UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-Q

Investment Company Act file number 811-06179

Flaherty & Crumrine Preferred Income Fund Incorporated

(Exact name of registrant as specified in charter)

301 E. Colorado Boulevard, Suite 720
Pasadena, CA 91101

Donald F. Crumrine
Flaherty & Crumrine Incorporated
301 E. Colorado Boulevard, Suite 720
Pasadena, CA 91101

Registrant’s telephone number, including area code: 626-795-7300

Date of fiscal year end: November 30

Date of reporting period: August 31, 2011

Form N-Q is to be used by management investment companies, other than small business investment companies registered on Form N-5 (§§ 239.24 and 274.5 of this chapter), to file reports with the Commission, not later than 60 days after the close of the first and third fiscal quarters, pursuant to rule 30b1-5 under the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use the information provided on Form N-Q in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-Q, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-Q 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 the Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.

 

 

Item 1.		Schedule of Investments.

The Schedule(s) of Investments is attached herewith.

FLAHERTY & CRUMRINE PREFERRED INCOME FUND

To the Shareholders of Flaherty & Crumrine Preferred Income Fund:

     During the third fiscal quarter of 2011¹, total return on net asset value² of the Fund was -2.7%; the fiscal year-to-date return was a more pleasing +8.0%. Prior to this most recent quarter, the Fund had nine consecutive quarters of positive returns.

     There was good news on the Fund’s dividend during the quarter — a combination of very low borrowing cost on the Fund’s leverage and relatively high income earned from the Fund’s investment portfolio led to another increase in your monthly dividend. The new rate of $0.093 (beginning in August) is 3.3% higher than the previous level.

     The Federal Reserve has indicated short-term interest rates are likely to stay at present levels at least through mid-2013. The Fund’s borrowing rate is not directly tied to the Fed’s short-term rate target, but the correlation is high, so borrowing costs should remain at or near current levels over the same period.

     On the flip side, however, the task of projecting portfolio income has become more difficult, due both to the sharp decline in interest rates and changes in the regulatory environment in which many preferred issuers operate. For instance, bank regulators here and abroad have yet to issue final guidelines for bank capital; until they do, it is hard to predict when issuers may call outstanding preferreds. We think eventually portfolio income could fall (as higher dividend paying securities are called), but we are working hard to minimize the impact.

     Conditions in financial markets are largely a tale of two houses — an ongoing economic drag from the residential housing market and a struggle of governments to get their financial houses in order. While there is a detailed discussion of these topics in our Quarterly Economic Update on the Fund’s website, our thoughts are summarized here.

     The drop in home prices and rise in foreclosures have eroded household wealth, pushed up savings, and slowed consumer spending, thus short-circuiting the cyclical recovery the economy normally would experience coming out of a deep recession. The resulting sluggish economic growth has encouraged companies to focus on reducing debt, lowering costs, and improving productivity. This has led to an unusual combination of strong profit growth and improving credit quality for corporations, but little improvement in employment. Finally, rising savings, limited demand for new investment, and highly accommodative monetary policy have pushed US Treasury rates to 60-year lows. As long as households seek to reduce indebtedness, which we expect will continue for some time, these conditions are likely to persist.

     At the same time, the deleveraging that began in the household sector has spread to the government sector. Investors are questioning governments’ ability and willingness to sustain current budgets and obligations, most visibly in the sovereign debt crisis boiling over in Europe. The uncertainty over how that situation will be resolved — and its short and long-term impact on the global economy —has sent many investors to the sidelines and out of risky assets. Although politicians are moving toward resolution of these issues, the solutions are often unpopular, and progress is likely to be slow.

¹     June 1, 2011 — August 31, 2011

²     Following the methodology required by the SEC, total return includes income and principal change, plus the impact of the Fund’s leverage and expenses.

     As of August 31, 12% of the Fund’s portfolio consisted of securities issued or guaranteed by banks and insurance companies based in Europe. Each of these companies has operations throughout the world, but is tied most closely to economic conditions in the Eurozone. We believe these issuers are well capitalized and well managed, and therefore better able to handle market turbulence.

     At the end of the day, we believe long-term investors will continue to earn attractive returns on preferred securities, although there may be some bumps along the way. We will continue to manage the Fund as we always have — in quiet times and in crisis — with a disciplined eye on credit fundamentals, relative value and risk management.

