 Sovereign Capital Trust VI, 7.908% 06/13/36 Capital Security..................... 1,140,467
16,000 USB Capital VII, 5.875% Pfd. 08/15/35............................................ 380,160
96,700 USB Capital VIII, 6.35% Pfd. 12/29/65............................................ 2,450,745
7,300 USB Capital XI, 6.60% Pfd. 09/15/66.............................................. 186,953
40,000 Zions Capital Trust B, 8.00% Pfd. 09/01/32....................................... 1,017,500
-------------------------------------------------------------------------------------------------------------------
90,353,333
----------------
FINANCIAL SERVICES -- 7.2%
-------------------------------------------------------------------------------------------------------------------------
35,000 Cabco Trust For Goldman Sachs Capital I, Adj. Rate Pfd. 02/15/34, Series GS...... 836,721
Goldman Sachs Group, Inc.:
25 Pass-Through Certificates, Class B, 144A****................................... 2,905,000*
2,500 STRIPES Custodial Receipts, Pvt................................................ 2,885,000*
3,000 Merrill Lynch Series II STRIPES Custodial Receipts, Pvt.......................... 3,369,000*
5,870 Morgan Stanley Capital Trust VI, 6.60% Pfd....................................... 149,758
136,855 SLM Corporation, 6.97% Pfd., Series A............................................ 7,577,661*
-------------------------------------------------------------------------------------------------------------------
17,723,140
----------------
INSURANCE -- 11.7%
-------------------------------------------------------------------------------------------------------------------------
15,000 ACE Ltd., 7.80% Pfd., Series C................................................... 386,437**(1)
$ 500,000 AMBAC Financial Group Inc, 6.15% Pfd., 02/15/37.................................. 496,300
$ 2,500,000 AON Capital Trust A, 8.205% 01/01/27 Capital Security............................ 2,944,070
10,000 Arch Capital Group Ltd., 7.875% Pfd., Series B................................... 261,875**(1)
$ 2,500,000 AXA 6.463% 12/14/18 Capital Security, 144A****................................... 2,488,767**(1)
5
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2007 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------- ---------
PREFERRED SECURITIES -- (CONTINUED)
INSURANCE -- (CONTINUED)
-------------------------------------------------------------------------------------------------------------------------
Axis Capital Holdings:
20,750 7.25% Pfd., Series A........................................................... $ 541,446**(1)
14,400 7.50% Pfd., Series B........................................................... 1,531,872(1)
27,000 Berkley W.R. Capital Trust II, 6.75% Pfd. 07/26/45............................... 686,812
35,200 Endurance Specialty Holdings, 7.75% Pfd.......................................... 930,600**(1)
18,250 Everest Re Capital Trust II, 6.20% Pfd., Series B................................ 440,281(1)
$ 1,250,000 Glen Meadow Pass Through, 6.505% Capital Security 144A****....................... 1,286,500
$ 5,000,000 Liberty Mutual Group, 7.80% 03/15/37 Capital Security, 144A****.................. 4,990,050
21,800 Principal Financial Group, 6.518% Pfd............................................ 622,663*
$ 357,000 Provident Financing Trust I, 7.405% 03/15/38 Capital Security.................... 376,798(2)
$ 4,500,000 Renaissancere Capital Trust, 8.54% 03/01/27 Capital Security, Series B........... 4,691,858(1)
Renaissancere Holdings Ltd.:
25,200 6.08% Pfd., Series C........................................................... 608,328**(1)
100,000 6.60% Pfd., Series D........................................................... 2,473,000**(1)
119,500 Scottish Re Group Ltd., 7.25% Pfd................................................ 2,452,140**(1)
22,850 XL Capital Ltd., 8.00% Pfd., Series A............................................ 586,959**(1)
-------------------------------------------------------------------------------------------------------------------
28,796,756
----------------
UTILITIES -- 29.5%
-------------------------------------------------------------------------------------------------------------------------
Alabama Power Company:
300 4.52% Pfd...................................................................... 26,040*
5,734 4.72% Pfd...................................................................... 519,787*
10,000 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993........................ 1,048,438*
10,000 Calenergy Capital Trust III, 6.50% Pfd. 09/01/27................................. 483,750
Central Hudson Gas & Electric Corporation:
5,000 4.35% Pfd., Series D, Pvt...................................................... 408,500*
900 4.96% Pfd., Series E, Pvt...................................................... 80,874*
8,340 Central Vermont Public Service Corporation, 8.30% Sinking Fund Pfd., Pvt......... 866,109*
Connecticut Light & Power Company:
12,124 4.50% Pfd., Series 1963, Pvt................................................... 483,141*
34,300 5.28% Pfd., Series 1967........................................................ 1,633,366*
1,905 6.56% Pfd., Series 1968........................................................ 98,546*
15,778 $3.24 Pfd...................................................................... 826,136*
2,100 Consolidated Edison Company of New York, 4.65% Pfd., Series C.................... 178,458*
2,886 Dayton Power and Light Company, 3.90% Pfd., Series C............................. 183,088*
$ 1,500,000 Dominion Resources Capital Trust III, 8.40% 01/15/31 Capital Security............ 1,878,136
