FLAHERTY & CRUMRINE PREFERRED INCOME FUND

To the Shareholders of Flaherty & Crumrine Preferred Income Fund:

     The start of fiscal 2009 has been a mixed bag--overall performance was
negative but signs of improvement began to appear late in the Fund's 1st fiscal
quarter ended February 28, 2009. During this period, the Fund's total return
based on net asset value was -11.8%. The total return based on market price was
-1.2%.

     Since the middle of 2007, when the first signs of economic trouble
appeared, financial markets throughout the world have experienced severe
turmoil. The preferred market has been knocked around especially hard and, as a
result, the performance of the Fund has suffered. In June 2007, the Fund's NAV
was just above $15 per share. At the end of this past fiscal period it was
$5.11. In the summer of 2007, the Fund was paying a monthly dividend of $0.086
per share; it is now $0.063. In addition to managing the Fund, we are
shareholders and these numbers hurt.

     The temptation to rip out the rear-view mirror and concentrate on the road
ahead is reinforced by the view from both. We have just experienced the worst
markets in the history of the Fund, and it's not possible to know if we have
seen the bottom. But if the first step towards recovery is admitting there is a
problem, the massive de-leveraging of our financial system is such an admission.
While painful, this will result in a much healthier economy going forward.

     In the meantime, however, there is a great deal of uncertainty and fear
about how much bad debt is out there and about the government's plans for
dealing with it. In the tumultuous days of late February, there were very real
concerns about the viability of several large financial institutions. In
addition, the hodge-podge of government programs introduced since September left
many scratching their heads to find any real core strategy for recovery. Talk of
nationalizing the banking system took on a life of its own, and prices of
securities issued by most banks (debt, preferred and common stock) all seemed to
be in freefall.

     On February 25th, the U.S. Treasury released details of its Capital
Assistance Program; two days later, Citicorp announced a preferred for common
exchange program; and in early March, several large banks announced that they
were profitable in January and February. These developments muted talk of bank
nationalization and financial meltdown. (Please see the Fund's website for a
more detailed discussion dated February 27, 2009.)

     The events of late February, along with subsequent announcements by several
banks that they expect to be profitable in the 1st quarter, have enticed some
investors back into the market. Equally important, efforts to kick start the
economy appear to be taking hold and some degree of confidence has been
restored. As discussed in the Quarterly Economic Update on the Fund's website,
we expect the growth rate of the U.S. economy to once again be positive by the
4th quarter of this year.

     As one would expect, for several quarters, bank issues have been the worst
performing segment of the preferred market, as well as of the Fund's portfolio.
Fortunately, the Fund's exposure to the banking industry was much less than it
might otherwise have been--bank issues comprise about 60% of the entire
preferred universe, but only 36%(1) of the portfolio as of February 28, 2009.

     Other than banks, the portfolio is invested in utilities 25%, insurance 15%
and energy 9%. These positions helped dampen the negative impact of the banks,
but they too are trading at historically low levels. Whereas concerns about
credit quality have been the key factor driving the bank market, prices in these
other segments have been impacted more by a widespread desire (or need) to sell.
Investors ranging from hedge funds to broker/dealer firms to closed-end funds
like PFD have been caught in a

----------
(1)  The bank component of the entire universe is based on par value, while
     calculation for the Fund's portfolio is based on market value.



deleveraging cycle where falling prices force sales, and sales cause prices to
fall further. This trend became readily evident during the latter part of last
year. Only recently has it shown signs of abating.

     There are indications the market for preferred stocks has begun to
stabilize. The indiscriminate selling has slowed and buyers are returning. We've
been encouraged to see more rational investor behavior. For example, most
companies in the utility industry are financially healthy, but until recently,
investors were acting like they were all marching up to death's door. The same
can be said for most insurance companies. And, in our opinion, there are still
many healthy banks in the U.S., yet the market had seemed to think a bank is a
bank is a bank (apologies to Gertrude Stein). In recent weeks, sanity appears to
be creeping back into the market and some are viewing these anomalies as
opportunities.