     We encourage you to visit the Fund’s website www.preferredincome.com for a more in-depth discussion of conditions in the preferred markets as well as the broader economy.

		Sincerely,
		Donald F. Crumrine		Robert M. Ettinger
		Chairman		President
		October 14, 2011

Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OVERVIEW
August 31, 2011 (Unaudited)

Fund Statistics
Net Asset Value		$	11.96
Market Price		$	13.61
Premium			13.80	%
Yield on Market Price			8.20	%
Common Stock Shares Outstanding			10,817,041

Moody’s Ratings		% of Net Assets†
A			6.5	%
BBB			74.1	%
BB			16.1	%
Below “BB”			0.8	%
Not Rated*			0.2	%
Below Investment Grade**			9.5	%

Industry Categories		% of Net Assets†

     

Top 10 Holdings by Issuer		% of Net Assets†
|
Banco Santander			4.9	%
HSBC Plc			4.2	%
Capital One Financial			4.0	%
Metlife			3.8	%
PNC Financial Services			3.8	%
Liberty Mutual Group			3.7	%
Wells Fargo			3.3	%
Southern California Edison			3.1	%
Interstate Power & Light			2.8	%
Enbridge Energy Partners			2.7	%

		% of Net Assets***†
Holdings Generating Qualified Dividend Income (QDI) for Individuals			44	%
Holdings Generating Income Eligible for the Corporate Dividends Received Deduction (DRD)			31	%

Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS
August 31, 2011 (Unaudited)

Shares/$ Par						Value
Preferred Securities — 93.9%
				Banking — 39.3%
$	2,750,000			Astoria Capital Trust I, 9.75% 11/01/29, Series B		$	2,865,676	(1)
	355,000			Banco Santander, 10.50% Pfd., Series 10			9,729,237	**(1)(2)
				Bank of America Corporation:
	15,551			6.70% Pfd.			358,451	*(1)
	26,920			8.20% Pfd.			670,308	*
	32,736			8.625% Pfd.			824,947	*
$	500,000			BankAmerica Institutional, Series A, 8.07% 12/31/26, 144A****			500,000
				Barclays Bank PLC:
$	3,250,000			6.278%			2,407,031	**(1)(2)
	1,200			7.75% Pfd., Series 4			29,124	**(2)
	75,000			8.125% Pfd., Series 5			1,850,250	**(1)(2)
	28,900			BB&T Capital Trust VI, 9.60% Pfd. 08/01/64			778,277	(1)
$	1,500,000			BBVA International Preferred, 5.919%			1,110,640	**(1)(2)
$	1,750,000			BNP Paribas, 7.195%, 144A****			1,522,500	**(1)(2)
$	4,750,000			Capital One Capital III, 7.686% 08/15/36			4,761,875	(1)
$	500,000			Capital One Capital V, 10.25% 08/15/39			522,175	(1)
$	2,500,000			Capital One Capital VI, 8.875% 05/15/40			2,545,485	(1)
	10,000			Citigroup Capital XII, 8.50% Pfd. 03/30/40			256,563
	62,300			Citigroup Capital XIII, 7.875% Pfd. 10/30/40			1,623,694	(1)
$	5,210,000			Colonial BancGroup, 7.114%, 144A****			201,887	(3)††
	2,500			Countrywide Capital IV, 6.75% Pfd. 04/01/33			55,235
	9,000			FBOP Corporation, Adj. Rate Pfd., 144A****			7,020*	(3)(4)†
$	750,000			Fifth Third Capital Trust IV, 6.50% 04/15/37			699,375
	30,000			Fifth Third Capital Trust V, 7.25% Pfd. 08/15/67			753,600
	130,000			Fifth Third Capital Trust VI, 7.25% Pfd. 11/15/67			3,258,125	(1)
	1,250			First Republic Preferred Capital Corporation, 10.50% Pfd., 144A****			1,276,563
	3,750			First Tennessee Bank, Adj. Rate Pfd., 3.75%(5), 144A****			2,433,984	*(1)
$	500,000			First Tennessee Capital II, 6.30% 04/15/34, Series B			462,500
$	1,500,000			First Union Capital II, 7.95% 11/15/29			1,531,975	(1)
$	500,000			Fleet Capital Trust II, 7.92% 12/11/26			493,750
	1			FT Real Estate Securities Company, 9.50% Pfd., 144A****			958,500
				Goldman Sachs:
$	785,000			Capital I, 6.345% 02/15/34			728,187	(1)
$	1,058,000			Capital II, 5.793%			767,050	(1)
	2,800			STRIPES Custodial Receipts, Adj. Rate, 10.70%(5), Pvt.			1,327,200	*(3)(4)
	132,900			HSBC Holdings PLC, 8.00% Pfd., Series 2			3,544,775	**(1)(2)
$	500,000			HSBC USA Capital Trust II, 8.38% 05/15/27, 144A****			509,013	(1)
	145,300			HSBC USA, Inc., 6.50% Pfd., Series H			3,639,983	*(1)

Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (Continued)
August 31, 2011 (Unaudited)

Shares/$ Par						Value
Preferred Securities — (Continued)
				Banking — (Continued)
$	1,725,000			JPMorgan Chase Capital XVIII, 6.95% 08/17/36, Series R		$	1,708,002	(1)
	59,065			Keycorp Capital IX, 6.75% Pfd. 12/15/66			1,506,158	(1)
	27,600			Keycorp Capital X, 8.00% Pfd. 03/15/68			710,976	(1)
$	550,000			Lloyds Banking Group PLC, 6.657%, 144A****			316,250	**(2)†
$	550,000			MBNA Capital, 8.278% 12/01/26, Series A			552,063
	25,000			Morgan Stanley Capital Trust VI, 6.60% Pfd. 02/01/46			614,063
$	860,000			NB Capital Trust IV, 8.25% 04/15/27			866,450	(1)
	200,000			PNC Financial Services, 9.875% Pfd., Series L			5,637,500	*(1)
$	1,750,000			PNC Preferred Funding Trust III, 8.70%, 144A****			1,794,187	(1)
	1,750			Sovereign REIT, 12.00% Pfd., Series A, 144A****			2,141,729
	6,025			SunTrust Capital IX, 7.875% Pfd. 03/15/68			153,110
$	2,400,000			Wachovia Capital Trust III, Adj. Rate, 5.56975%(5)			2,109,000	*(1)
	20,000			Wachovia Preferred Funding, 7.25% Pfd., Series A			519,650	(1)
$	1,000,000			Washington Mutual, 9.75%, 144A****			25,000	††
$	1,600,000			Webster Capital Trust IV, 7.65% 06/15/37			1,628,810	(1)
				Wells Fargo & Company:
	1,305			7.50% Pfd., Series L			1,358,466	*(1)
	15,000			8.00% Pfd., Series J			435,000	*
$	500,000			Wells Fargo Capital XV, 9.75%			518,750
							77,600,119
				Financial Services — 2.8%
$	1,000,000			Claudius, Ltd. — Credit Suisse AG, 7.875%, Series B			995,000	(2)
				Heller Financial, Inc.:
	35,000			6.687% Pfd., Series C			3,491,250	*(1)
	5,760			6.95% Pfd., Series D			583,020	*
	22,404			HSBC Finance Corporation, 6.36% Pfd., Series B			515,572	*(1)
				Lehman Brothers Holdings, Inc.:
	15,000			5.67% Pfd., Series D			4,650	*††
	19,500			5.94% Pfd., Series C			5,070	*††
	25,000			6.50% Pfd., Series F			1,613	*††
	27,500			7.95% Pfd.			770	*††
							5,596,945
				Insurance — 19.0%
$	975,000			Ace Capital Trust II, 9.70% 04/01/30			1,306,486	(1)(2)
$	250,000			AON Corporation, 8.205% 01/01/27			287,229