6
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2007 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------- ---------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
-------------------------------------------------------------------------------------------------------------------------
Duquesne Light Company:
7,675 4.10% Pfd...................................................................... $ 271,849*
9,190 4.15% Pfd...................................................................... 329,462*
910 4.20% Pfd...................................................................... 33,015*
5,490 $2.10 Pfd., Series A........................................................... 199,177*
100,000 Entergy Arkansas, Inc., 6.45% Pfd................................................ 2,604,000*
4,555 Entergy Gulf States, Inc., 7.56% Pfd............................................. 456,365*
36,000 Entergy Louisiana, Inc., 6.95% Pfd............................................... 3,707,640*
5,000 Entergy Mississippi, Inc., 4.92% Pfd............................................. 411,850*
Florida Power Company:
5,157 4.60% Pfd...................................................................... 444,069*
18,535 4.75% Pfd...................................................................... 1,648,132*
18,300 FPC Capital I, 7.10% Pfd., Series A.............................................. 458,073
101,000 FPL Group Capital, Inc., 6.60% Pfd. 10/01/66, Series A........................... 2,613,375
13,100 Georgia Power Capital Trust, 6.125% Pfd.......................................... 343,056*
50,000 Georgia Power Capital Trust V, 7.125% Pfd. 03/31/42............................. 1,271,875
2,010 Great Plains Energy, Inc., 4.50% Pfd............................................. 170,770*
50,000 Hawaiian Electric Company, Inc., 5.25% Pfd., Series H, Pvt....................... 935,000*
32,650 Indianapolis Power & Light Company, 5.65% Pfd.................................... 3,131,135*
384,000 Interstate Power & Light Company, 8.375% Pfd., Series B.......................... 12,168,000*
Pacific Enterprises:
27,430 $4.50 Pfd...................................................................... 2,368,306*
10,000 $4.75 Pfd., Series 53.......................................................... 911,400*
Pacific Gas & Electric Co.:
7,600 4.50% Pfd., Series H........................................................... 158,612*
41,500 5.00% Pfd., Series D........................................................... 919,640*
79,086 5.00% Pfd., Series E........................................................... 1,799,997*
PacifiCorp:
1,095 5.40% Pfd...................................................................... 110,858*
1,225 $4.56 Pfd...................................................................... 100,989*
14,542 $4.72 Pfd...................................................................... 1,241,014*
10,278 $7.48 Sinking Fund Pfd......................................................... 1,045,787*
$ 500,000 PECO Energy Capital Trust III, 7.38% 04/06/28 Capital Security, Series D......... 546,200
8,137 Portland General Electric, 7.75% Sinking Fund Pfd................................ 824,685*
5,000 PPL Electric Utilities Corporation, 6.75% Pfd.................................... 525,000*
10,000 Public Service Company of New Mexico, 4.58% Pfd., Series 1965.................... 795,400*
7
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2007 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------- ---------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
-------------------------------------------------------------------------------------------------------------------------
San Diego Gas & Electric Company:
1,200 4.40% Pfd...................................................................... $ 19,980*
700 4.50% Pfd...................................................................... 11,921*
77,000 $1.70 Pfd...................................................................... 2,011,625*
South Carolina Electric & Gas Company:
24,924 5.125% Purchase Fund Pfd., Pvt................................................. 1,280,595*
6,703 6.00% Purchase Fund Pfd., Pvt.................................................. 341,183*
10,600 Southern California Edison, 6.00% Pfd............................................ 1,092,463*
Southern Union Company:
$ 200,000 7.20% Pfd. 11/01/66, Capital Security.......................................... 201,566
64,800 7.55% Pfd...................................................................... 1,687,392*
$ 750,000 TXU Electric Capital V, 8.175% 01/30/37 Capital Security......................... 766,018
Union Electric Company:
14,150 4.56% Pfd...................................................................... 1,198,930*
18,800 $7.64 Pfd...................................................................... 1,946,176*
12,500 Virginia Electric & Power Company, $7.05 Pfd..................................... 1,295,313*
13,500 Virginia Power Capital Trust, 7.375% Pfd. 07/30/42............................... 343,609
Wisconsin Power & Light Company:
1,220 4.50% Pfd...................................................................... 105,310*
546 4.80% Pfd...................................................................... 50,276*
13,000 6.20% Pfd...................................................................... 1,334,532*
Xcel Energy, Inc.:
16,030 $4.08 Pfd., Series B........................................................... 1,284,003*
26,200 $4.10 Pfd., Series C........................................................... 2,109,100*
