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

                                    FORM N-Q

        QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED MANAGEMENT
                               INVESTMENT COMPANY

                  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
        ---------------------------------------------------------------
               (Address of principal executive offices) (Zip code)

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

        Registrant's telephone number, including area code: 626-795-7300
                                                           ----------------
                   Date of fiscal year end: NOVEMBER 30, 2006
                                            -----------------------
                    Date of reporting period: AUGUST 31, 2006
                                             ------------------------

Form N-Q is to be used by  management  investment  companies,  other  than small
business investment companies registered on Form N-5 (ss.ss. 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. ss. 3507.





ITEM 1. SCHEDULE OF INVESTMENTS.
The Schedule(s) of Investments is attached herewith.

FLAHERTY & CRUMRINE PREFERRED INCOME FUND

To the  Shareholders  of the  Flaherty & Crumrine Preferred Income Fund ("PFD"):

     During the Fund's 3rd fiscal  quarter,  the  economy  slowed from its rapid
growth  earlier in the year and,  for the first time in two years,  the  Federal
Reserve  paused in its  ratcheting  up of  short-term  interest  rates.  In this
environment,  the Fund performed  very well,  earning a total return of +3.0% on
its net asset value (NAV) in the three  months  ended August 31st and +5.5% over
its  fiscal  year-to-date.

     In a reversal of the weak  markets for Treasury  securities  earlier in the
year, when the Fund's hedging strategies  contributed  significantly to results,
long-term  interest  rates  declined  during the recent  fiscal  quarter and the
interest-rate hedge proved unnecessary. However, as always, we follow the Fund's
investment  strategy of  maintaining  the hedge in place,  while  attempting  to
control  its  cost.  Doing so helps  protect  the value of the  Fund's  holdings
against  significant  increases  in  long-term  interest  rates and  potentially
results in an increase  in the Fund's  distributable  income.  During the recent
fiscal  quarter,  the Fund's NAV performed very well,  even after  absorbing the
cost of the hedge.

    Conditions in the market for preferred  securities  continue to be positive.
This  market is somewhat  amorphous,  so we find it useful to break it down into
smaller  groups of  similarly-structured  issues.  The  market  for  traditional
preferred  STOCK  (issues  that pay  dividends  and may have tax  advantages  to
certain  investors which the Fund can pass through to its shareholders) has been
delivering  strong relative  returns for some time. As of August 31st, this type
of security comprised 62% of the Fund's portfolio.

     Since the  beginning of 2006,  fourteen  new  traditional  preferred  stock
issues totaling $5.7 billion have been brought to market  (increasing the sector
total by roughly  10%);  the  additional  supply has helped  focus  interest  on
traditional preferred stock and appears to have attracted new investors. Several
of these recent issues have dividend  rates that adjust every quarter to reflect
changes in short-term  interest rates. This floating-rate  feature fits the Fund
nicely because it tends to offset changes in the cost of the Fund's leverage and
requires only a minimal interest-rate hedge. However, unless the level of income
we can earn on this type of security goes up, we don't anticipate increasing the
Fund's holdings much beyond present levels.

    The other major  category of the  preferred  market is the fully  taxable or
"hybrid"  preferred.  Income from these  issues is taxed as  ordinary  income to
investors  and  is  a  deductible  expense  to  the  issuer.  Taxable  preferred
securities  comprise the lion's share of the preferred  market,  and the segment
continues to grow rapidly.  Over $24 billion of new taxable preferred securities
have come to market in 2006. As of August 31st, 33% of the Fund's  portfolio was
invested in fully-taxable preferred securities.

    Much of the recent  growth in  taxable  preferred  securities  has come from
issuance  of  "enhanced"  preferreds.   These  issues  have  certain  terms  and
conditions  which may result in better  credit  ratings for the issuer (which in
turn helps keep their borrowing costs down).  Since most of these features favor
the issuer,  investors  should require a higher  return.  In our view, too often
this is not the case.  As a  result,  the  portfolio's  allocation  to  enhanced
preferreds has increased at a much slower pace than that of the overall  market.

     While changes in short-term  interest rates affect the valuation of some of
the Fund's  securities (and therefore its NAV),  short-term  rates more directly
affect the Fund's income and the amount of its dividend by influencing  both the
cost of its Money Market  PreferredTM  Stock  (MMP(R))  leverage and its hedging
strategy. The Fund's leverage generally produces additional distributable income
for its  Common  Stock  shareholders.  The amount of this  additional  income is
influenced by the "spread" between the income generated by the portfolio and the
cost of leverage.



    As the Fed increased  short-term  interest  rates  through June 2006,  these
spreads   narrowed   significantly   and  the  Fund  generated  less  additional
distributable  income.  If the Fed maintains its pause on short-term  rates, and
long-term rates do not decrease materially,  the Fund's leverage should continue
to produce the same additional  distributable  income as it does now. Of course,
if the Fed  lowers  short-term  interest  rates,  the Fund  should see a greater
benefit  from  its  use  of  leverage  and  consequently  have  more  additional
distributable income for its Common Stock shareholders.

