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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000935069-01-500271.txt : 20010716
<SEC-HEADER>0000935069-01-500271.hdr.sgml : 20010716
ACCESSION NUMBER:		0000935069-01-500271
CONFORMED SUBMISSION TYPE:	N-30D
PUBLIC DOCUMENT COUNT:		1
CONFORMED PERIOD OF REPORT:	20010531
FILED AS OF DATE:		20010713

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			PREFERRED INCOME OPPORTUNITY FUND INC
		CENTRAL INDEX KEY:			0000882071
		STANDARD INDUSTRIAL CLASSIFICATION:	 []
		IRS NUMBER:				954355600
		STATE OF INCORPORATION:			MD
		FISCAL YEAR END:			1130

	FILING VALUES:
		FORM TYPE:		N-30D
		SEC ACT:		
		SEC FILE NUMBER:	811-06495
		FILM NUMBER:		1680471

	BUSINESS ADDRESS:	
		STREET 1:		301 E COLORADO BLVD STE 720
		STREET 2:		C/O FLAHERTY & CRUMRINE INC
		CITY:			PASADENA
		STATE:			CA
		ZIP:			91101
		BUSINESS PHONE:		8187957300

	MAIL ADDRESS:	
		STREET 1:		301 COLORADO BLVD
		STREET 2:		STE 720
		CITY:			PASADENA
		STATE:			CA
		ZIP:			91101
</SEC-HEADER>
<DOCUMENT>
<TYPE>N-30D
<SEQUENCE>1
<FILENAME>prefopp.txt
<DESCRIPTION>PREFERRED INCOME OPPORTUNITY SEMI
<TEXT>

PREFERRED INCOME OPPORTUNITY FUND
INCORPORATED


Dear Shareholder:

     The Preferred Income Opportunity Fund continued to do well in a period that
was rather  challenging for many investors.  Through May 31, 2001, total returns
on the Fund's net asset  value were 6.60% for the first half of fiscal  2001 and
17.80% for the trailing twelve months.  The total returns on the market price of
the shares were better since the market discount from NAV narrowed.

     Remember  the  ancient  curse  that says,  "You  shall live in  interesting
times!" Well,  that's the way it has been in the preferred market lately.  There
were good places to be and also plenty of bad ones.  Furthermore,  that was true
for broad  market  sectors as well as for  individual  preferreds  within  those
sectors.   The  Fund  is  always  seeking  to  take  advantage  of  such  market
inefficiencies,  and it has paid off. A good deal of the Fund's success has come
from simply being in the right preferreds at the right time.

     The following pie chart shows the allocation of the Fund's  portfolio among
major market sectors.  For those who have lives away from preferreds,  we should
explain the distinction  between hybrid and traditional  preferreds.  Hybrids do
not offer any special tax  advantages  to  investors.  In contrast,  traditional
preferreds  qualify for the Dividends  Received Deduction (the "DRD") that makes
their dividends 70% tax-free to corporate investors.

                      PORTFOLIO ALLOCATION AS OF 5/31/2001

                               [GRAPHIC OMITTED]
          EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

ADJUSTABLE RATES                        12.3%
TRADITIONAL FIXED RATES                 43.8%
HYBRID PREFERREDS                       38.9%
CASH & OTHER                             5.0%

     Generally  speaking,  hybrids  performed very well,  while  traditional DRD
eligible preferreds lagged far behind. On the surface, this disparity appears to
have created some very attractive values among traditional preferreds.  However,
the specific issues that we would most like to own are still hard to find in the
market.  We  are  constantly  looking  for  opportunities  resulting  from  this
situation.

<PAGE>

     The steps taken by the Federal  Reserve to cut  short-term  interest  rates
helped us by reducing the cost of the Fund's leverage. The rate paid by the Fund
on its  outstanding  shares of Money Market  Cumulative  Preferred(TM)  stock is
adjusted  to the current  level of  short-term  rates  every 49 days  through an
auction process.  Typically, the cost to the Fund comes down as short-term rates
fall. That's good for the holders of our common stock.