     The depressed prices of preferred securities have also attracted the
interest of issuers themselves, and in the past few weeks several have launched
formal tender offers or appear to be purchasing their securities in the open
market. In this environment, a company's willingness to spend cash and purchase
its own securities is a meaningful indication of just how cheap the securities
have gotten.

     Another small but important sign of improvement was the ability of one
company to raise capital by issuing preferred. FPL Capital, a subsidiary of a
large public utility, sold $375 million of a new preferred security, and demand
for the issue was strong. This was the first new preferred issue since last
September! A vibrant new issue market would be a sure signal of the market's
return to health, and while we're not there yet, we are encouraged by the
response to this recent issue.

     In light of ongoing weakness in the preferred market, the Fund has
continued to reduce the amount of leverage it employs. As the value of the
Fund's investment portfolio declined, the ratios of assets to liabilities using
required measures fell and the Fund reduced leverage to maintain coverage
ratios. During the last quarter, the Fund announced the redemption of $10
million of its auction preferred shares on April 7th. One consequence of
deleveraging over the past six months has been a reduction in the amount of
income available for distribution to shareholders as dividends, and in December,
the Fund reduced its dividend by 4.5%. Leverage remains an important part of the
Fund's strategy for producing high current income and we have provided a more
complete description on the Fund's website in a Leverage Update dated April 20,
2009.

     We are optimistic about the future. By no means are we out of the
woods--there are many substantial challenges ahead. A wise friend used to
counsel against betting on the end of the world, pointing out that it just
doesn't happen that often (and if it does, there will be bigger issues to worry
about!). Much of our optimism stems from just how far prices have fallen; the
likelihood of more defaults is higher than in the past, but market prices imply
widespread business failures, and we will take the other side of that bet.

     We hope you'll visit the Fund's website, www.preferredincome.com. Our most
recent Economic Update breaks down the economic data in a useful and informative
way. The website also keeps shareholders up-to-date on various issues affecting
the Fund.

Sincerely,


/s/ Donald F. Crumrine                  /s/ Robert M. Ettinger

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

April 20, 2009


                                        2



                          Flaherty & Crumrine Preferred Income Fund Incorporated
                                                              PORTFOLIO OVERVIEW
                                                   FEBRUARY 28, 2009 (UNAUDITED)

FUND STATISTICS ON 2/28/09


                               
Net Asset Value                   $      5.11
Market Price                      $      5.43
Premium                                  6.26%
Yield on Market Price                   13.92%
Common Stock Shares Outstanding    10,600,205




MOODY'S RATINGS           % OF NET ASSETS+
---------------           ----------------
                       
AA                              4.2%
A                              17.2%
BBB                            39.9%
BB                             21.1%
Below "BB"                      1.2%
Not Rated                       4.1%
                               ----
Below Investment Grade*        18.6%


*    BELOW INVESTMENT GRADE BY BOTH MOODY'S AND S&P.



INDUSTRY CATEGORIES   % OF NET ASSETS+
-------------------   ----------------
                   
Banking                      36%
Utilities                    25%
Insurance                    15%
Energy                        9%
Other                        15%




TOP 10 HOLDINGS BY ISSUER   % OF NET ASSETS+
-------------------------   ----------------
                         
Interstate Power & Light          5.1%
PNC Financial Services            5.0%
Liberty Mutual Group              5.0%
Banco Santander                   4.2%
Sovereign Bancorp                 3.9%
Kinder Morgan                     3.8%
Bank of America                   3.0%
Union Electric                    2.9%
Ocean Spray                       2.8%
Enbridge Energy Partners          2.7%




                                                                                           % OF NET ASSETS**+
                                                                                           ------------------
                                                                                        
Holdings Generating Qualified Dividend Income (QDI) for Individuals                                51%
Holdings Generating Income Eligible for the Corporate Dividends Received Deduction (DRD)           45%


**   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.

+    NET ASSETS INCLUDES ASSETS ATTRIBUTABLE TO THE USE OF LEVERAGE.