    The cost of the Fund's  hedging  strategy is also  directly  affected by the
slope of the yield curve (in other  words,  the  difference  between  short- and
long-term interest rates). When the yield curve is steep - as it was for most of
the period from mid-2001  through 2004 - hedging tends to be expensive,  because
the market charges the difference  between long- and short-term  yields to those
hedging. However, if the slope of the yield curve is as flat as it has been this
year,  the market  will not charge as much to hedge and the Fund should not need
to spend as much on its hedging strategy as it has over the past few years.

    We  hope   investors   will   take   advantage   of  the   Fund's   website,
WWW.PREFERREDINCOME.COM. On it, there is a more extensive discussion of enhanced
hybrid preferred securities, the impact of changing short-term interest rates on
the additional  distributable income provided by the Fund's leverage and how the
slope of the yield curve  affects the cost of the Fund's  hedging  strategy.  It
also contains a wide range of additional information about the Fund.

Sincerely,

           /S/ DONALD F. CRUMRINE                    /S/ ROBERT M. ETTINGER
           Donald F. Crumrine                        Robert M. Ettinger
           Chairman of the Board                     President

October 19, 2006



--------------------------------------------------------------------------------
                          Flaherty & Crumrine Preferred Income Fund Incorporated
                                                              PORTFOLIO OVERVIEW
                                                     AUGUST 31, 2006 (UNAUDITED)
                        --------------------------------------------------------


FUND STATISTICS ON 08/31/06
------------------------------------------------------
Net Asset Value                $     15.29

Market Price                   $     16.51

Premium                               7.98%

Yield on Market Price                 6.25%

Common Stock Shares

Outstanding                     10,444,513

INDUSTRY CATEGORIES         % OF PORTFOLIO
------------------------------------------
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS

Utilities                               33%
Banks                                   31%
Insurance                               14%
Financial Services                      12%
Oil and Gas                              5%
Other                                    3%
REITs                                    2%

MOODY'S RATINGS             % OF PORTFOLIO
------------------------------------------
AAA                                    0.4%

AA                                     4.6%

A                                     21.4%

BBB                                   48.1%

BB                                    12.0%

Not Rated                            11.7%
------------------------------------------
Below Investment Grade*               14.9%

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


TOP 10 HOLDINGS BY ISSUER               % OF PORTFOLIO
------------------------------------------------------
Interstate Power & Light                       4.9%

HSBC                                           3.9%

FBOP Corporation                               3.8%

Goldman Sachs                                  3.6%


North Fork Bancorporation                      3.5%

SLM Corporation                                3.4%

Xcel Energy                                    3.1%

Lehman Brothers                                2.9%

First Republic Bank                            2.9%

Cobank                                         2.8%




                                                                                            % OF PORTFOLIO**
------------------------------------------------------------------------------------------------------------
                                                                                                
Holdings Generating Qualified Dividend Income (QDI) for Individuals                                 67%
Holdings Generating Income Eligible for the Corporate Dividend Received Deduction (DRD)             62%
------------------------------------------------------------------------------------------------------------
**  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, 2006 (UNAUDITED)
--------------------------------------------------------------------------------





SHARES/$ PAR                                                                                                VALUE
------------                                                                                               -------
                                                                                                          
