FLAHERTY & CRUMRINE PREFERRED INCOME FUND
Dear Shareholder:
The Flaherty & Crumrine Preferred Income Fund ("PFD") produced a total
return on Net Asset Value ("NAV") of 2.6%(1) during the three month period
ending August 31, 2004. Since the beginning of the fiscal year on December 1,
2003, the total return on NAV has been 3.9%.
The NAV returns are consistent with our expectations for how the Fund
should perform during periods of volatile long-term interest rates. As can be
seen from the chart below, the yield on the 30 year U.S. Treasury bond has
changed direction in each of the first three fiscal quarters of 2004 (changes in
the value of the Fund's assets and hedge positions are closely correlated to the
performance of this bond). The decline in rates during the first fiscal quarter
contributed to strong returns for the period. The subsequent jump in rates
during the second fiscal quarter resulted in negative returns for the period, as
the Fund's hedges only partially offset the drop in value of the Fund's
investment portfolio.
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS:
--------------------------------------------------------------------------------
YIELD ON LONG-TERM U.S. TREASURY BOND
DATE YIELD
12/01/03 5.155%
12/05/03 5.047%
12/12/03 5.090%
12/19/03 4.959%
12/26/03 4.969%
01/02/04 5.170%
01/09/04 4.964%
01/16/04 4.892%
01/23/04 4.938%
01/30/04 4.965%
02/06/04 4.928%
02/13/04 4.916%
02/20/04 4.954%
02/27/04 4.855%
03/05/04 4.743%
03/12/04 4.707%
03/19/04 4.718%
03/26/04 4.771%
04/02/04 4.972%
04/09/04 5.028%
04/16/04 5.174%
04/23/04 5.246%
04/30/04 5.281%
05/07/04 5.462%
05/14/04 5.500%
05/21/04 5.460%
05/28/04 5.345%
06/04/04 5.461%
06/11/04 5.474%
06/18/04 5.374%
06/25/04 5.336%
07/02/04 5.205%
07/09/04 5.213%
07/16/04 5.121%
07/23/04 5.171%
07/30/04 5.203%
08/06/04 5.034%
08/13/04 5.008%
08/20/04 5.027%
08/27/04 5.016%
08/31/04 4.935%
--------------------------------------------------------------------------------
As we began the most recent fiscal quarter, the Fund's hedge positions had
appreciated significantly and were offsetting changes in value of the preferred
portfolio almost dollar-for-dollar. Following the weakness in March and April we
were unwilling to risk further declines in NAV, so we maintained the existing
hedge position. If interest rates had continued to rise, the NAV of the Fund
should have remained reasonably stable. That is exactly how the Fund's safety
net hedging strategy is intended to work!
Shortly after the start of the third quarter, long-term interest rates
reversed course and began a steady DECLINE, despite the fact that the Federal
Reserve began INCREASING short-term rates in June (for a more detailed
discussion of the economic conditions driving interest rates, see the "3rd
Quarter Economic Update" on the Fund's website: WWW.PREFERREDINCOME.COM). As
expected, the Fund's preferred securities appreciated throughout the period,
while the hedge fell in value, dragging down overall performance. Initially this
drag was substantial, but it lessened as rates continued to fall.
The Fund also benefited from a modest, favorable move in the relationship
between the Fund's preferred securities and U.S. Treasuries. Simply stated, the
price of our preferreds rose by more than the price of corresponding Treasury
bonds during the quarter. This was the opposite of conditions in the previous
quarter.
--------------------------
(1) Based on monthly data provided by Lipper Inc. Distributions are assumed to
be reinvested at NAV in accordance with Lipper's practice.
NAV investment performance is comprised of principal change and income. The
discussion to this point has focused on factors that impact the principal
change. Let's turn to the other component of performance -- income. The Fund's
investment portfolio continues to produce sufficient amounts of dividend and
interest income to support the current monthly dividend. There are, however,
some warning flags on the horizon.
The Federal Reserve's present policy of raising short-term interest rates
directly affects the Fund by increasing the cost of its leverage. The Fed's
policy has been in place for some time now, and we have factored it into our
management strategy. However, changes in long-term interest rates and the
resulting impact on income are more difficult to plan for. If long-term interest
rates rise, the Fund's hedges should appreciate and enable the Fund to purchase
additional income-producing securities; this additional income should tend to
offset the higher leverage expense.