     In contrast,  the Fed's shift  toward  easier money did not have much of an
effect on  long-term  interest  rates.  A decline in those rates last winter was
effectively  reversed  by  a  spurt  in  the  spring.   Although  the  ride  was
occasionally exciting,  long-term interest rate shifts and the Fund's hedges did
not play a major role in the results for the first half of fiscal 2001.

     The following  Questions & Answers  section covers  several  additional key
points  concerning  the  Fund.  We urge you to read it  carefully.  For  updated
information on the Fund at any time, we also recommend  visiting our web site at
WWW.PREFERREDINCOME.COM.

                                                          Sincerely,
                                                          /S/ ROBERT T. FLAHERTY
                                                          Robert T. Flaherty
                                                          CHAIRMAN OF THE BOARD

June 20, 2001


                               QUESTIONS & ANSWERS

HOW WOULD MOVING MONEY FROM HYBRIDS INTO TRADITIONAL PREFERREDS AFFECT THE
FUND'S INCOME?

     The  impact  on  income  of  adding  a  reasonable  amount  of  traditional
preferreds  to the  Fund's  portfolio  could  be  less  than  you  might  think.
Traditional preferreds typically do yield less than hybrid preferreds,  although
that yield sacrifice is quite small at the moment.  Furthermore,  there are some
offsetting  factors.  Traditional  preferreds qualify for the Dividends Received
Deduction (the "DRD"), which reduces the cost of the Fund's leverage in a rather
complicated  way. In  addition,  the cost of that  leverage has come down due to
lower  short-term  interest  rates.  All  things  considered,  we are  presently
comfortable with the Fund's existing dividend rate.

     In the long run,  the best way to get more  income is to have more money to
invest.  Our  experience has shown that the best way to get more money is to buy
the cheapest  preferreds  available.  Realistically,  the biggest challenge will
probably be finding enough cheap  traditional  preferreds that fit well into the
Fund's portfolio.

                                        2

<PAGE>

IS THE FUND INVOLVED IN THE CALIFORNIA UTILITY SITUATION?

     The Fund does not own any shares of the big California  electric  utilities
that are flirting with bankruptcy.  That is a good thing, too.  California seems
to be making the worst of a bad situation.

     We work hard on analyzing the  creditworthiness  of major utilities.  After
all, that's our job given the large  concentration of utility  preferreds in the
Fund's  portfolio.  We probably won't be right every time, but we did understand
the problem in California  long before the market saw it coming.  This brings to
mind the saying often attributed to Ben Hogan.  "Golf is a game of luck, and the
more you practice, the luckier you get."

IS THERE ANYTHING NEW CONCERNING THE FUND'S HEDGING STRATEGIES?

     Economics  have favored  continuing to hedge by  purchasing  put options on
Treasury bond futures contracts as we have in the past. As previously  discussed
in these reports, we believe that the purchase of options on interest rate swaps
(called "swaptions") could also be a very suitable part of our hedging strategy.
We have been waiting for the "right price" for  swaptions,  and our patience has
been well  rewarded  so far.  No hedge can be any better than the price that you
pay for it.

     We have been willing to accept somewhat more exposure to the risk of rising
long-term interest rates in return for reducing the potential cost of the hedge.
This  has  seemed  appropriate  in  view of the  weakness  in the  economy,  the
demonstrated  uncertainty in the common stock market,  and the Federal Reserve's
determined  effort  to lower  interest  rates.  It is  analogous  to  buying  an
insurance policy with a slightly larger deductible in order to save money on the
premium.  We would still expect the hedge to provide some welcome  relief should
long-term interest rates suddenly soar.

IS THE SHRINKING SIZE OF THE TREASURY BOND MARKET STILL A PROBLEM FOR THE FUND?