PREFERRED SECURITIES -- 94.4%
               BANKING -- 31.2%
------------------------------------------------------------------------------------------------------------------------------------
$  3,000,000   Astoria Capital Trust I, 9.75% 11/01/29 Capital Security, Series B...............   $      3,405,360
               Auction Pass-Through Trust, Cl. B:
          11     Series 2006-5, Variable Rate Pfd., 144A****....................................            328,625*
          11     Series 2006-6, Variable Rate Pfd., 144A****....................................            328,625*
      54,700   BAC Capital Trust I, 7.00% Pfd. 12/15/31.........................................          1,398,132
       6,000   BAC Capital Trust II, 7.00% Pfd. 02/01/32........................................            151,320
$  1,500,000   Barclays Bank PLC, Adj. Rate Pfd.................................................          1,405,957**(1)
$    800,000   Barnett Capital II, 7.95% 12/01/26 Capital Security..............................            835,068
$  2,000,000   Capital One Capital III, 7.686% Pfd..............................................          2,089,970
      74,700   Citigroup Capital VIII, 6.95% Pfd. 09/15/31......................................          1,901,115
               Cobank, ACB:
      50,000     7.00% Pfd., 144A****...........................................................          2,589,750*
      75,000     Adj. Rate Pfd., 144A****.......................................................          4,087,125*
               Comerica (Imperial) Capital Trust I:
       5,000     7.60% Pfd. 07/01/50............................................................            127,350
$    500,000     9.98% 12/31/26 Capital Security, Series B......................................            539,657
$  1,500,000   Dime Capital Trust I, 9.33% 05/06/27 Capital Security, Series A..................          1,589,137
       9,000   FBOP Corporation, Adj. Rate Pfd., 144A****.......................................          9,180,000*
$  2,250,000   First Hawaiian Capital I, 8.343% 07/01/27 Capital Security, Series B.............          2,371,241(1)
               First Republic Bank:
     200,000     6.25% Pfd......................................................................          4,914,000*
      53,700     6.70% Pfd......................................................................          1,363,174*
      22,500   First Republic Preferred Capital Corporation II, 8.75% Pfd., Series B, 144A****..            605,813
$  1,500,000   First Union Capital II, 7.95% 11/15/29 Capital Security..........................          1,787,393
      16,500   Fleet Capital Trust VII, 7.20% Pfd. 12/15/31.....................................            420,833
       5,000   Fleet Capital Trust VIII, 7.20% Pfd. 03/15/32....................................            128,450
$  7,820,000   GreenPoint Capital Trust I, 9.10% 06/01/27 Capital Security......................          8,309,102
$  3,000,000   HBOS Capital Funding LP, 6.85% Pfd...............................................          3,040,650(1)
       5,000   HSBC Series II, Variable Inverse Pfd., Pvt.......................................          5,510,000*
               HSBC USA, Inc.:
     140,000     6.50% Pfd., Series H...........................................................          3,700,900*
       3,250     $2.8575 Pfd....................................................................            163,296*
$    270,000   Keycorp Institutional Capital B, 8.25% 12/15/26 Capital Security.................            282,701
$    674,000   NB Capital Trust II, 7.83% 12/15/26 Capital Security.............................            702,399
      16,000   PFGI Capital Corporation, 7.75% Pfd..............................................            412,960
$    650,000   RBS Capital Trust B, 6.80% Pfd...................................................            655,629**(1)
          10   Roslyn Real Estate, 8.95% Pfd., Series C, 144A****...............................          1,093,816
      77,600   Sovereign Bancorp, 7.30% Pfd., Series C..........................................          2,068,816*
      30,600   Sovereign Capital Trust V, 7.75% Pfd. 05/22/36...................................            807,228

                                       4




--------------------------------------------------------------------------------
                          Flaherty & Crumrine Preferred Income Fund Incorporated
                                            PORTFOLIO OF INVESTMENTS (CONTINUED)
                                                     AUGUST 31, 2006 (UNAUDITED)
--------------------------------------------------------------------------------





SHARES/$ PAR                                                                                                VALUE
------------                                                                                               -------
                                                                                                          
PREFERRED SECURITIES -- (CONTINUED)
               BANKING -- (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
       1,100   SunTrust Capital V, 7.05% Pfd. 12/15/31..........................................   $         28,028
       9,100   USB Capital V, 7.25% Pfd. 12/15/31...............................................            231,959
      16,000   USB Capital VII, 5.875% Pfd. 08/15/35............................................            369,760
      96,700   USB Capital VIII, 6.35% Pfd. 12/29/65............................................          2,403,479
       7,300   USB Capital X, 6.50% Pfd. 04/12/66...............................................            182,245
$  2,400,000   Washington Mutual Preferred Funding, Variable Rate Pfd., 144A****................          2,355,636
      40,000   Zions Capital Trust B, 8.00% Pfd. 09/01/32.......................................          1,031,200
-------------------------------------------------------------------------------------------------------------------
                                                                                                         74,897,899
                                                                                                   ----------------
               FINANCIAL SERVICES -- 11.1%
------------------------------------------------------------------------------------------------------------------------------------
               Goldman Sachs Group, Inc.:
     100,000     Adj. Rate Pfd., Series D.......................................................          2,557,500*
          25     Pass-Through Certificates, Class B, 144A****...................................          2,667,500*
       2,500     STRIPES Custodial Receipts, Pvt................................................          2,660,000*
               Lehman Brothers Holdings, Inc.:
      36,280     5.67% Pfd., Series D...........................................................          1,776,632*
     104,475     5.94% Pfd., Series C...........................................................          5,293,226*
       3,000   Merrill Lynch Series II STRIPES Custodial Receipts, Pvt..........................          3,072,000*
       9,200   Morgan Stanley Capital Trust IV, 6.25% Pfd.......................................            226,550
       5,870   Morgan Stanley Capital Trust VI, 6.60% Pfd.......................................            147,601
               SLM Corporation:
     136,855     6.97% Pfd., Series A...........................................................          7,362,115*
       7,500     Adj. Rate Pfd., Series B.......................................................            766,312*
-------------------------------------------------------------------------------------------------------------------
                                                                                                         26,529,436
                                                                                                   ----------------
               INSURANCE -- 11.6%
------------------------------------------------------------------------------------------------------------------------------------
      15,000   ACE Ltd., 7.80% Pfd., Series C...................................................            387,450**(1)
               Aegon NV:
      27,750     6.375% Pfd.....................................................................            694,027**(1)
      25,000     6.50% Pfd......................................................................            626,000**(1)
      10,000   Arch Capital Group Ltd., 7.875% Pfd., Series B...................................            255,550**(1)
               Axis Capital Holdings:
      70,750     7.25% Pfd., Series A...........................................................          1,806,601**(1)
       9,300     Variable Rate Pfd., Series B...................................................            942,601(1)
      27,000   Berkley W.R. Capital Trust II, 6.75% Pfd. 07/26/45...............................            664,740
      61,200   Endurance Specialty Holdings, 7.75% Pfd..........................................          1,521,738**(1)
      18,250   Everest Re Capital Trust II, 6.20% Pfd., Series B................................            419,020(1)
     140,000   MetLife Inc., 6.50% Pfd., Series B...............................................          3,602,200*