22,000 $4.11 Pfd., Series D........................................................... 1,775,180*
17,750 $4.16 Pfd., Series E........................................................... 1,449,643*
10,000 $4.56 Pfd., Series G........................................................... 886,700*
-------------------------------------------------------------------------------------------------------------------
72,450,615
----------------
OIL AND GAS -- 4.5%
-------------------------------------------------------------------------------------------------------------------------
8,000 Devon Energy Corporation, 6.49% Pfd., Series A................................... 815,500*
$ 1,500,000 Enterprise Products Partners, 8.375% Pfd......................................... 1,673,415
5,985 EOG Resources, Inc., 7.195% Pfd., Series B....................................... 6,416,698*
$ 1,225,000 KN Capital Trust III, 7.63% 04/15/28 Capital Security............................ 1,195,600
10,000 Lasmo America Limited, 8.15% Pfd., 144A****...................................... 1,055,400*(1)
-------------------------------------------------------------------------------------------------------------------
11,156,613
----------------
8
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2007 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------- ---------
PREFERRED SECURITIES -- (CONTINUED)
REAL ESTATE INVESTMENT TRUST (REIT) -- 2.7%
-------------------------------------------------------------------------------------------------------------------------
21,400 BRE Properties, Inc., 8.08% Pfd., Series B....................................... $ 547,707
10,000 Equity Office Property Trust, 7.75% Pfd., Series G............................... 250,938
1,000 Equity Residential Properties, 8.29% Pfd., Series K.............................. 60,440
Public Storage, Inc.:
153,770 6.45% Pfd., Series F........................................................... 3,825,029
44,000 6.625% Pfd., Series M.......................................................... 1,094,500
2,800 6.75% Pfd., Series E........................................................... 71,050
10,000 6.75% Pfd., Series L........................................................... 254,063
10,000 7.25% Pfd., Series K........................................................... 261,563
10,000 Realty Income Corp., 6.75% Pfd., Series E........................................ 251,563
-------------------------------------------------------------------------------------------------------------------
6,616,853
----------------
MISCELLANEOUS INDUSTRIES -- 1.9%
-------------------------------------------------------------------------------------------------------------------------
13,600 E.I. Du Pont de Nemours and Company, $4.50 Pfd., Series B........................ 1,166,626*
40,000 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A****.............................. 3,600,000*
26,000 Touch America Holdings, $6.875 Pfd............................................... --*+
-------------------------------------------------------------------------------------------------------------------
4,766,626
----------------
U.S. GOVERNMENT SECURITIES -- 0.2%
-------------------------------------------------------------------------------------------------------------------------
11,000 Federal Home Loan Mortgage, Adj. Rate Pfd., Series B............................. 496,320*
-------------------------------------------------------------------------------------------------------------------
496,320
----------------
TOTAL PREFERRED SECURITIES
(Cost $218,981,849)............................................................ 232,360,256
----------------
CORPORATE DEBT SECURITIES -- 5.2%
INSURANCE -- 2.5%
-------------------------------------------------------------------------------------------------------------------------
$ 900,000 Farmers Exchange Capital, 7.20% 07/15/48, 144A****............................... 954,071
$ 4,729,000 Liberty Mutual Insurance, 7.697% 10/15/97, 144A****.............................. 5,093,161
-------------------------------------------------------------------------------------------------------------------
6,047,232
----------------
UTILITIES -- 1.5%
-------------------------------------------------------------------------------------------------------------------------
$ 1,000,000 Duquesne Light Holdings, 6.25% 08/15/35.......................................... 917,571
5,000 Entergy Louisiana LLC, 7.60% 04/01/32............................................ 127,188
45,000 Northern States Power Company, 8.00%............................................. 1,170,000
Southern Union Company:
$ 850,000 7.60% 02/01/24, Senior Notes................................................... 916,201
$ 500,000 8.25% 11/15/29, Senior Notes................................................... 578,924
-------------------------------------------------------------------------------------------------------------------
3,709,884
----------------
9
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2007 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------- ---------
CORPORATE DEBT SECURITIES -- (CONTINUED)
OIL AND GAS -- 1.1%
-------------------------------------------------------------------------------------------------------------------------
$ 2,450,000 KN Energy, Inc., 7.45% 03/01/98.................................................. $ 2,402,926
15,000 Nexen, Inc., 7.35% Subordinated Notes............................................ 385,782(1)
-------------------------------------------------------------------------------------------------------------------
2,788,708