     Not at the moment! The Treasury continues to use the federal budget surplus
to buy back and retire some of its outstanding  bonds.  Nonetheless,  the market
has adjusted to this situation,  much as we have  previously  suggested in these
reports.  Treasury  bonds have resumed their role as lead dog,  pointing the way
for other fixed income  securities.  This has made hedging the Fund's  portfolio
much less difficult.

     The  battles  in  Washington  over the  recently  enacted  tax cuts and the
competing  proposals  for  spending  the  rest of the  expected  federal  budget
surpluses have only  reinforced our view of Treasury  bonds.  "The idea that the
folks in Washington can keep their fingers out of this fiscal cookie jar strains
credibility.  Furthermore,  the  projections  assume  away  the  possibility  of
recessions  that could sharply reduce the expected  surpluses.  Before  Treasury
bonds dry up and blow  away,  new  forces  could  easily  come into  play."  The
previous  quotation is from our  semi-annual  report last year.  The more things
change, the more they stay the same!

WHERE DO THINGS STAND NOW ON THE PROPOSED  CHANGES IN MOODY'S  RATING SYSTEM AND
ITS EFFECT ON THE FUND?

     As  mentioned  in the Fund's  November  30,  2000  annual  report,  Moody's
Investors  Service  intends to restructure the scale on which it rates preferred
stocks in order to make those ratings more consistent with its ratings on bonds.
In  response,  we have  obtained  the  necessary  approval  from Moody's of some
changes in the Fund's  corporate  articles  governing its outstanding  shares of
Money Market Cumulative

                                        3

<PAGE>

     Preferred(TRADE  MARK)  stock  ("MMP").  We  currently  expect  that  these
changes,  which will become  effective when Moody's  actually changes its rating
scale, will help us avoid the unintended, but potentially substantial,  negative
effects of Moody's  restructuring  on the Fund's  MMP. We are now  awaiting  the
publication of Moody's rating changes, which could happen fairly soon.

HOW IS THE MARKET PRICE OF THE FUND'S SHARES TRACKING THEIR NET ASSET VALUE?

     The following  graph tells the story.  Clearly,  the premiums and discounts
bounce around from week to week, reflecting changes in both the market price and
the   NAV.   The  best   source   of   up-to-date   data  is  our  web  site  at
www.preferredincome.com.

                       PREFERRED INCOME OPPORTUNITY FUND
                    PREMIUM/DISCOUNT OF MARKET PRICE TO NAV

                               [GRAPHIC OMITTED]
          EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHICS

Date     Prem/Disc
12/27/91
01/03/92
01/10/92
01/17/92
01/24/92
01/31/92
02/07/92
02/14/92
2/21/92          0.0726
2/28/92          0.0805
3/6/92           0.0874
3/13/92          0.098
3/20/92          0.0819
3/27/92          0.0556
4/3/92           0.0538
4/10/92          0.0705
4/17/92          0.0547
4/24/92          0.059
5/1/92           0.0546
5/8/92           0.0536
5/15/92          0.0306
5/22/92          0.0248
5/29/92          0.0307
6/5/92           0.0181
6/12/92          0.04
6/19/92          0.0357
6/26/92          0.0442
7/3/92           0.0475
7/10/92          0.0626
7/17/92          0.08
7/24/92          0.0592
7/31/92          0.0647
8/7/92           0.0613
8/14/92          0.0628
8/21/92          0.0514
8/28/92          0.0539
9/4/92           0.0409
9/11/92          0.0684
9/18/92          0.0572
9/25/92          0.0539
10/2/92          0.062
10/9/92          0.0675
10/16/92         0.049
10/23/92         0.0188
10/30/92         0.0474
11/6/92          0.018
11/13/92         0.0188
11/20/92         0.0408
11/27/92         0.0844
12/4/92          0.063
12/11/92         0.0515
12/18/92         0.0691
12/25/92         0.0638
1/1/93           0.0621
1/8/93           0.0679
1/15/93          0.0595
1/22/93          0.0434
1/29/93          0.0475
2/5/93           0.0483
2/12/93          0.0284
2/19/93          0.0202
2/26/93          0.031
3/5/93           0.0473
3/12/93          0.0651
3/19/93          0.0303
3/26/93          0.036
4/2/93           0.0514
4/9/93           0.0675
4/16/93          0.057
4/23/93          0.0853
4/30/93          0.0651
5/7/93           0.0513
5/14/93          0.061
5/21/93          0.057
5/28/93          0.0441
6/4/93           0.0497
6/11/93          0.0561
6/18/93          0.0497
6/25/93          0.0417
7/2/93           0.0472
7/9/93           0.0425
7/16/93          0.0362
7/23/93          0.0068
7/30/93          0.0306
8/6/93           0.0212
8/13/93          0.0181
8/20/93          0.0008
8/27/93          0.037
9/3/93           0.0331
9/10/93          0.0401
9/17/93          0.0338
9/24/93          0.0244
10/1/93          0.0214
10/8/93          0.0261
10/15/93         0.0263
10/22/93         0.0246
10/29/93         0.009
11/5/93          0
11/12/93        -0.0107
11/19/93        -0.0282
11/26/93        -0.0179
12/3/93         -0.0076
12/10/93        -0.0334
12/17/93        -0.0338
12/24/93        -0.0431
12/31/93         0.0249
1/7/94          -0.0036
1/14/94          0.0157
1/21/94         -0.023
1/28/94         -0.0377
2/4/94          -0.0323
2/11/94         -0.0361
2/18/94         -0.0863
2/25/94         -0.05
3/4/94          -0.0392
3/11/94         -0.0315
3/18/94         -0.0585
3/25/94         -0.0562
4/1/94          -0.0556
4/8/94          -0.0612
4/15/94         -0.0771
4/22/94         -0.1012
4/29/94         -0.1145
5/6/94          -0.0775
5/13/94         -0.0633
5/20/94         -0.0636
5/27/94         -0.0312
6/3/94          -0.0683
6/10/94         -0.0288
6/17/94         -0.0457
6/24/94         -0.0393
7/1/94          -0.0409
7/8/94          -0.045
7/15/94         -0.049
7/22/94         -0.0294
7/29/94         -0.0327
8/5/94          -0.0221
8/12/94         -0.0303
8/19/94         -0.0269
8/26/94         -0.0348
9/2/94          -0.0204
9/9/94          -0.0318
9/16/94         -0.0409
9/23/94         -0.0628
9/30/94         -0.062
10/7/94         -0.1322
10/14/94        -0.1149
10/21/94        -0.141
10/28/94        -0.104
11/4/94         -0.0786
11/11/94        -0.0976
11/18/94        -0.099
11/25/94        -0.077
12/2/94         -0.0402
12/9/94         -0.0868
12/16/94        -0.0732
12/23/94        -0.0604
12/30/94        -0.0851
1/6/95          -0.001
1/13/95         -0.0141
1/20/95         -0.0303
1/27/95         -0.0619
2/3/95          -0.0119
2/10/95         -0.0314
2/17/95         -0.0702
2/24/95         -0.0376
3/3/95          -0.0297
3/10/95         -0.0585