                                       5


--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2006 (UNAUDITED)
--------------------------------------------------------------------------------





SHARES/$ PAR                                                                                                VALUE
------------                                                                                               -------
                                                                                                          
PREFERRED SECURITIES -- (CONTINUED)
               INSURANCE -- (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
$  1,625,000   Oil Insurance Ltd., Variable Rate Pfd., 144A****.................................   $      1,657,597(1)
      13,900   PartnerRe Capital Trust I, 7.90% Pfd. 12/31/31...................................            353,546**(1)
       2,010   PartnerRe Ltd., 6.75% Pfd., Series C.............................................             50,180**(1)
     151,800   Principal Financial Group, 6.518% Pfd............................................          4,191,957*
$    357,000   Provident Financing Trust I, 7.405% 03/15/38 Capital Security....................            339,248
$  4,500,000   Renaissancere Capital Trust, 8.54% 03/01/27 Capital Security, Series B...........          4,738,973(1)
               Renaissancere Holdings Ltd.:
      25,200     6.08% Pfd., Series C...........................................................            560,952**(1)
       6,300     7.30% Pfd., Series B...........................................................            157,973**(1)
       6,100     8.10% Pfd., Series A...........................................................            153,415**(1)
     119,500   Scottish Re Group Ltd., 7.25% Pfd................................................          2,364,308**(1)
       7,500   St. Paul Capital Trust I, 7.60% Pfd. 10/15/50....................................            190,500
$  1,250,000   USF&G Capital, 8.312% 07/01/46 Capital Security, 144A****........................          1,501,763
      22,850   XL Capital Ltd., 8.00% Pfd., Series A............................................            589,302**(1)
-------------------------------------------------------------------------------------------------------------------
                                                                                                         27,769,641
                                                                                                   ----------------
               UTILITIES -- 31.7%
------------------------------------------------------------------------------------------------------------------------------------
               Alabama Power Company:
         300     4.52% Pfd......................................................................             25,717*
       5,734     4.72% Pfd......................................................................            513,308*
      10,000   Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993........................          1,041,500*
      10,000   Calenergy Capital Trust III, 6.50% Pfd. 09/01/27.................................            472,400
               Central Hudson Gas & Electric Corporation:
       5,000     4.35% Pfd., Series D, Pvt......................................................            417,875*
         900     4.96% Pfd., Series E, Pvt......................................................             80,469*
      11,119   Central Vermont Public Service Corporation, 8.30% Sinking Fund Pfd., Pvt.........          1,155,209*
               Connecticut Light & Power Company:
      12,124     4.50% Pfd., Series 1963, Pvt...................................................            469,441*
      34,300     5.28% Pfd., Series 1967........................................................          1,586,889*
       1,905     6.56% Pfd., Series 1968........................................................            100,003*
      15,778     $3.24 Pfd......................................................................            832,132*
       2,100   Consolidated Edison Company of New York, 4.65% Pfd., Series C....................            184,506*
       2,886   Dayton Power and Light Company, 3.90% Pfd., Series C.............................            193,593*

                                       6


--------------------------------------------------------------------------------
                          Flaherty & Crumrine Preferred Income Fund Incorporated
                                            PORTFOLIO OF INVESTMENTS (CONTINUED)
                                                     AUGUST 31, 2006 (UNAUDITED)
--------------------------------------------------------------------------------





SHARES/$ PAR                                                                                                VALUE
------------                                                                                               -------
                                                                                                          