----------------
MISCELLANEOUS -- 0.1%
-------------------------------------------------------------------------------------------------------------------------
15,000 AT&T Inc, 6.375% 02/15/56........................................................ 374,062
-------------------------------------------------------------------------------------------------------------------
374,062
----------------
TOTAL CORPORATE DEBT SECURITIES
(Cost $12,093,470)............................................................. 12,919,886
----------------
COMMON STOCK -- 0.5%
BANKING -- 0.5%
-------------------------------------------------------------------------------------------------------------------------
68,921 New York Community Bancorp, Inc.................................................. 1,153,738*
-------------------------------------------------------------------------------------------------------------------
1,153,738
----------------
TOTAL COMMON STOCK
(Cost $1,135,835).............................................................. 1,153,738
----------------
OPTION CONTRACTS -- 0.1%
1,540 June Put Options on June U.S. Treasury Bond Futures, Expiring 05/25/07........... 157,438+
-------------------------------------------------------------------------------------------------------------------
TOTAL OPTION CONTRACTS
(Cost $662,442)................................................................ 157,438
----------------
10
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2007 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------- ---------
MONEY MARKET FUND -- 0.1%
241,644 BlackRock Provident Institutional, TempFund...................................... $ 241,644
-------------------------------------------------------------------------------------------------------------------
TOTAL MONEY MARKET FUND
(Cost $241,644)................................................................ 241,644
----------------
TOTAL INVESTMENTS (Cost $233,115,240***).......................................... 100.4% 246,832,962
OTHER ASSETS AND LIABILITIES (Net)................................................ (0.4)% (1,070,461)
--------- ----------------
TOTAL NET ASSETS AVAILABLE TO COMMON AND PREFERRED STOCK.......................... 100.0%++ $ 245,762,501
--------- ----------------
MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (MMP(R)) REDEMPTION VALUE.......................... (80,000,000)
----------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK..................................................... $ 165,762,501
================
-----------------------------
* Securities eligible for the Dividends Received Deduction and distributing
Qualified Dividend Income.
** Securities distributing Qualified Dividend Income only.
*** 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. These securities have
been determined to be liquid under the guidelines established by the
Board of Directors.
(1) Foreign Issuer.
(2) A portion of the security is on loan.
+ 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:
PFD. -- Preferred Securities
PVT. -- Private Placement Securities
11
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)
FOR THE PERIOD FROM DECEMBER 1, 2006 THROUGH FEBRUARY 28, 2007 (UNAUDITED)
--------------------------------------------------------------------------
VALUE
--------
OPERATIONS:
Net investment income......................................................................... $ 3,447,715
Net realized gain/(loss) on investments sold during the period................................ 2,390,183
Change in net unrealized appreciation/depreciation of investments held
during the period......................................................................... (2,191,055)
Distributions to MMP(R)* Shareholders from net investment income,
including changes in accumulated undeclared distributions ................................ (883,992)
----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.......................................... 2,762,851
DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock Shareholders(2)..................... (2,704,137)
----------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS.............................................. (2,704,137)
FUND SHARE TRANSACTIONS:
Increase from shares issued under the Dividend Reinvestment
and Cash Purchase Plan.................................................................... 228,702
----------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING
FROM FUND SHARE TRANSACTIONS.................................................................. 228,702
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK ----------------
FOR THE PERIOD ........................................................................... $ 287,416
================
----------------------------------------------------------------------------------------------------------------------
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period........................................................................... $ 165,475,085
Net increase in net assets during the period.................................................. 287,416
----------------
End of period................................................................................. $ 165,762,501
================
--------------------------------------------------------
* Money Market Cumulative Preferred(TM) StocK.
(1) These tables summarize the three months ended February 28, 2007 and should
be read in conjunction with the Fund's audited financial statements,
including footnotes, in its Annual Report dated November 30, 2006.
(2) May include income earned, but not paid out, in prior fiscal year.