Things get more challenging if long-term rates decline. This so-called
"bull flattening" scenario (short-term rates rise while long-term rates
decline), initially puts a strain on distributable income. Once again, the cost
of LEVERAGE goes up along with higher short-term rates, but now the income
generated by the investment portfolio may at some point actually fall if issuers
retire older preferred securities with relatively high coupons and replace them
with new issues that pay a lower rate (the issuer is analogous to a homeowner
refinancing a mortgage when interest rates drop).
Fortunately, there is a bright side to this scenario -- as the yield curve
flattens, the cost of the Fund's HEDGING strategy falls. The mathematics behind
this are fairly complicated, but the concept is quite simple. Hedging a
long-term security creates a package that closely resembles a short-term
security. The market imposes a "charge" for this transformation, the amount of
which is closely tied to the difference between long-term and short-term
interest rates. The larger the difference, the more expensive it is to hedge.
Therefore, the cost of hedging declines when the yield curve flattens and the
interest rate differential shrinks. The benefits to the Fund don't materialize
immediately, but they can be significant over time.
Changes in investment income, leverage expense and the cost of hedging (as
well as other factors like realized gains or losses) mean that setting the
dividend rate entails both science and art. We carefully monitor all of these
moving parts, and do our best to set a rate that is sustainable under current
market conditions.
Readers will notice some changes to the appearance of the information that
follows. These changes are in accordance with recent changes to the SEC rules on
shareholder reporting. The biggest change is the inclusion of a complete listing
of the investment portfolio (previous reports for the Fund's first and third
fiscal quarters did not include a portfolio listing). In addition, we've
included a page entitled "Portfolio Overview" that contains a number of
schedules summarizing important measures of the Fund's investments.
We hope you will also continue to visit the Fund's web site at
WWW.PREFERREDINCOME.COM where a broad range of information about the Fund is
updated regularly. We also encourage you to visit WWW.PREFERREDSTOCKGUIDE.COM.
It contains useful information about most of the issues that make up the
preferred securities universe.
Sincerely,
/S/ DONALD F. CRUMRINE /S/ROBERT M. ETTINGER
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
October 11, 2004
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OVERVIEW
AUGUST 31, 2004
-----------------------------------------------------
FUND STATISTICS ON 8/31/04
--------------------------------------------
Net Asset Value $ 15.56
Market Price $ 17.90
Premium/Discount 15.04%
Yield on Market Price 6.37%
Common Shares
Outstanding 10,243,165
MOODY'S RATINGS % OF PORTFOLIO
--------------------------------------------
AAA 0.6%
AA 5.6%
A 28.2%
BBB 43.2%
BB 15.8%
Not Rated 5.3%
--------------------------------------------
Below Investment Grade* 15.0%
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND
S&P
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS:
INDUSTRY CATEGORIES % OF PORTFOLIO
--------------------------------------------
Utilities 45%
Banks 28%
Financial Services 11%
Insurance 9%
Oil and Gas 4%
Other 3%
TOP 10 HOLDINGS BY ISSUER % OF PORTFOLIO
--------------------------------------------
J.P. Morgan Chase 6.5%
Lehman Brothers 5.2%
Interstate Power 5.1%
Citigroup 4.8%
GreenPoint Financial 3.8%
Zurich RegCaPS 3.7%
Duke Energy 3.7%
ABN AMRO 3.4%
Alabama Power 3.4%
SLM Corporation 2.9%
% OF PORTFOLIO**
----------------------------------------------------------------------------------------------------
Holdings Generating Qualified Dividend Income (QDI) for Individuals 76%
Holdings Generating Income Eligible for the Corporate Dividend Received Deduction (DRD) 76%
----------------------------------------------------------------------------------------------------
** 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
AUGUST 31, 2004 (UNAUDITED)
-----------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- 93.6%
BANKING -- 28.4%
--------------------------------------------------------------------------------------------------------------------
ABN AMRO North America, Inc.:
3,625 6.46% Pfd., 144A*** .......................................................... $ 3,806,014*
4,000 6.59% Pfd., 144A*** .......................................................... 4,253,260*
400 BancWest Capital I, 9.50% Pfd. 12/01/30 ........................................ 10,814(1)
$750,000 Barnett Capital II, 7.95% 12/01/26 Capital Security ............................ 839,580
$1,500,000 BT Preferred Capital Trust II, 7.875% 02/25/27 Capital Security ................ 1,673,865(1)
Citigroup, Inc.:
128,927 5.864% Pfd., Series M ........................................................ 6,561,095*
9,876 6.213% Pfd., Series G ........................................................ 516,811*