PREFERRED SECURITIES -- (CONTINUED)
               UTILITIES -- (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
$  1,500,000   Dominion Resources Capital Trust III, 8.40% 01/15/31 Capital Security............   $      1,732,327
               Duquesne Light Company:
       7,675     4.10% Pfd......................................................................            278,142*
       9,190     4.15% Pfd......................................................................            337,089*
         910     4.20% Pfd......................................................................             33,779*
      40,575     6.50% Pfd......................................................................          2,060,196*
       5,490     $2.10 Pfd., Series A...........................................................            203,789*
     100,000   Entergy Arkansas, Inc., 6.45% Pfd................................................          2,571,000*
       4,555   Entergy Gulf States, Inc., 7.56% Pfd.............................................            439,626*
      36,000   Entergy Louisiana, Inc., 6.95% Pfd., 144A****....................................          3,729,780*
       5,000   Entergy Mississippi, Inc., 4.92% Pfd.............................................            401,575*
               Florida Power Company:
       5,157     4.60% Pfd......................................................................            447,009*
      18,535     4.75% Pfd......................................................................          1,658,975*
      13,100   Georgia Power Capital Trust, 6.125% Pfd..........................................            336,997*
      50,000   Georgia Power Capital Trust  V, 7.125% Pfd. 03/31/42.............................          1,279,000
       2,010   Great Plains Energy, Inc., 4.50% Pfd.............................................            165,523*
      24,000   Gulf Power Company, 6.00% Pfd., Series 1.........................................          2,506,200*
      50,000   Hawaiian Electric Company, Inc., 5.25% Pfd., Series H, Pvt.......................            879,000*
$  3,500,000   Houston Light & Power Capital Trust II, 8.257% 02/01/37 Capital Security.........          3,677,187
      32,650   Indianapolis Power & Light Company, 5.65% Pfd....................................          3,023,063*
     384,000   Interstate Power & Light Company, 8.375% Pfd., Series B..........................         11,813,760*
               Pacific Enterprises:
      27,430     $4.50 Pfd......................................................................          2,317,561*
      10,000     $4.75 Pfd., Series 53..........................................................            891,800*
               Pacific Gas & Electric Co.:
       7,600     4.50% Pfd., Series H...........................................................            151,278*
      41,500     5.00% Pfd., Series D...........................................................            909,680*
      79,086     5.00% Pfd., Series E...........................................................          1,780,226*
               PacifiCorp:
       1,095     5.40% Pfd......................................................................            110,896*
       1,225     $4.56 Pfd......................................................................             99,874*
      14,542     $4.72 Pfd......................................................................          1,227,127*
      10,278     $7.48 Sinking Fund Pfd.........................................................          1,045,530*
$    500,000   PECO Energy Capital Trust III, 7.38% 04/06/28 Capital Security, Series D.........            533,540
       8,137   Portland General Electric, 7.75% Sinking Fund Pfd................................            829,364*
       5,000   PPL Electric Utilities Corporation, 6.75% Pfd....................................            522,125*
      10,000   Public Service Company of New Mexico, 4.58% Pfd., Series 1965....................            773,600*

                                       7



--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2006 (UNAUDITED)
--------------------------------------------------------------------------------





SHARES/$ PAR                                                                                                VALUE
------------                                                                                               -------
                                                                                                          
PREFERRED SECURITIES -- (CONTINUED)
               UTILITIES -- (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
               San Diego Gas & Electric Company:
       1,200     4.40% Pfd......................................................................   $         19,734*
         700     4.50% Pfd......................................................................             11,774*
      77,000     $1.70 Pfd......................................................................          1,997,380*
               South Carolina Electric & Gas Company:
      24,924     5.125% Purchase Fund Pfd., Pvt.................................................          1,280,844*
       6,703     6.00% Purchase Fund Pfd., Pvt..................................................            341,250*
      10,600   Southern California Edison, 6.00% Pfd............................................          1,051,859*
      75,000   Southern Union Company, 7.55% Pfd................................................          1,948,875*
$    750,000   TXU Electric Capital V, 8.175% 01/30/37 Capital Security.........................            789,866
               Union Electric Company:
      14,150     4.56% Pfd......................................................................          1,264,798*
       8,800     $7.64 Pfd......................................................................            908,644*
      12,500   Virginia Electric & Power Company, $7.05 Pfd.....................................          1,279,188*
      13,500   Virginia Power Capital Trust, 7.375% Pfd. 07/30/42...............................            345,668
               Wisconsin Power & Light Company:
       1,220     4.50% Pfd......................................................................            103,956*
         546     4.80% Pfd......................................................................             49,626*
      13,000     6.20% Pfd......................................................................          1,332,435*
               Xcel Energy, Inc.:
      16,030     $4.08 Pfd., Series B...........................................................          1,255,710*
      26,200     $4.10 Pfd., Series C...........................................................          2,062,464*
      22,000     $4.11 Pfd., Series D...........................................................          1,736,130*
      17,750     $4.16 Pfd., Series E...........................................................          1,417,693*
      10,000     $4.56 Pfd., Series G...........................................................            875,500*
-------------------------------------------------------------------------------------------------------------------
                                                                                                         75,913,054
                                                                                                   ----------------
               OIL AND GAS -- 4.5%
------------------------------------------------------------------------------------------------------------------------------------
       8,000   Devon Energy Corporation, 6.49% Pfd., Series A...................................            816,000*
$  1,021,000   Enterprise Products Partners, Variable Rate Pfd..................................          1,062,463
       5,985   EOG Resources, Inc., 7.195% Pfd., Series B.......................................          6,267,552*
$  1,675,000   KN Capital Trust III, 7.63% 04/15/28 Capital Security............................          1,511,603
      10,000   Lasmo America Limited, 8.15% Pfd., 144A****......................................          1,068,800*(1)
-------------------------------------------------------------------------------------------------------------------
                                                                                                         10,726,418
                                                                                                   ----------------
               REAL ESTATE INVESTMENT TRUST (REIT) -- 2.4%
------------------------------------------------------------------------------------------------------------------------------------
      21,400   BRE Properties, Inc., 8.08% Pfd., Series B.......................................            549,017
      20,000   Duke Realty Corporation, 6.625% Pfd., Series J...................................            490,600