                                        3



Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 2009 (UNAUDITED)



SHARES/$ PAR                                                                            VALUE
------------                                                                       --------------
                                                                                
PREFERRED SECURITIES -- 84.8%
               BANKING -- 35.8%
$  3,000,000   Astoria Capital Trust I, 9.75% 11/01/29, Series B ...............   $    2,677,850
               Banco Santander:
      34,248      Adj. Rate Pfd. ...............................................          248,726**(1)
     277,150      6.50% Pfd. ...................................................        3,672,238**(1)
      22,750      6.80% Pfd. ...................................................          277,778**(1)
               Bank of America Corporation:
     108,000      Adj. Rate Pfd., Series 5 .....................................          558,360*
     200,000      6.25% Pfd. ...................................................        1,380,000*
      48,700      6.70% Pfd. ...................................................          374,503*
$  4,800,000   Capital One Capital III, 7.686% 08/15/36 ........................        2,181,634
$  5,210,000   CBG Florida REIT Corporation, 7.114%, 144A**** ..................          527,189
               CIT Group, Inc.:
$    905,000      6.10% 03/15/67 ...............................................          201,218
     254,500      6.35% Pfd., Series A .........................................        1,145,886*
      38,500   Citigroup, Inc., 8.125% Pfd., Series AA .........................          320,416*+
      50,000   Cobank, ACB, 7.00% Pfd., 144A**** ...............................        1,342,300*
$  4,400,000   Comerica Capital Trust II, 6.576% 02/20/37 ......................        1,393,784
       9,000   FBOP Corporation, Adj. Rate Pfd., 144A**** ......................        2,058,750*
$  2,250,000   First Hawaiian Capital I, 8.343% 07/01/27, Series B .............        1,838,230(1)
       1,250   First Republic Preferred Capital Corporation, 10.50% Pfd.,
                  144A**** .....................................................          262,500
      22,500   First Republic Preferred Capital Corporation II, 8.75% Pfd.,
                  Series B, 144A**** ...........................................          358,594
       2,250   First Tennessee Bank, Adj. Rate Pfd., 144A**** ..................          787,500*
$  1,500,000   First Union Capital II, 7.95% 11/15/29 ..........................        1,248,728
               Goldman Sachs:
       7,800      Cabco Trust Capital I, Adj. Rate Pfd. 02/15/34 ...............           74,588
          11      Pass-Through Certificates, Class B, 144A**** .................                0*+
       2,500      STRIPES Custodial Receipts, Pvt. .............................               25*
               HSBC USA, Inc.:
      52,000      Adj. Rate Pfd., Series D .....................................          627,250*
     176,000      Adj. Rate Pfd., Series G .....................................        1,535,160*
       2,500      $2.8575 Pfd. .................................................           65,625*
      15,000   Keycorp Capital IX, 6.75% Pfd. 12/15/66 .........................          153,638
$    550,000   Lloyds Banking Group PLC, 6.657%, 144A**** ......................          109,337**(1)
       3,000   Merrill Lynch, Series II STRIPES Custodial Receipts, Pvt. .......            7,530*+
      31,500   PFGI Capital Corporation, 7.75% Pfd. ............................          573,892
     274,200   PNC Financial Services, 9.875% Pfd., Series F ...................        4,414,620*
$  1,500,000   Regions Financing Trust II, 6.625% 05/15/47 .....................          469,427



                                        4



                          Flaherty & Crumrine Preferred Income Fund Incorporated
                                            PORTFOLIO OF INVESTMENTS (CONTINUED)
                                                   FEBRUARY 28, 2009 (UNAUDITED)



SHARES/$ PAR                                                                            VALUE
------------                                                                       --------------
                                                                                