3/17/95         -0.0523
3/24/95         -0.0534
3/31/95         -0.0393
4/7/95          -0.0341
4/14/95         -0.0393
4/21/95         -0.069
4/28/95         -0.0341
5/5/95          -0.0576
5/12/95         -0.0501
5/19/95         -0.0933
5/26/95         -0.0753
6/2/95          -0.0481
6/9/95          -0.0729
6/16/95         -0.0702
6/23/95         -0.0749
6/30/95         -0.0686
7/7/95          -0.069
7/14/95         -0.0869
7/21/95         -0.1087
7/28/95         -0.0911
8/4/95          -0.0973
8/11/95         -0.1018
8/18/95         -0.1011
8/25/95         -0.078
9/1/95          -0.0706
9/8/95          -0.0833
9/15/95         -0.071
9/22/95         -0.0749
9/29/95         -0.0641
10/6/95         -0.0718
10/13/95        -0.1006
10/20/95        -0.0909
10/27/95        -0.1012
11/3/95         -0.1232
11/10/95        -0.0962
11/17/95        -0.1071
11/24/95        -0.1093
12/1/95         -0.1014
12/8/95         -0.1277
12/15/95        -0.1233
12/22/95        -0.1265
12/29/95        -0.1454
1/5/96          -0.1197
1/12/96         -0.1279
1/19/96         -0.1312
1/26/96         -0.1146
2/2/96          -0.1233
2/9/96          -0.1233
2/16/96         -0.1279
2/23/96         -0.1303
3/1/96          -0.1124
3/8/96          -0.1465
3/15/96         -0.1508
3/22/96         -0.1487
3/29/96         -0.1515
4/5/96          -0.1315
4/12/96         -0.1286
4/19/96         -0.1279
4/26/96         -0.1383
5/3/96          -0.1257
5/10/96         -0.113
5/17/96         -0.1408
5/24/96         -0.1386
5/31/96         -0.1386
6/7/96          -0.1255
6/14/96         -0.1337
6/21/96         -0.1301
6/28/96         -0.0918
7/5/96          -0.1079
7/12/96         -0.0911
7/19/96         -0.1122
7/26/96         -0.0939
8/2/96          -0.0876
8/9/96          -0.0688
8/16/96         -0.0673
8/23/96         -0.0881
8/30/96         -0.0836
9/6/96          -0.0836
9/13/96         -0.0661
9/20/96         -0.0889
9/27/96         -0.0991
10/4/96         -0.0876
10/11/96        -0.0876
10/18/96        -0.0935
10/25/96        -0.0834
11/1/96         -0.0796
11/8/96         -0.0932
11/15/96        -0.0726
11/22/96        -0.0586
11/29/96        -0.0608
12/6/96         -0.0792
12/13/96        -0.0813
12/20/96        -0.1009
12/27/96        -0.0837
1/3/97          -0.0693
1/10/97         -0.0562
1/17/97         -0.0693
1/24/97         -0.0834
1/31/97         -0.0678
2/7/97          -0.0623
2/14/97         -0.0551
2/21/97         -0.0645
2/28/97         -0.0605
3/7/97          -0.0581
3/14/97         -0.0654
3/21/97         -0.0715
3/28/97         -0.0715
4/4/97          -0.0573
4/11/97         -0.0973
4/18/97         -0.0806
4/25/97         -0.0748
5/2/97          -0.0672
5/9/97          -0.052
5/16/97         -0.0647
5/23/97         -0.0573
5/30/97         -0.0362
6/6/97          -0.0615
6/13/97         -0.0385
6/20/97         -0.0473
6/27/97         -0.0418
7/4/97          -0.0498
7/11/97         -0.0585
7/18/97         -0.0486
7/25/97         -0.063
8/1/97          -0.0273
8/8/97          -0.0701
8/15/97         -0.0715
8/22/97         -0.0767
8/29/97         -0.0472
9/5/97          -0.058
9/12/97         -0.0656
9/19/97         -0.0557
9/26/97         -0.0492
10/3/97         -0.0292
10/10/97        -0.0492
10/17/97        -0.0506
10/24/97        -0.0574
10/31/97        -0.0477
11/7/97         -0.0442
11/14/97        -0.0377
11/21/97        -0.0688
11/28/97        -0.0484
12/5/97         -0.0406
12/12/97        -0.0652
12/19/97        -0.0648
12/26/97        -0.0456
1/2/98          -0.0171
1/9/98          -0.0197
1/16/98         -0.0185
1/23/98         -0.062
1/30/98         -0.0477
2/6/98          -0.053
2/13/98         -0.0604
2/20/98         -0.0456
2/27/98         -0.0477
3/6/98          -0.0473
3/13/98         -0.0568
3/20/98         -0.0487
3/27/98         -0.0579
4/3/98          -0.0682
4/10/98         -0.0508
4/17/98         -0.062