                                       8



--------------------------------------------------------------------------------
                          Flaherty & Crumrine Preferred Income Fund Incorporated
                                            PORTFOLIO OF INVESTMENTS (CONTINUED)
                                                     AUGUST 31, 2006 (UNAUDITED)
--------------------------------------------------------------------------------




SHARES/$ PAR                                                                                                VALUE
------------                                                                                               -------
                                                                                                          
PREFERRED SECURITIES -- (CONTINUED)
               REAL ESTATE INVESTMENT TRUST (REIT) -- (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
      10,000   Equity Office Property Trust, 7.75% Pfd., Series G...............................   $        253,900
       1,000   Equity Residential Properties, 8.29% Pfd., Series K..............................             59,105
      16,000   PS Business Parks, Inc., 7.00% Pfd., Series H....................................            398,320
               Public Storage, Inc.:
      19,000     6.18% Pfd., Series D...........................................................            450,870
     123,270     6.45% Pfd., Series F...........................................................          2,990,530
      10,000     6.45% Pfd., Series X...........................................................            245,450
       3,500     6.60% Pfd., Series C...........................................................             86,573
       2,800     6.75% Pfd., Series E...........................................................             70,322
      10,000     7.25% Pfd., Series K...........................................................            254,750
-------------------------------------------------------------------------------------------------------------------
                                                                                                          5,849,437
                                                                                                   ----------------
               MISCELLANEOUS INDUSTRIES -- 1.9%
------------------------------------------------------------------------------------------------------------------------------------
      13,600   E.I. Du Pont de Nemours and Company, $4.50 Pfd., Series B........................          1,120,504*
      40,000   Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A****..............................          3,470,400*
      26,000   Touch America Holdings, $6.875 Pfd...............................................                 --*+
-------------------------------------------------------------------------------------------------------------------
                                                                                                          4,590,904
                                                                                                   ----------------
                 TOTAL PREFERRED SECURITIES
                 (Cost $215,118,029) ...........................................................        226,276,789
                                                                                                   ----------------
CORPORATE DEBT SECURITIES -- 4.5%
               FINANCIAL SERVICES -- 0.4%
------------------------------------------------------------------------------------------------------------------------------------
      36,300   Saturns-GS, 6.00% 02/15/33, Series Goldman Sachs.................................            864,121
-------------------------------------------------------------------------------------------------------------------
                                                                                                            864,121
                                                                                                   ----------------

               INSURANCE -- 2.3%
------------------------------------------------------------------------------------------------------------------------------------
$    900,000   Farmers Exchange Capital, 7.20% 07/15/48, 144A****...............................            895,990
               Liberty Mutual Insurance:
$    572,000     7.50% 08/15/36, 144A****.......................................................            588,777
$  4,142,000     7.697% 10/15/97, 144A****......................................................          4,133,033
-------------------------------------------------------------------------------------------------------------------
                                                                                                          5,617,800
                                                                                                   ----------------
               UTILITIES -- 0.9%
------------------------------------------------------------------------------------------------------------------------------------
$  1,000,000   Duquesne Light Holdings, 6.25% 08/15/35..........................................            926,850
       5,000   Entergy Louisiana LLC, 7.60% 04/01/32............................................            127,775
      45,000   Northern States Power Company, 8.00%.............................................          1,169,550
-------------------------------------------------------------------------------------------------------------------
                                                                                                          2,224,175
                                                                                                   ----------------

                                       9



--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2006 (UNAUDITED)
--------------------------------------------------------------------------------



SHARES/$ PAR                                                                                                VALUE
------------                                                                                               -------
                                                                                                          
CORPORATE DEBT SECURITIES -- (CONTINUED)
               OIL AND GAS -- 0.9%
------------------------------------------------------------------------------------------------------------------------------------
$  2,000,000   KN Energy, Inc., 7.45% 03/01/98..................................................   $      1,766,990
      15,000   Nexen, Inc., 7.35% Subordinated Notes............................................            381,750(1)
-------------------------------------------------------------------------------------------------------------------
                                                                                                          2,148,740
                                                                                                   ----------------