PREFERRED SECURITIES -- (CONTINUED)
               BANKING -- (CONTINUED)
     271,480   Sovereign Bancorp, 7.30% Pfd., Series C .........................   $    3,010,713*
      20,100   Sovereign Capital Trust V, 7.75% Pfd. 05/22/36 ..................          240,446
       1,000   Sovereign REIT, 12.00% Pfd., Series A, 144A**** .................          642,500
               U.S. Bancorp, Auction Pass-Through Trust, Cl. B:
          11      Series 2006-5, Variable Rate Pfd., 144A**** ..................              275*+
          11      Series 2006-6, Variable Rate Pfd., 144A**** ..................              275*+
$  1,000,000   Washington Mutual Preferred Funding IV, 9.75%, 144A**** .........              700++
$  1,600,000   Webster Capital Trust IV, 7.65% 06/15/37 ........................          651,232
                                                                                   --------------
                                                                                       35,433,417
                                                                                   --------------
               FINANCIAL SERVICES -- 0.0%
               Lehman Brothers Holdings, Inc.:
      15,000      5.67% Pfd., Series D .........................................            3,840*++
      19,500      5.94% Pfd., Series C .........................................            4,877*++
      25,000      6.50% Pfd., Series F .........................................            1,663*++
      27,500      7.95% Pfd. ...................................................              110*++
                                                                                   --------------
                                                                                           10,490
                                                                                   --------------
               INSURANCE -- 12.0%
      27,500   Arch Capital Group Ltd., 8.00% Pfd., Series A ...................          485,719**(1)
      35,900   Axis Capital Holdings, 7.50% Pfd., Series B .....................        2,170,830(1)
      90,600   Delphi Financial Group, 7.376% Pfd. 05/15/37 ....................          925,253
$  3,000,000   Everest Re Holdings, 6.60% 05/15/37 .............................        1,070,283
               Liberty Mutual Group:
$  4,500,000      7.80% 03/15/37, 144A**** .....................................        1,802,354
$    500,000      10.75% 06/15/58, 144A**** ....................................          265,331
$  2,000,000   MetLife Capital Trust IV, 7.875% 12/15/37, 144A**** .............        1,254,504
$  1,500,000   MetLife Capital Trust X, 9.25% 04/08/38, 144A**** ...............        1,001,360
$  2,000,000   PartnerRe Finance II, 6.44% 12/01/66 ............................          770,842(1)
               Renaissancere Holdings Ltd.:
      73,050      6.08% Pfd., Series C .........................................          945,998**(1)
      19,700      6.60% Pfd., Series D .........................................          279,740**(1)
     119,500   Scottish Re Group Ltd., 7.25% Pfd. ..............................          294,269**(1)+
$    750,000   USF&G Capital, 8.312% 07/01/46, 144A**** ........................          610,826
                                                                                   --------------
                                                                                       11,877,309
                                                                                   --------------



                                        5



Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2009 (UNAUDITED)



SHARES/$ PAR                                                                            VALUE
------------                                                                       --------------
                                                                                
PREFERRED SECURITIES -- (CONTINUED)
               UTILITIES -- 25.0%
               Alabama Power Company:
         300      4.52% Pfd. ...................................................   $       20,559*
       5,734      4.72% Pfd. ...................................................          410,339*
      25,000      6.45% Pfd. ...................................................          528,908*
       5,000   Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 .......          512,813*
         900   Central Hudson Gas & Electric Corporation, 4.96% Pfd.,
                  Series E, Pvt. ...............................................           69,778*
       2,780   Central Vermont Public Service Corporation, 8.30% Sinking Fund
                  Pfd., Pvt. ...................................................          278,348*
$  2,491,000   COMED Financing III, 6.35% 03/15/33 .............................        1,355,438
$    500,000   Dominion Resources, Inc., 7.50% .................................          325,402
               Duquesne Light Company:
       7,675      4.10% Pfd. ...................................................          175,566*
       9,190      4.15% Pfd. ...................................................          221,709*
         910      4.20% Pfd. ...................................................           21,158*
       5,490      $2.10 Pfd., Series A .........................................          120,780*
      25,000   Entergy Arkansas, Inc., 6.45% Pfd. ..............................          507,813*
               Georgia Power Company:
      12,600      6.125% Pfd. ..................................................          309,110*
       5,500      6.50% Pfd., Series 07-A ......................................          470,250*
       2,010   Great Plains Energy, Inc., 4.50% Pfd. ...........................          157,293*
      50,000   Hawaiian Electric Company, Inc., 5.25% Pfd., Series H, Pvt. .....          739,065*
      32,650   Indianapolis Power & Light Company, 5.65% Pfd. ..................        2,325,294*
     199,000   Interstate Power & Light Company, 8.375% Pfd., Series B .........        5,096,888*
               Pacific Enterprises:
      22,430      $4.50 Pfd. ...................................................        1,750,242*
      10,000      $4.75 Pfd., Series 53 ........................................          784,063*
       1,095   PacifiCorp, 5.40% Pfd. ..........................................           89,379*
$    500,000   PECO Energy Capital Trust III, 7.38% 04/06/28, Series D .........          428,317
$  2,475,000   Puget Sound Energy, Inc., 6.974% 06/01/67 .......................        1,386,000
      25,000   Southern California Edison, 6.00% Pfd., Series C ................        1,879,688*
$  1,000,000   Southern Union Company, 7.20% 11/01/66 ..........................          505,000
$    750,000   TXU Electric Capital V, 8.175% 01/30/37 .........................          333,713
               Union Electric Company:
      14,150      4.56% Pfd. ...................................................          923,288*
      18,800      $7.64 Pfd. ...................................................        1,901,150*
$  1,900,000   Wisconsin Energy Corporation, 6.25% 05/15/67 ....................        1,160,619
                                                                                   --------------
                                                                                       24,787,970
                                                                                   --------------