Shares/$ Par						Value
Preferred Securities — (Continued)
				Insurance — (Continued)
	14,300			Arch Capital Group Ltd., 8.00% Pfd., Series A		$	360,181	**(1)(2)
$	3,500,000			AXA SA, 6.379%, 144A****			2,730,000	**(1)(2)
	35,900			Axis Capital Holdings, 7.50% Pfd., Series B			3,508,105	(1)(2)
	90,600			Delphi Financial Group, 7.376% Pfd. 05/15/37			2,168,738	(1)
$	4,000,000			Everest Re Holdings, 6.60% 05/15/37			3,650,000	(1)
$	4,100,000			Liberty Mutual Group, 10.75% 06/15/58, 144A****			5,084,000	(1)
$	900,000			MetLife Capital Trust IV, 7.875% 12/15/37, 144A****			922,500	(1)
$	2,775,000			MetLife Capital Trust X, 9.25% 04/08/38, 144A****			3,288,375	(1)
$	2,400,000			MetLife, Inc., 10.75% 08/01/39			3,296,460	(1)
	30,000			PartnerRe Ltd., 7.250% Pfd., Series E			758,400	**(1)(2)
				Principal Financial Group:
	14,000			5.563% Pfd., Series A			1,354,938	*(1)
	105,000			6.518% Pfd., Series B			2,684,063	*(1)
	51,084			Renaissancere Holdings Ltd., 6.08% Pfd., Series C			1,161,139	**(1)(2)
	119,500			Scottish Re Group Ltd., 7.25% Pfd.			1,101,647	**(2)†
$	1,300,000			Stancorp Financial Group, 6.90% 06/01/67			1,159,027	(1)
$	750,000			USF&G Capital, 8.312% 07/01/46, 144A****			926,828	(1)
$	2,000,000			XL Capital Ltd., 6.50%, Series E			1,785,000	(1)(2)
							37,533,116
				Utilities — 24.2%
	56,430			Alabama Power Company, 6.45% Pfd.			1,569,459	*(1)
				Baltimore Gas & Electric Company:
	10,000			6.70% Pfd., Series 1993			1,005,938	*(1)
	2,400			7.125% Pfd., Series 1993			242,700	*
	20,600			Calenergy Capital Trust III, 6.50% Pfd. 09/01/27			1,019,700	(1)
$	3,458,000			COMED Financing III, 6.35% 03/15/33			3,070,604	(1)
	15,000			Constellation Energy Group, 8.625% Pfd. 06/15/63, Series A			405,450
$	250,000			Dominion Resources Capital Trust I, 7.83% 12/01/27			252,548
				Dominion Resources, Inc.:
$	3,500,000			7.50% 06/30/66			3,591,094	(1)
	13,178			8.375% Pfd. 06/15/64, Series A			382,821	(1)
	40,000			Entergy Arkansas, Inc., 6.45% Pfd.			1,000,000	*(1)
	25,000			Entergy Louisiana, Inc., 6.95% Pfd.			2,461,720	*(1)
$	3,284,000			FPL Group Capital, Inc., 6.65% 06/15/67			3,181,007	(1)
	25,000			Georgia Power Company, 6.50% Pfd., Series 2007A			2,675,000	*(1)
	7,500			Gulf Power Company, 6.45% Pfd., Series 2007A			806,784	*(1)

Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (Continued)
August 31, 2011 (Unaudited)

Shares/$ Par						Value
Preferred Securities — (Continued)
				Utilities — (Continued)
	32,650			Indianapolis Power & Light Company, 5.65% Pfd.		$	3,056,856	*
	185,596			Interstate Power & Light Company, 8.375% Pfd., Series B			5,440,283	*(1)
$	500,000			PECO Energy Capital Trust III, 7.38% 04/06/28, Series D			513,560	(1)
$	600,000			PPL Capital Funding, 6.70% 03/30/67, Series A			579,659	(1)
	46,000			PPL Electric Utilities Corporation, 6.25% Pfd.			1,162,940	*(1)
$	3,800,000			Puget Sound Energy, Inc., 6.974% 06/01/67			3,846,128	(1)
	50,526			Scana Corporation, 7.70% Pfd. 01/30/65			1,437,970	(1)
				Southern California Edison:
	38,900			6.00% Pfd., Series C			3,825,574	*(1)
	10,700			6.125% Pfd.			1,080,700	*(1)
	12,500			6.50% Pfd., Series D			1,261,329	*(1)
$	750,000			TXU Electric Capital V, 8.175% 01/30/37			221,250	(3)
	3,000			Virginia Electric & Power Company, $6.98 Pfd.			310,031	*
	3,700			Wisconsin Public Service Corporation, 6.88% Pfd.			385,494	*
$	3,250,000			WPS Resources Corporation, 6.11% 12/01/66			3,107,156	(1)
							47,893,755
				Energy — 6.6%
$	5,000,000			Enbridge Energy Partners LP, 8.05% 10/01/37			5,248,575	(1)
$	4,100,000			Enterprise Products Partners, 8.375% 08/01/66, Series A			4,293,914	(1)
	3,500			Kinder Morgan GP, Inc., 8.33% Pfd., 144A****			3,545,063	*
							13,087,552
				Real Estate Investment Trust (REIT) — 0.3%
				PS Business Parks, Inc.:
	12,500			6.70% Pfd., Series P			316,016
	7,500			6.875% Pfd., Series R			191,250
							507,266
				Miscellaneous Industries — 1.7%
	37,400			Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A****			3,260,813	*(1)
							3,260,813
				Total Preferred Securities
				(Cost $184,580,236)			185,479,566

Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (Continued)
August 31, 2011 (Unaudited)

Shares/$ Par						Value
Corporate Debt Securities — 3.8%
				Banking — 0.2%
$	415,000			Goldman Sachs Group, 6.75% 10/01/37, Sub Notes		$	395,097	(1)
							395,097
				Insurance — 2.3%
$	2,500,000			Liberty Mutual Insurance, 7.697% 10/15/97, 144A****			2,318,765	(1)
$	2,000,000			UnumProvident Corporation, 7.25% 03/15/28			2,193,754	(1)
							4,512,519
				Utilities — 1.3%
$	2,175,000			Southern Union Company, 8.25% 11/15/29, Senior Notes			2,684,885	(1)
							2,684,885
				Total Corporate Debt Securities
				(Cost $6,241,936)			7,592,501
Common Stock — 0.4%
				Banking — 0.1%
	3,620			CIT Group, Inc.			125,143	*†
							125,143
				Utilities — 0.3%
	6,250			Exelon Corporation			269,500	*
	14,558			PPL Corporation			420,435	*
							689,935
				Total Common Stock
				(Cost $962,666)			815,078

Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (Continued)
August 31, 2011 (Unaudited)

Shares/$ Par						Value
Money Market Fund — 0.8%
1,519,725 BlackRock Liquidity Funds, T-Fund						$	1,519,725
Total Money Market Fund
(Cost $1,519,725)							1,519,725
Total Investments (Cost $193,304,563***)			98.9	%			195,406,870
Other Assets And Liabilities (Net)			1.1	%			2,221,691
Total Managed Assets			100.0	%‡		$	197,628,561
Loan Principal Balance							(68,300,000	)
Total Net Assets Available To Common Stock						$	129,328,561

ABBREVIATIONS:
Pfd.		— Preferred Securities
Pvt.		— Private Placement Securities
REIT		— Real Estate Investment Trust
STRIPES		— Structured Residual Interest Preferred Enhanced Securities

Flaherty & Crumrine Preferred Income Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK⁽¹⁾
For the period from December 1, 2010 through August 31, 2011 (Unaudited)

		Value
OPERATIONS:
Net investment income		$	9,164,725
Net realized gain/(loss) on investments sold during the period			4,753,293
Change in net unrealized appreciation/depreciation of investments			(3,770,307	)
Net increase in net assets resulting from operations.			10,147,711
DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock Shareholders(2)			(9,092,909	)
Total Distributions to Common Stock Shareholders.			(9,092,909	)
FUND SHARE TRANSACTIONS:
Increase from shares issued under the Dividend Reinvestment and Cash Purchase Plan			712,636
Net increase in net assets available to Common Stock resulting from Fund share transactions			712,636
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK FOR THE PERIOD		$	1,767,438
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period.		$	127,561,123
Net increase in net assets during the period			1,767,438
End of period		$	129,328,561

Flaherty & Crumrine Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS⁽¹⁾
For the period from December 1, 2010 through August 31, 2011 (Unaudited)
For a Common Stock share outstanding throughout the period.

PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period		$	11.86
INVESTMENT OPERATIONS:
Net investment income			0.85
Net realized and unrealized gain/(loss) on investments.			0.09
Total from investment operations			0.94
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
From net investment income			(0.84	)
Total distributions to Common Stock Shareholders			(0.84	)
Net asset value, end of period		$	11.96
Market value, end of period		$	13.61
Common Stock shares outstanding, end of period			10,817,041
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
Net investment income†			9.30	%*
Operating expenses including interest expense.			2.10	%*
Operating expenses excluding interest expense			1.47	%*
SUPPLEMENTAL DATA:††
Portfolio turnover rate			14	%**
Total managed assets, end of period (in 000’s)		$	197,629
Ratio of operating expenses including interest expense to total managed assets			1.40	%*
Ratio of operating expenses excluding interest expense to total managed assets			0.98	%*