4/24/98         -0.0768
5/1/98          -0.0618
5/8/98          -0.054
5/15/98         -0.0717
5/22/98         -0.0664
5/29/98         -0.0648
6/5/98          -0.0643
6/12/98         -0.0627
6/19/98         -0.0573
6/26/98         -0.06
7/3/98          -0.0575
7/10/98         -0.0562
7/17/98         -0.0563
7/24/98         -0.0465
7/31/98         -0.0526
8/7/98          -0.0472
8/14/98         -0.0864
8/21/98         -0.0954
8/28/98         -0.054
9/4/98          -0.0618
9/11/98         -0.0487
9/18/98         -0.0392
9/25/98         -0.0402
10/2/98         -0.0554
10/9/98         -0.0744
10/16/98        -0.0485
10/23/98        -0.0406
10/30/98        -0.0616
11/6/98         -0.0396
11/13/98        -0.0481
11/20/98        -0.0641
11/27/98        -0.0478
12/4/98         -0.0413
12/11/98        -0.0363
12/18/98        -0.0537
12/25/98        -0.0132
1/1/99          -0.0196
1/8/99          -0.0297
1/15/99         -0.0392
1/22/99         -0.0627
1/29/99         -0.0677
2/5/99          -0.061
2/12/99         -0.0887
2/19/99         -0.0937
2/26/99         -0.1078
3/5/99          -0.0846
3/12/99         -0.065
3/19/99         -0.1022
3/26/99         -0.0888
4/2/99          -0.0724
4/9/99          -0.1029
4/16/99         -0.0781
4/23/99         -0.093
4/30/99         -0.1156
5/7/99          -0.1015
5/14/99         -0.1277
5/21/99         -0.1256
5/28/99         -0.1093
6/4/99          -0.1007
6/11/99         -0.0558
6/18/99         -0.0835
6/25/99         -0.0602
7/2/99          -0.0532
7/9/99          -0.0532
7/16/99         -0.0761
7/23/99         -0.0558
7/30/99         -0.0829
8/6/99          -0.0464
8/13/99         -0.078
8/20/99         -0.0864
8/27/99         -0.0345
9/3/99          -0.1057
9/10/99         -0.0938
9/17/99         -0.0683
9/24/99         -0.0401
10/1/99         -0.077
10/8/99         -0.086
10/15/99        -0.1231
10/22/99        -0.1254
10/29/99        -0.1223
11/5/99         -0.1192
11/12/99        -0.1252
11/19/99        -0.0826
11/26/99        -0.0979
12/3/99         -0.097
12/10/99        -0.0807
12/17/99        -0.1118
12/24/99        -0.1212
12/31/99        -0.0354
1/7/00          -0.0028
1/14/00         -0.0385
1/21/00         -0.0996
1/28/00         -0.1047
2/4/00          -0.0923
2/11/00         -0.0845
2/18/00         -0.1038
2/25/00         -0.0962
3/3/00          -0.1021
3/10/00         -0.0858
3/17/00         -0.1055
3/24/00         -0.1272
3/31/00         -0.1361
4/7/00          -0.1047
4/14/00         -0.0894
4/21/00         -0.0781
4/28/00         -0.064
5/5/00          -0.0385
5/12/00         -0.0566
5/19/00         -0.0734
5/26/00         -0.0759
6/2/00          -0.0905
6/9/00          -0.1037
6/16/00         -0.0943
6/23/00         -0.0775
6/30/00         -0.0841
7/7/00          -0.0909
7/14/00         -0.0893
7/21/00         -0.097
7/28/00         -0.0927
8/4/00          -0.0912
8/11/00         -0.0879
8/18/00         -0.1046
8/25/00         -0.1046
9/1/00          -0.1105
9/8/00          -0.1113
9/15/00         -0.0836
9/22/00         -0.1189
9/29/00         -0.1155
10/6/00         -0.0896
10/13/00        -0.0921
10/20/00        -0.0895
10/27/00        -0.0725
11/3/00         -0.0739
11/10/00        -0.0747
11/17/00        -0.0962
11/24/00        -0.0937
12/1/00         -0.0928
12/8/00         -0.0903
12/15/00        -0.0913
12/22/00        -0.0672
12/29/00        -0.0276
1/5/01          -0.0411
1/12/01         -0.02
1/19/01         -0.0077
1/26/01          0.0192
2/2/01          -0.0528
2/9/01          -0.0346
2/16/01         -0.0184
2/23/01         -0.0257
3/2/01          -0.0109
3/9/01          -0.036
3/16/01         -0.0393
3/23/01         -0.036
3/30/01         -0.0109
4/6/01           0.02
4/13/01          0.0046
4/20/01          0.0243
4/27/01         -0.0278
5/4/01          -0.0218
5/11/01          0.0037
5/18/01         -0.0228
5/25/01         -0.0111
6/1/01          -0.0345