51,500 6.231% Pfd., Series H ........................................................ 2,715,080*
31,850 6.365% Pfd., Series F ........................................................ 1,683,432*
Cobank, ACB:
50,000 7.00% Pfd., 144A*** .......................................................... 2,708,250*
75,000 Adj. Rate Pfd., 144A*** ...................................................... 4,228,125*
$500,000 Comerica (Imperial) Capital Trust I, 9.98% 12/31/26 Capital Security, Series B . 610,860
$2,250,000 First Hawaiian Capital I, 8.343% 07/01/27 Capital Security, Series B ........... 2,577,128(1)
$1,500,000 First Union Capital II, 7.95% 11/15/29 Capital Security ........................ 1,830,900
$906,000 First Union Institutional Capital I, 8.04% 12/01/26 Capital Security ........... 1,016,156
$1,820,000 First Union Institutional Capital II, 7.85% 01/01/27 Capital Security .......... 2,020,500
$7,820,000 GreenPoint Capital Trust I, 9.10% 06/01/27 Capital Security .................... 9,025,961
34,200 HSBC USA, Inc., $2.8575 Pfd. ................................................... 1,771,218*
J.P. Morgan Chase & Co.:
37,500 6.625% Pfd., Series H ........................................................ 1,999,875*
147,775 Series A, Adj. Rate Pfd. ..................................................... 13,595,300*
$270,000 Keycorp Institutional Capital B, 8.25% 12/15/26 Capital Security ............... 304,241
$674,000 NB Capital Trust II, 7.83% 12/15/26 Capital Security ........................... 749,549
16,500 Regions Financial Trust I, 8.00% Pfd. .......................................... 447,810
$2,635,000 Republic New York Capital II, 7.53% 12/04/26 Capital Security .................. 2,875,655(1)
7,500 Wachovia Preferred Funding, 7.25% Pfd. Series A ................................ 207,825
-------------------------------------------------------------------------------------------------------------------
68,029,304
----------------
FINANCIAL SERVICES -- 10.8%
--------------------------------------------------------------------------------------------------------------------
The Bear Stearns Companies Inc.:
63,100 5.49% Pfd., Series G ......................................................... 3,018,704*
62,540 5.72% Pfd., Series F ......................................................... 3,152,328*
6,975 Freddie Mac, 5.00% Pfd., Series F .............................................. 310,841*
4
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2004 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- 93.6%
FINANCIAL SERVICES -- (CONTINUED)
--------------------------------------------------------------------------------------------------------------------
Lehman Brothers Holdings, Inc.:
85,400 5.67% Pfd., Series D ......................................................... $ 4,130,371*
154,475 5.94% Pfd., Series C ......................................................... 7,696,717*
20,000 6.50% Pfd., Series F ......................................................... 521,300*
123,805 SLM Corporation, 6.97% Pfd., Series A .......................................... 6,950,413*
-------------------------------------------------------------------------------------------------------------------
25,780,674
----------------
INSURANCE -- 7.8%
--------------------------------------------------------------------------------------------------------------------
21,000 Everest Re Capital Trust II, 6.20% Pfd. Series B ............................... 500,745(1)
$5,150,000 MMI Capital Trust I, 7.625% 12/15/27 Capital Security, Series B ................ 5,584,351
18 Premium Assets, Series A, Zurich RegCaPS Variable Inverse Pfd., Pvt. ........... 1,996,798*
$4,000,000 Provident Financing Trust I, 7.405% 03/15/38 Capital Security .................. 3,584,280
7,000 St. Paul Capital Trust I, 7.60% Pfd. ........................................... 185,150
Zurich RegCaPS Funding Trust:
4,250 6.01% Pfd., 144A*** .......................................................... 4,315,875*
2,450 6.58% Pfd., Pvt., 144A*** .................................................... 2,538,519*
-------------------------------------------------------------------------------------------------------------------
18,705,718
----------------
UTILITIES -- 40.3%
--------------------------------------------------------------------------------------------------------------------
Alabama Power Company:
300 4.52% Pfd. ................................................................... 26,463*
5,734 4.72% Pfd. ................................................................... 528,187*
34,100 5.20% Pfd. ................................................................... 825,902*
275,000 5.30% Pfd. ................................................................... 6,635,750*
2,049 Appalachian Power Company, 5.92% Sinking Fund Pfd. ............................. 206,047*
26,125 Avista Corporation, $6.95 Sinking Fund Pfd., Series K .......................... 2,618,247*
10,000 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 ...................... 1,047,800*
10,100 Boston Edison Company, 4.78% Pfd. .............................................. 952,733*