                                        6



                          Flaherty & Crumrine Preferred Income Fund Incorporated
                                            PORTFOLIO OF INVESTMENTS (CONTINUED)
                                                   FEBRUARY 28, 2009 (UNAUDITED)



SHARES/$ PAR                                                                            VALUE
------------                                                                       --------------
                                                                                
PREFERRED SECURITIES -- (CONTINUED)
               ENERGY -- 9.2%
$  4,500,000   Enbridge Energy Partners LP, 8.05% 10/01/37 .....................   $    2,686,590
$  2,600,000   Enterprise Products Partners, 7.034% 01/15/68 ...................        1,679,405
       3,500   Kinder Morgan GP, Inc., 8.33% Pfd., 144A**** ....................        3,802,094*
      10,000   Lasmo America Limited, 8.15% Pfd., 144A**** .....................          953,125*(1)
                                                                                   --------------
                                                                                        9,121,214
                                                                                   --------------
               MISCELLANEOUS INDUSTRIES -- 2.8%
      40,000   Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** .............        2,735,000*
                                                                                   --------------
                                                                                        2,735,000
                                                                                   --------------
               TOTAL PREFERRED SECURITIES
                  (Cost $153,970,383) ..........................................       83,965,400
                                                                                   --------------
CORPORATE DEBT SECURITIES -- 2.9%
               INSURANCE -- 2.9%
$  4,729,000   Liberty Mutual Insurance, 7.697% 10/15/97, 144A**** .............        2,884,435
                                                                                   --------------
                                                                                        2,884,435
                                                                                   --------------
               TOTAL CORPORATE DEBT SECURITIES
                  (Cost $4,646,173) ............................................        2,884,435
                                                                                   --------------
MONEY MARKET FUND -- 10.1%
   9,969,776   BlackRock Provident Institutional, T-Fund .......................        9,969,776
                                                                                   --------------
               TOTAL MONEY MARKET FUND
                  (Cost $9,969,776) ............................................        9,969,776
                                                                                   --------------



                                        7



Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2009 (UNAUDITED)


                                                                             
TOTAL INVESTMENTS (Cost $168,586,332***) .............................    97.8%    $   96,819,611
OTHER ASSETS AND LIABILITIES (Net) ...................................     2.2%         2,193,066
                                                                         -----     --------------
TOTAL NET ASSETS AVAILABLE TO COMMON AND PREFERRED STOCK .............   100.0%+++ $   99,012,677
                                                                         -----     --------------
AUCTION PREFERRED STOCK (APS) REDEMPTION VALUE .......................                (44,800,000)
                                                                                   --------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ...........................             $   54,212,677
                                                                                   ==============


----------
*    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. At February 28, 2009, these
     securities amounted to $21,398,949 or 21.6% of net assets. These securities
     have been determined to be liquid under the guidelines established by the
     Board of Directors.

(1)  Foreign Issuer.

+    Non-income producing.

++   The issuer has filed for bankruptcy protection. As a result, the Fund may
     not be able to recover the principal invested and also does not expect to
     receive income on this security going forward.