12
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Flaherty & Crumrine Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS(1)
FOR THE PERIOD FROM DECEMBER 1, 2006 THROUGH FEBRUARU 28, 2007 (UNAUDITED)
FOR A COMMON STOCK SHARE OUTSTANDING THROUGHOUT THE PERIOD.
-----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......................................................... $ 15.80
----------------
INVESTMENT OPERATIONS:
Net investment income......................................................................... 0.33
Net realized and unrealized gain/(loss) on investments........................................ 0.01
DISTRIBUTIONS TO MMP(R)* SHAREHOLDERS:
From net investment income.................................................................... (0.08)
From net realized capital gains............................................................... --
----------------
Total from investment operations.............................................................. 0.26
----------------
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
From net investment income.................................................................... (0.26)
From net realized capital gains............................................................... --
----------------
Total distributions to Common Stock Shareholders.............................................. (0.26)
----------------
Net asset value, end of period................................................................ $ 15.80
================
Market value, end of period................................................................... $ 17.25
================
Common Stock shares outstanding, end of period................................................ 10,488,187
================
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
Net investment income+........................................................................ 6.25%**
Operating expenses............................................................................ 1.46%**
--------------------------------------------------------
SUPPLEMENTAL DATA:++
Portfolio turnover rate....................................................................... 15%***
Total net assets available to Common and Preferred Stock, end of period (in 000's)............ $ 245,763
Ratio of operating expenses to total average net assets available to
Common and Preferred Stock................................................................ 0.98%**
(1) These tables summarize the three months ended February 28, 2007 and should
be read in conjunction with the Fund's audited financial statements,
including footnotes, in its Annual Report dated November 30, 2006.
* Money Market Cumulative PreferredTM Stock.
** Annualized.
*** Not Annualized.
+ The net investment income ratios reflect income net of operating expenses
and payments to MMP(R)* Shareholders.
++ Information presented under heading Supplemental Data includes MMP(R)*.
13
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Flaherty & Crumrine Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS (CONTINUED)
PER SHARE OF COMMON STOCK (UNAUDITED)
------------------------------------
TOTAL DIVIDEND
DIVIDENDS NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE(1)
---------- --------- ------------- ------------
December 31, 2006............................... $0.0860 $15.56 $16.86 $16.02
January 31, 2007................................ 0.0860 15.61 17.20 16.34
February 28, 2007............................... 0.0860 15.80 17.25 16.39
--------------------
(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.
14
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Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
-----------------------------------------
1. AGGREGATE INFORMATION FOR FEDERAL INCOME TAX PURPOSES
At February 28, 2007, the aggregate cost of securities for federal income
tax purposes was $233,362,589, the aggregate gross unrealized appreciation for
all securities in which there is an excess of value over tax cost was
$17,667,381 and the aggregate gross unrealized depreciation for all securities
in which there is an excess of tax cost over value was $4,197,008.
15
DIRECTORS
Donald F. Crumrine, CFA
Chairman of the Board
David Gale
Morgan Gust
Karen H. Hogan
Robert F. Wulf, CFA
OFFICERS
Donald F. Crumrine, CFA
Chief Executive Officer
Robert M. Ettinger, CFA
President
R. Eric Chadwick, CFA
Chief Financial Officer,
Vice President and Treasurer
Chad C. Conwell
Chief Compliance Officer,
Vice President and Secretary
Bradford S. Stone
Vice President and
Assistant Treasurer
Laurie C. Lodolo
Assistant Compliance Officer,
Assistant Treasurer and
Assistant Secretary
INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: flaherty@pfdincome.com
QUESTIONS CONCERNING YOUR SHARES OF FLAHERTY &
CRUMRINE PREFERRED INCOME FUND?
o If your shares are held in a Brokerage
Account, contact your Broker.
o If you have physical possession of your shares
in certificate form, contact the Fund's Transfer
Agent & Shareholder Servicing Agent --
PFPC Inc.
P.O. Box 43027
Providence, RI 02940-3027
1-800-331-1710
THIS REPORT IS SENT TO SHAREHOLDERS OF FLAHERTY & CRUMRINE PREFERRED INCOME FUND
INCORPORATED FOR THEIR INFORMATION. IT IS NOT A PROSPECTUS, CIRCULAR OR
REPRESENTATION INTENDED FOR USE IN THE PURCHASE OR SALE OF SHARES OF THE FUND OR
OF ANY SECURITIES MENTIONED IN THIS REPORT.
[GRAPHIC OMITTED]
LIGHTHOUSE ART
FLAHERTY & CRUMRINE
===================
PREFERRED INCOME FUND
QUARTERLY
REPORT
FEBRUARY 28, 2007
www.preferredincome.com