Central Hudson Gas & Electric Corporation:
5,000 4.35% Pfd., Series D, Pvt. ................................................... 403,625*
900 4.96% Pfd., Series E, Pvt. ................................................... 82,102*
10,000 Central Illinois Light Company, 4.64% Pfd. ..................................... 898,550*
11,000 Central Illinois Public Service Corporation, 4.90% Pfd. ........................ 1,043,020*
22,239 Central Vermont Public Service Corporation, 8.30% Pvt. Sinking Fund Pfd. ....... 2,314,302*
Connecticut Light & Power Company:
700 4.50% Pfd., Pvt. ............................................................. 26,226*
9,300 5.28% Pfd. ................................................................... 445,610*
1,905 6.56% Pfd., Series 1968 ...................................................... 98,698*
15,778 $3.24 Pfd. ................................................................... 825,663*
2,100 Consolidated Edison Company of New York, 4.65% Pfd., Series C .................. 193,526*
5
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2004 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
--------------------------------------------------------------------------------------------------------------------
Duke Energy Corporation:
4,556 4.50% Pfd., Series C, Pvt. ................................................... $ 387,533*
26,851 6.75%, Sinking Fund Pfd, Series X ............................................ 2,791,967*
519 7.04% Pfd., Series Y ......................................................... 53,602*
30,762 7.85% Pfd., Series S ......................................................... 3,190,788*
Duquesne Light Company:
7,675 4.10% Pfd. ................................................................... 266,706*
6,330 4.15% Pfd. ................................................................... 222,626*
910 4.20% Pfd. ................................................................... 32,391*
25,775 6.50% Pfd. ................................................................... 1,326,897*
5,490 $2.10 Pfd. Series A .......................................................... 195,417*
5,000 Energy East Capital Trust I, 8.25% Pfd. ........................................ 133,175
Entergy Arkansas, Inc.:
5,407 7.32% Pfd. ................................................................... 564,896*
11,350 7.40% Pfd. ................................................................... 1,181,819*
5,030 7.80% Pfd. ................................................................... 526,515*
3,822 7.88% Pfd. ................................................................... 399,189*
30,266 $1.96 Pfd. ................................................................... 757,407*
4,555 Entergy Gulf States, Inc., 7.56% Pfd. .......................................... 464,132*
Entergy Louisiana, Inc.:
260 7.84% Pfd. ................................................................... 27,208*
106,138 8.00% Pfd., Series 92 ........................................................ 2,678,923*
8,600 Entergy Mississippi, Inc., 7.44% Pfd. .......................................... 891,863*
10,800 Enterprise Capital Trust I, 7.44% Pfd., Series A ............................... 272,106
Florida Power Company:
17,769 4.58% Pfd. ................................................................... 1,541,283*
5,157 4.60% Pfd. ................................................................... 447,112*
18,535 4.75% Pfd. ................................................................... 1,659,346*
170 Florida Power & Light Company, 4.50% Pfd., Series A, Pvt. ...................... 15,262*
50,000 Georgia Power Capital Trust V, 7.125% Pfd. ..................................... 1,345,500
2,010 Great Plains Energy, Inc., 4.50% Pfd. .......................................... 157,021*
55,000 HECO Capital Trust III, 6.50% Pfd. ............................................. 1,406,350
$3,500,000 Houston Light & Power, Capital Trust II, 8.257%, 02/01/37 Capital Security ..... 3,695,860
2,717 Idaho Power Company, 7.68% Pfd., Series 1 ...................................... 281,019*
8,000 Indiana Michigan Power Company, 6.875% Sinking Fund Pfd. ....................... 797,320*
32,650 Indianapolis Power & Light Company, 5.65% Pfd. ................................. 2,952,376*
384,000 Interstate Power & Light Company, 8.375% Pfd., Series B ........................ 12,226,560*
14,250 Narragansett Electric Company, 4.64% Pfd. ...................................... 630,491*
6
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2004 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
--------------------------------------------------------------------------------------------------------------------
Northern Indiana Public Service Company:
3,905 7.44% Pfd. ................................................................... $ 399,521*
7,465 Series A, Adj. Rate Pfd. ..................................................... 384,634*
6,170 Ohio Edison Company, 4.44% Pfd. ................................................ 479,995*
1,724 Ohio Power Company, 5.90% Sinking Fund Pfd. .................................... 172,460*