+++  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:

CABCO   -- Corporate Asset Backed Corporation
PFD.    -- Preferred Securities
PVT.    -- Private Placement Securities
STRIPES -- Structured Residual Interest Preferred Enhanced Securities


                                        8



                          Flaherty & Crumrine Preferred Income Fund Incorporated
                 STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)
      FOR THE PERIOD FROM DECEMBER 1, 2008 THROUGH FEBRUARY 28, 2009 (UNAUDITED)



                                                                                        VALUE
                                                                                   --------------
                                                                                
OPERATIONS:
   Net investment income .......................................................   $    2,731,837
   Net realized gain/(loss) on investments sold during the period ..............       (3,705,379)
   Change in net unrealized appreciation/depreciation of investments ...........       (5,680,353)
   Distributions to APS* Shareholders from net investment income,
      including changes in accumulated undeclared distributions ................         (507,079)
                                                                                   --------------
   NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ........................       (7,160,974)
DISTRIBUTIONS:
   Dividends paid from net investment income to Common Stock Shareholders(2) ...       (2,001,890)
                                                                                   --------------
   TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS ............................       (2,001,890)
FUND SHARE TRANSACTIONS:
   Increase from shares issued under the Dividend Reinvestment and Cash
      Purchase Plan ............................................................           98,166
                                                                                   --------------
   NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING FROM
      FUND SHARE TRANSACTIONS ..................................................           98,166
                                                                                   --------------
NET DECREASE IN NET ASSETS AVAILABLE TO COMMON STOCK FOR THE PERIOD ............   $   (9,064,698)
                                                                                   ==============
NET ASSETS AVAILABLE TO COMMON STOCK:
   Beginning of period. ........................................................   $   63,277,375
   Net decrease in net assets during the period ................................       (9,064,698)
                                                                                   --------------
   End of period ...............................................................   $   54,212,677
                                                                                   ==============


----------
*    Auction Preferred Stock.

(1)  These tables summarize the three months ended February 28, 2009 and should
     be read in conjunction with the Fund's audited financial statements,
     including footnotes, in its Annual Report dated November 30, 2008.

(2)  May include income earned, but not paid out, in prior fiscal year.


                                        9



Flaherty & Crumrine Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS(1)
FOR THE PERIOD FROM DECEMBER 1, 2008 THROUGH FEBRUARY 28, 2009 (UNAUDITED)
FOR A COMMON STOCK SHARE OUTSTANDING THROUGHOUT THE PERIOD.


                                                                                
PER SHARE OPERATING PERFORMANCE:
   Net asset value, beginning of period ........................................   $         5.98
                                                                                   --------------
INVESTMENT OPERATIONS:
   Net investment income .......................................................             0.26
   Net realized and unrealized gain/(loss) on investments. .....................            (0.89)
DISTRIBUTIONS TO APS* SHAREHOLDERS:
   From net investment income ..................................................            (0.05)
                                                                                   --------------
   Total from investment operations ............................................            (0.68)
                                                                                   --------------
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
   From net investment income ..................................................            (0.19)
                                                                                   --------------
   Total distributions to Common Stock Shareholders ............................            (0.19)
                                                                                   --------------
   Net asset value, end of period ..............................................   $         5.11
                                                                                   ==============
   Market value, end of period .................................................   $         5.43
                                                                                   ==============
   Common Stock shares outstanding, end of period ..............................       10,600,205
                                                                                   ==============
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
   Net investment income+ ......................................................            14.03%**
   Operating expenses ..........................................................             2.24%**
SUPPLEMENTAL DATA:++
   Portfolio turnover rate .....................................................                6%***
   Total net assets available to Common and Preferred Stock, end of
      period (in 000's) ........................................................   $       99,013
   Ratio of operating expenses to total average net assets available to
      Common and Preferred Stock ...............................................             1.21%**


(1)  These tables summarize the three months ended February 28, 2009 and should
     be read in conjunction with the Fund's audited financial statements,
     including footnotes, in its Annual Report dated November 30, 2008.

*    Auction Preferred Stock.

**   Annualized.

***  Not Annualized.

+    The net investment income ratios reflect income net of operating expenses
     and payments to APS Shareholders.

++   Information presented under heading Supplemental Data includes APS.