                   TOTAL CORPORATE DEBT SECURITIES
                   (Cost $10,612,460)...........................................................         10,854,836
                                                                                                   ----------------

OPTION CONTRACTS -- 0.0%
       1,273   December Put Options on December U.S. Treasury Bond Futures, Expiring 11/21/06...            139,234+
         312   October Put Options on December U.S. Treasury Bond Futures, Expiring 09/22/06....              4,875+
-------------------------------------------------------------------------------------------------------------------
                   TOTAL OPTION CONTRACTS
                   (Cost $822,205)..............................................................            144,109
                                                                                                   ----------------
MONEY MARKET FUND -- 0.4%
     867,667   BlackRock Provident Institutional, TempFund .....................................            867,667
-------------------------------------------------------------------------------------------------------------------
                   TOTAL MONEY MARKET FUND
                   (Cost $867,667)..............................................................            867,667
                                                                                                   ----------------

TOTAL INVESTMENTS (Cost $227,420,361***)..........................................     99.3%            238,143,401
OTHER ASSETS AND LIABILITIES (Net)................................................      0.7%              1,585,026
                                                                                     ------        ----------------

TOTAL NET ASSETS AVAILABLE TO COMMON AND PREFERRED STOCK..........................    100.0%++     $    239,728,427
                                                                                     ------        ----------------

MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (MMP(R)) REDEMPTION VALUE ..........................        (80,000,000)
                                                                                                   ----------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK .....................................................   $    159,728,427
                                                                                                   ================


---------------------------------
*     Securities  eligible for the Dividends Received Deduction and distributing
      Qualified Dividend Income.
**    Securities distributing Qualified Dividend Income only.
***   Aggregate cost of securities held.
****  Securities exempt from registration  under Rule 144A of the Securities Act
      of 1933.  These  securities  may be resold  in  transactions  exempt  from
      registration to qualified institutional buyers. These securities have been
      determined to be liquid under the  guidelines  established by the Board of
      Directors.
(1)   Foreign Issuer.
+     Non-income producing.
++    The percentage  shown for each  investment  category is the total value of
      that  category  as a  percentage  of net  assets  available  to Common and
      Preferred Stock.

          ABBREVIATIONS:
PFD.  -- Preferred Securities
PVT.  -- Private Placement Securities
REIT  -- Real Estate Investment Trust

                                       10




--------------------------------------------------------------------------------
                          Flaherty & Crumrine Preferred Income Fund Incorporated
                 STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)
       FOR THE PERIOD FROM DECEMBER 1, 2005 THROUGH AUGUST 31, 2006 (UNAUDITED)
--------------------------------------------------------------------------------





                                                                                                             VALUE
                                                                                                           --------
                                                                                                           

OPERATIONS:
      Net investment income ....................................................................   $      9,932,653
      Net realized  gain/(loss) on investments  sold during the period .........................          3,748,887
      Change in net  unrealized  appreciation/depreciation  of  investments  held
          during the period ....................................................................         (2,740,350)
      Distributions to MMP(R)* Shareholders from net investment income,
          including changes in accumulated undeclared distributions ............................         (2,394,848)
                                                                                                   ----------------
      NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS......................................          8,546,342

DISTRIBUTIONS:
      Dividends paid from net investment income to Common Stock Shareholders(2) ................         (8,199,831)
                                                                                                   ----------------
      TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS .........................................         (8,199,831)

FUND SHARE TRANSACTIONS:
      Increase from shares issued under the Dividend Reinvestment
          and Cash Purchase Plan ...............................................................          1,104,548
                                                                                                   ----------------
      NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING
          FROM FUND SHARE TRANSACTIONS..........................................................          1,104,548

NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK                                               ----------------
      FOR THE PERIOD ...........................................................................   $      1,451,059
                                                                                                   ================

------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AVAILABLE TO COMMON STOCK:
      Beginning of period ......................................................................   $    158,277,368
      Net increase in net assets during the period .............................................          1,451,059
                                                                                                   ----------------
      End of period ............................................................................   $    159,728,427
                                                                                                   ================

-------------------------------------
*     Money Market Cumulative PreferredTM Stock.
(1)   These tables summarize the nine months ended August 31, 2006 and should be
      read  in  conjunction  with  the  Fund's  audited  financial   statements,
      including footnotes, in its Annual Report dated November 30, 2005.
(2)   May include income earned, but not paid out, in prior fiscal year.