Pacific Enterprises:
27,430 $4.50 Pfd. ................................................................... 2,276,141*
10,000 $4.75 Pfd., Series 53 ........................................................ 875,900*
PacifiCorp:
200 5.40% Pfd. ................................................................... 20,197*
1,225 $4.56 Pfd. ................................................................... 104,468*
14,542 $4.72 Pfd. ................................................................... 1,283,695*
14,388 $7.48 Sinking Fund Pfd. ...................................................... 1,505,848*
5,000 PECO Energy Company, $4.40 Pfd., Series C ...................................... 412,700*
790 Pennsylvania Power Company, 7.75% Pfd. ......................................... 80,256*
11,194 Portland General Electric, 7.75% Sinking Fund Pfd. ............................. 1,163,169*
19,209 Potomac Electric Power Company, $3.40 Sinking Fund Pfd. ........................ 962,083*
5,000 PPL Electric Utilities Corporation, 6.75% Pfd. ................................. 523,125*
10,000 Public Service Company of New Mexico, 4.58% Pfd., Series 1965 .................. 761,100*
29,050 REI Trust I, 7.20% Pfd. Series C ............................................... 717,245
San Diego Gas & Electric Company:
1,200 4.40% Pfd. ................................................................... 20,490*
700 4.50% Pfd. ................................................................... 12,226*
67,000 $1.70 Pfd .................................................................... 1,751,380*
21,250 $1.7625 Sinking Fund Pfd. .................................................... 550,375*
100,000 Savannah Electric & Power Company, 6.00% Pfd. .................................. 2,709,000*
South Carolina Electric & Gas Company:
25,373 5.125% Purchase Fund Pfd., Pvt. .............................................. 1,336,269*
6,703 6.00% Purchase Fund Pfd., Pvt. ............................................... 341,920*
60,000 Southern Union Company, 7.55% Pfd. ............................................. 1,641,900*
$750,000 TXU Electric Capital V, 8.175% 01/30/37 Capital Security ....................... 832,931
TXU US Holdings Company:
10,000 $4.00 Pfd., Series TES ....................................................... 716,400*
5,700 $4.00 Pfd., Series TPL ....................................................... 408,348*
1,000 $4.84 Pfd. ................................................................... 86,680*
Union Electric Company:
14,150 4.56% Pfd. ................................................................... 1,265,647*
4,000 $7.64 Pfd. ................................................................... 417,880*
12,500 Virginia Electric & Power Company, $7.05 Pfd. .................................. 1,291,313*
7
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2004 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
--------------------------------------------------------------------------------------------------------------------
Wisconsin Power & Light Company:
1,220 4.50% Pfd. ................................................................... $ 109,190*
333 4.80% Pfd. ................................................................... 31,478*
13,000 6.20% Pfd. ................................................................... 1,335,230*
Xcel Energy, Inc.:
16,030 $4.08 Pfd., Series B ......................................................... 1,167,385*
26,200 $4.10 Pfd., Series C ......................................................... 1,917,316*
22,000 $4.11 Pfd., Series D ......................................................... 1,599,950*
17,750 $4.16 Pfd., Series E ......................................................... 1,318,026*
10,000 $4.56 Pfd., Series G ......................................................... 813,900*
-------------------------------------------------------------------------------------------------------------------
96,490,882
----------------
OIL AND GAS -- 4.2%
--------------------------------------------------------------------------------------------------------------------
17,200 Anadarko Petroleum Corporation, 5.46% Pfd. ..................................... 1,726,536*
7,000 Apache Corporation, 5.68% Pfd., Series B ....................................... 714,525*
5,985 EOG Resources, Inc., 7.195% Pfd., Series B ..................................... 6,551,570*
10,000 Lasmo America Limited, 8.15% Pfd., 144A*** ..................................... 1,152,800*
-------------------------------------------------------------------------------------------------------------------
10,145,431
----------------
REAL ESTATE INVESTMENT TRUST (REIT) -- 0.4%
--------------------------------------------------------------------------------------------------------------------
40,000 Regency Centers Corporation, 7.25% Pfd., REIT .................................. 1,011,400
-------------------------------------------------------------------------------------------------------------------
1,011,400
----------------
MISCELLANEOUS INDUSTRIES -- 1.7%