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, 2010 — Extra		$	0.0300			$	11.82			$	11.62			$	11.66
December 31, 2010			0.0900				11.82				11.62				11.66
January 31, 2011			0.0900				11.92				11.80				11.90
February 28, 2011			0.0900				12.16				12.13				12.16
March 31, 2011			0.0900				12.14				12.36				12.14
April 29, 2011			0.0900				12.38				12.71				12.38
May 31, 2011			0.0900				12.56				13.34				12.67
June 30, 2011			0.0900				12.37				13.45				12.78
July 29, 2011			0.0900				12.39				12.90				12.39
August 31, 2011			0.0930				11.96				13.61				12.93

Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (Unaudited)

1. Aggregate Information for Federal Income Tax Purposes

     At August 31, 2011, the aggregate cost of securities for federal income tax purposes was $193,105,218, the aggregate gross unrealized appreciation for all securities in which there is an excess of value over tax cost was $23,629,882 and the aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over value was $21,328,230.

2. Additional Accounting Standards

     Fair Value Measurement: The inputs and valuation techniques used to measure fair value of the Fund’s investments are summarized into three levels as described in the hierarchy below:

	•		Level 1 — quoted prices in active markets for identical securities
	•		Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)
	•		Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)

     The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Transfers in and out of levels are recognized at market value at the end of the period. A summary of the inputs used to value the Fund’s investments as of August 31, 2011 is as follows:

										Level 2				Level 3
		Total				Level 1				Significant				Significant
		Value at				Quoted				Observable				Unobservable
		August 31, 2011				Price				Inputs				Inputs
Preferred Securities
Banking		$	77,600,119			$	55,833,341			$	21,557,871			$	208,907
Financial Services			5,596,945				515,572				5,081,373				—
Insurance			37,533,116				22,610,503				14,922,613				—
Utilities			47,893,755				18,125,440				29,768,315				—
Energy			13,087,552				9,542,489				3,545,063				—
Real Estate Investment Trust (REIT)			507,266				507,266				—				—
Miscellaneous Industries			3,260,813				—				3,260,813				—
Corporate Debt Securities			7,592,501				3,079,982				4,512,519				—
Common Stock
Banking			125,143				125,143				—				—
Utilities			689,935				689,935				—				—
Money Market Fund			1,519,725				1,519,725				—				—
Total Investments		$	195,406,870			$	112,549,396			$	82,648,567			$	208,907

The Fund did not have any significant transfers in and out of Level 1 and Level 2 during the period.

Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

     The valuation of the Fund’s investments in Level 2 and Level 3 is based primarily on market information, where available. This includes, but is not limited to, prices provided by third-party providers, observable trading activity (including the recency, depth, and consistency of such information with quoted levels), and the depth and consistency of broker-quoted prices. In the event market information is not directly available, comparable information may be observed for securities that are similar in many respects to those being valued. The Fund may employ an income approach for certain securities that also takes into account credit risk, interest rate risk, and potential recovery prospects.

     The following is a reconciliation of Level 3 investments for which significant unobservable inputs were used to determine fair value:

						Preferred Securities
		Total Investments				Banking
Balance as of 11/30/10		$	39,816			$	39,816
Accrued discounts/premiums.			—				—
Realized gain/(loss)			—				—
Change in unrealized appreciation/(depreciation) .			(32,796	)			(32,796	)
Purchases			—				—
Sales.			—				—
Transfer in			201,887				201,887	(1)
Transfer out			—				—
-
Balance as of 8/31/11		$	208,907			$	208,907

     For the period ended August 31, 2011, total change in unrealized gain/(loss) on Level 3 securities still held at period-end and included in the change in net assets was $(32,796).

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Item 2.		Controls and Procedures.

(a)

The registrant’s principal executive and principal financial 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, as amended (the “1940 Act”) (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).

(b)

There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

Item 3.		Exhibits.

Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 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) Flaherty & Crumrine 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 10/25/11

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.

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

Date 10/25/11

By (Signature and Title)*		/s/ R. Eric Chadwick   R. Eric Chadwick, Chief Financial Officer, Treasurer and
		Vice President
		(principal financial officer)

Date 10/25/11