                                       11




--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS(1)
FOR THE PERIOD FROM DECEMBER 1, 2005 THROUGH AUGUST 31, 2006  (UNAUDITED)
FOR A COMMON STOCK SHARE OUTSTANDING THROUGHOUT THE PERIOD.
--------------------------------------------------------------------------------



                                                                                                      
PER SHARE OPERATING PERFORMANCE:
     Net asset value, beginning of period ......................................................   $          15.26
                                                                                                   ----------------
INVESTMENT OPERATIONS:
      Net investment income ....................................................................               0.96
      Net realized and unrealized gain/(loss) on investments ...................................               0.09
DISTRIBUTIONS TO MMP(R)* SHAREHOLDERS:
      From net investment income ...............................................................              (0.23)
      From net realized capital gains ..........................................................                 --
                                                                                                   ----------------
      Total from investment operations .........................................................               0.82
                                                                                                   ----------------
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
      From net investment income ...............................................................              (0.79)
      From net realized capital gains ..........................................................                 --
                                                                                                   ----------------
      Total distributions to Common Stock Shareholders .........................................              (0.79)
                                                                                                   ----------------
      Net asset value, end of period ...........................................................   $          15.29
                                                                                                   ================
      Market value, end of period ..............................................................   $          16.51
                                                                                                   ================
      Common Stock shares outstanding, end of period ...........................................         10,444,513
                                                                                                   ================
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
      Net investment income+ ...................................................................               6.32%**
      Operating expenses .......................................................................               1.51%**
--------------------------------------------------------
SUPPLEMENTAL DATA:++
      Portfolio turnover rate ..................................................................                 54%***
      Total net assets available to Common and Preferred Stock, end of period (in 000's)........   $        239,728
      Ratio of operating expenses to total average net assets available to
          Common and Preferred Stock ...........................................................               1.00%**



(1)   These tables summarize the nine months ended August 31, 2006 and should be
      read  in  conjunction  with  the  Fund's  audited  financial   statements,
      including footnotes, in its Annual Report dated November 30, 2005.
*     Money Market Cumulative PreferredTM Stock.
**    Annualized.
***   Not Annualized.
+     The net investment income ratios reflect income net of operating  expenses
      and payments to MMP(R)* Shareholders.
++    Information presented under heading Supplemental Data includes MMP(R)*.

                                       12


--------------------------------------------------------------------------------
                          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, 2005 ...........   $0.0905             $15.38                $16.09                   $15.38
January 28, 2006 ............    0.0905              15.43                 16.89                    16.05
February 28, 2006 ...........    0.0905              15.57                 16.65                    15.82
March 31, 2006 ..............    0.0860              15.40                 16.08                    15.40
April 30, 2006 ..............    0.0860              15.23                 15.55                    15.23
May 31, 2006 ................    0.0860              15.10                 15.55                    15.10
June 30, 2006 ...............    0.0860              14.94                 15.19                    14.94
July 31, 2006 ...............    0.0860              14.89                 15.73                    14.94
August 31, 2006 .............    0.0860              15.29                 16.51                    15.68
--------------------


(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.

                                       13


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


1.    AGGREGATE INFORMATION FOR FEDERAL INCOME TAX PURPOSES

      At August 31, 2006,  the aggregate  cost of securities  for federal income
tax purposes was $227,705,319,  the aggregate gross unrealized  appreciation for
all  securities  in  which  there  is an  excess  of  value  over  tax  cost was
$15,485,858,  and the aggregate gross unrealized depreciation for all securities
in which there is an excess of tax cost over value was $5,047,776.


                                       14



                      [This page intentionally left blank]



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
      Christopher D. Ryan, CFA
          Vice President
      Laurie C. Lodolo
          Assistant Compliance Officer,
          Assistant Treasurer and
          Assistant Secretary

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

QUESTIONS CONCERNING YOUR SHARES OF FLAHERTY &
      CRUMRINE PREFERRED INCOME FUND?
      o If your shares are held in a Brokerage
        Account, contact your Broker.
      o If you have physical possession of your shares
        in  certificate form, contact the Fund's Transfer
        Agent & Shareholder Servicing Agent --
               PFPC Inc.
               P.O. Box 43027
               Providence, RI 02940-3027
               1-800-331-1710

THIS REPORT IS SENT TO SHAREHOLDERS OF FLAHERTY & CRUMRINE PREFERRED INCOME FUND
INCORPORATED  FOR  THEIR  INFORMATION.  IT IS  NOT  A  PROSPECTUS,  CIRCULAR  OR
REPRESENTATION INTENDED FOR USE IN THE PURCHASE OR SALE OF SHARES OF THE FUND OR
OF ANY SECURITIES MENTIONED IN THIS REPORT.

                                [GRAPHIC OMITTED]
                                 LIGHTHOUSE ART

                              FLAHERTY & CRUMRINE
                              PREFERRED INCOME FUND

                                    QUARTERLY
                                     REPORT

                                 AUGUST 31, 2006

                             www.preferredincome.com


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     OCTOBER 16, 2006
    ----------------------------------------------------------------------------


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     OCTOBER 16, 2006
    ----------------------------------------------------------------------------


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

Date     OCTOBER 16, 2006
    ----------------------------------------------------------------------------



* Print the name and title of each signing officer under his or her signature.