--------------------------------------------------------------------------------------------------------------------
13,600 E.I. Du Pont de Nemours and Company, $4.50 Pfd., Series B ...................... 1,176,944*
36,200 Farmland Industries, Inc., 8.00% Pfd., 144A*** ................................. --+
33,250 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A*** ............................. 2,764,738*
26,000 Touch America Holdings, $6.875 Pfd. ............................................ --+
-------------------------------------------------------------------------------------------------------------------
3,941,682
----------------
TOTAL PREFERRED SECURITIES
(Cost $204,148,080) .......................................................... 224,105,091
----------------
CORPORATE DEBT SECURITY -- 0.5%
UTILITIES -- 0.5%
--------------------------------------------------------------------------------------------------------------------
45,000 Northern States Power Company, 8.00% ........................................... 1,242,000
-------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE DEBT SECURITY
(Cost $1,107,375) ............................................................ 1,242,000
----------------
8
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2004 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
COMMON STOCK AND CONVERTIBLE SECURITIES -- 4.9%
INSURANCE -- 0.7%
--------------------------------------------------------------------------------------------------------------------
50,000 UnumProvident Corporation, 8.25% Mandatory Convertible, 05/16/06 $ 1,662,750
-------------------------------------------------------------------------------------------------------------------
1,662,750
----------------
UTILITIES -- 4.2%
--------------------------------------------------------------------------------------------------------------------
107,500 Duke Energy Corporation 2,381,662*
109,500 FPL Group, Inc., 8.50%, Mandatory Convertible, Series A, 02/16/05 6,305,558
30,000 TXU Corporation, 8.75%, Mandatory Convertible, 11/16/05 1,371,150
-------------------------------------------------------------------------------------------------------------------
10,058,370
----------------
TOTAL COMMON STOCK AND CONVERTIBLE SECURITIES
(Cost $11,120,311) 11,721,120
----------------
OPTION CONTRACTS -- 0.1%
1,450 October Put Options on December U.S. Treasury Bond Futures, Expiring 9/25/04 146,875+
-------------------------------------------------------------------------------------------------------------------
TOTAL OPTION CONTRACTS
(Cost $1,152,956) 146,875
----------------
9
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2004 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
MONEY MARKET FUND -- 0.6%
1,557,423 BlackRock Provident Institutional, TempFund .................................... $ 1,557,423
-------------------------------------------------------------------------------------------------------------------
TOTAL MONEY MARKET FUND
(Cost $1,557,423) ............................................................ 1,557,423
----------------
TOTAL INVESTMENTS (Cost $219,086,145**) ........................................... 99.7% 238,772,509
OTHER ASSETS AND LIABILITIES (Net) ................................................ 0.3% 727,158
--------- ----------------
Total Net Assets Available to Common and Preferred Stock .......................... 100.0%++ $ 239,499,667
--------- ----------------
MONEY MARKET CUMULATIVE PREFERRED STOCK(TM)(MMP(R)) REDEMPTION VALUE ......................... (80,000,000)
ACCUMULATED UNDECLARED DISTRIBUTIONS TO MMP(R) ............................................... (156,298)
----------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ................................................... $ 159,343,369
================
-----------------------------
* Securities eligible for the Dividends Received Deduction and distributing
Qualified Dividend Income.
** 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.
(1) Foreign issuer.
+ 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:
REIT -- Real Estate Investment Trust
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.
10
--------------------------------------------------------------------------------
Flaherty & Crumrine 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, 2003 - Extra ........................... $0.0400 $15.90 $18.40 $17.48
December 31, 2003 ................................... 0.0950 15.90 18.40 17.48
January 31, 2004 .................................... 0.0950 16.23 18.35 17.43
February 29, 2004 ................................... 0.0950 16.37 18.97 18.02
March 31, 2004 ...................................... 0.0950 16.36 19.62 18.64
April 30, 2004 ...................................... 0.0950 15.94 16.11 15.94
May 31, 2004 ........................................ 0.0950 15.45 17.62 16.74
June 30, 2004 ....................................... 0.0950 15.29 17.03 16.18
July 31, 2004 ....................................... 0.0950 15.28 16.78 15.94
August 31, 2004 ..................................... 0.0950 15.56 17.90 17.01
--------------------
(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.