                                       10



                          Flaherty & Crumrine Preferred Income Fund Incorporated
                                                FINANCIAL HIGHLIGHTS (CONTINUED)
                                           PER SHARE OF COMMON STOCK (UNAUDITED)



                                     TOTAL                   NYSE      DIVIDEND
                                   DIVIDENDS   NET ASSET   CLOSING   REINVESTMENT
                                      PAID       VALUE      PRICE      PRICE(1)
                                   ---------   ---------   -------   ------------
                                                         
December 31, 2008 ..............    $0.0630      $6.50      $5.90        $6.56
January 30, 2009 ...............     0.0630       6.08       7.05         6.70
February 27, 2009 ..............     0.0630       5.11       5.43         5.16


----------
(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 reinvestment 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



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

1.   AGGREGATE INFORMATION FOR FEDERAL INCOME TAX PURPOSES

     At February 28, 2009 the aggregate cost of securities for federal income
tax purposes was $168,794,750, the aggregate gross unrealized appreciation for
all securities in which there is an excess of value over tax cost was $1,122,295
and the aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value was $73,097,434.

2.   ADDITIONAL ACCOUNTING STANDARDS

     STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 157 "FAIR VALUE
MEASUREMENTS" ("SFAS 157")

     In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 157 "Fair Value Measurements"
("SFAS 157") effective for fiscal years beginning after November 15, 2007. This
standard clarifies the definition of fair value for financial reporting,
establishes a framework for measuring fair value and requires additional
disclosures about the use of fair value measurements. The Fund has adopted SFAS
157 as of December 1, 2007. The three levels of the fair value hierarchy under
SFAS 157 are described 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. A
summary of the inputs used to value the Fund's net assets as of February 28,
2009 is as follows:



                                                                       OTHER FINANCIAL
                                                                         INSTRUMENTS
                                                        INVESTMENTS      (UNREALIZED
                                                       IN SECURITIES    APPRECIATION/
VALUATION INPUTS                                      (MARKET VALUE)    DEPRECIATION)*
----------------                                      --------------   ---------------
                                                                 
Level 1 - Quoted Prices ..........................      $36,425,291          $--
Level 2 - Other Significant Observable Inputs ....       60,394,320           --
Level 3 - Significant Unobservable Inputs ........               --           --
                                                        -----------          ---
TOTAL ............................................      $96,819,611          $--


*    Other financial instruments are derivative instruments not reflected in the
     Portfolio of Investments, such as futures, forwards and swaps which are
     valued at the unrealized appreciation/depreciation on the investment. As of
     February 28, 2009 the Fund does not have any other financial instruments.


                                       12



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

3.   SECTION 19 NOTICES

     Section 19 of the Investment Company Act of 1940 requires registered
investment companies to include a notice with the payment of a dividend if a
portion of that dividend may come from sources other than undistributed net
income (other sources could include realized gains from the sale of securities
and non-taxable return of capital). Copies of the Section 19 notices for the
Fund are available on the website at www.preferredincome.com.

     The amounts and sources of distributions reported below are only estimates
and are not being provided for tax reporting purposes. Form 1099-DIV will be
sent to shareholders in January 2010 reporting the amount and tax
characterization of distributions for the 2009 calendar year.



                                                    SOURCE OF DISTRIBUTIONS AS OF 2/28/09
                                              ------------------------------------------------
                                                  NET           NET         RETURN   TOTAL PER
                                              INVESTMENT      REALIZED        OF       COMMON
                                                INCOME     CAPITAL GAINS   CAPITAL     SHARE
                                              ----------   -------------   -------   ---------
                                                                         
Calendar 2009 Distributions ..............     $0.1197         $0.00       $0.0063     $0.126
Percentage of Total Distributions ........        95.0%          0.0%          5.0%        --



                                       13



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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?

     -    If your shares are held in a Brokerage Account, contact your Broker.

     -    If you have physical possession of your shares in certificate form,
          contact the Fund's Transfer Agent & Shareholder Servicing Agent --

               PNC Global Investment Servicing
               (U.S.) 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.

                (FLAHERTY & CRUMRINE PREFERRED INCOME FUND LOGO)

                                Quarterly Report

                                February 28, 2009

                             www.preferredincome.com