11
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Flaherty & Crumrine Preferred Income Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)
FOR THE PERIOD FROM DECEMBER 1, 2003 THROUGH AUGUST 31, 2004 (UNAUDITED)
----------------------------------------------------------------------------
VALUE
(000'S)
--------
OPERATIONS:
---------------------------------------------------------------------------------------------------------------------
Net investment income ........................................................................ $ 9,533
Net realized loss on investments sold during the period ...................................... (1,413)
Change in net unrealized depreciation of investments held during the period .................. (1,322)
Distributions to Money Market Cumulative PreferredTM Stock Shareholders from net
investment income, including changes in accumulated undeclared distributions ............. (786)
-------------
NET INCREASE IN NET ASSETS FROM OPERATIONS ............................................... 6,012
DISTRIBUTIONS:
---------------------------------------------------------------------------------------------------------------------
Dividends paid from net investment income to Common Stock Shareholders(2) .................... (9,131)
-------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS ......................................... (9,131)
FUND SHARES TRANSACTIONS:
---------------------------------------------------------------------------------------------------------------------
Increase from Common Stock Transactions ...................................................... 1,538
-------------
NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS .................................. 1,538
NET DECREASE IN NET ASSETS AVAILABLE TO COMMON STOCK FOR THE -------------
PERIOD ....................................................................................... (1,581)
=============
NET ASSETS AVAILABLE TO COMMON STOCK:
---------------------------------------------------------------------------------------------------------------------
Beginning of period .......................................................................... 160,924
Net decrease during the period ............................................................... (1,581)
-------------
End of period ................................................................................ $ 159,343
=============
--------------------------------------------------------
(1) These tables summarize the nine months ended August 31, 2004 and should be
read in conjunction with the Fund's audited financial statements, including
footnotes, in its Annual Report dated November 30, 2003.
(2) Includes income earned, but not paid out, in prior fiscal year.
12
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Flaherty & Crumrine Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS(1)
FOR THE PERIOD FROM DECEMBER 1, 2003 THROUGH AUGUST 31, 2004 (UNAUDITED)
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD.
-----------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ......................................................... $ 15.85
-----------
INVESTMENT OPERATIONS:
Net investment income ........................................................................ 0.93
Net realized loss and unrealized depreciation on investments ................................. (0.25)
DISTRIBUTIONS TO MMP(R)* SHAREHOLDERS:
From net investment income (including change in accumulated undeclared
dividends on MMP(R)*) .................................................................... (0.08)
From net realized capital gains .............................................................. --
-----------
Total from investment operations ............................................................. 0.60
-----------
DISTRIBUTIONS TO COMMON SHAREHOLDERS:
From net investment income ................................................................... (0.89)
From net realized capital gains .............................................................. --
-----------
Total distributions to Common Shareholders ................................................... (0.89)
-----------
Net asset value, end of period ............................................................... $ 15.56
===========
Market value, end of period .................................................................. $ 17.90
===========
Common shares outstanding, end of period ..................................................... 10,243,165
===========
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK
SHAREHOLDERS:
Net investment income + ...................................................................... 7.22%**
Operating expenses ........................................................................... 1.49%**
--------------------------------------------------------
SUPPLEMENTAL DATA:++
Portfolio turnover rate ...................................................................... 23%***
Total net assets available to Common and Preferred Stock, end of period (in 000's) ........... $ 239,500
Ratio of operating expenses to total average net assets available to Common and
Preferred Stock .......................................................................... 0.99%**
(1) These tables summarize the nine months ended August 31, 2004 and should be
read in conjunction with the Fund's audited financial statements, including
footnotes, in its Annual Report dated November 30, 2003.
* Money Market Cumulative Preferred(TM) 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)*.
--------------------------------------------------------------------------------
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[BEGIN SIDEBAR]
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
R. Eric Chadwick, CFA
Chief Financial Officer,
Vice President, Treasurer
and Secretary
Peter C. Stimes, CFA
Chief Compliance
Officer and Vice President
Bradford S. Stone
Vice President
Laurie 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.
[END SIDEBAR]
[GRAPHIC OMITTED]
LIGHTHOUSE
FLAHERTY & CRUMRINE
=====================
PREFERRED INCOME FUND
QUARTERLY
REPORT
AUGUST 31, 2004
web site: www.preferredincome.com