IS A SPECIAL YEAR-END DISTRIBUTION BY THE FUND LIKELY THIS YEAR?

     We doubt it. Significant year-end special distributions typically come from
net capital gains realized by the Fund. The Fund has a capital loss carryforward
from last year,  which is likely to offset for tax purposes any gains that might
be realized in the current  fiscal year.  We know that this isn't as much fun as
getting a big year-end check, but it may also keep our shareholders  from paying
taxes unnecessarily.


                                        4

<PAGE>

- --------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated
                                                                  FINANCIAL DATA
                                           PER SHARE OF COMMON STOCK (UNAUDITED)
                                  ----------------------------------------------

                                                                DIVIDEND
                         DIVIDEND   NET ASSET      NYSE       REINVESTMENT
                           PAID       VALUE    CLOSING PRICE    PRICE (1)
                         --------   ---------  -------------  ------------
December 31, 1999 ....   $0.5800     $10.82       $10.4375       $10.55
January 31, 2000 .....    0.0680      10.76         9.6250         9.73
February 29, 2000 ....    0.0680      10.61         9.5000         9.54
March 31, 2000 .......    0.0680      10.78         9.3125         9.59
April 30, 2000 .......    0.0680      10.35         9.6875         9.65
May 31, 2000 .........    0.0680      10.08         9.1875         9.24
June 30, 2000 ........    0.0680      10.44         9.5625         9.60
July 31, 2000 ........    0.0680      10.57         9.5625         9.66
August 31, 2000 ......    0.0680      10.77         9.5625         9.62
September 30, 2000 ...    0.0680      10.74         9.5000         9.69
October 31, 2000 .....    0.0680      10.55         9.7500         9.76
November 30, 2000 ....    0.0680      10.68         9.5625         9.62

December 31, 2000 ....    0.0680      10.67        10.3750        10.34
January 31, 2001 .....    0.0680      10.93        10.6500        10.58
February 28, 2001 ....    0.0680      11.06        10.5000        10.92
March 31, 2001 .......    0.0680      10.96        10.8400        10.94
April 30, 2001 .......    0.0680      10.84        10.6500        10.77
May 31, 2001 .........    0.0680      10.96        10.6000        10.70

- --------------------------------------------------------------------------------
(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.

                       See Notes to Financial Statements.

                                        5

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS
MAY 31, 2001 (UNAUDITED)
- ------------------------------------------------------

                                                   VALUE
SHARES/$ PAR                                     (NOTE 1)
- ------------                                     --------

PREFERRED STOCKS AND SECURITIES -- 95.0%
  ADJUSTABLE RATE PREFERRED STOCKS -- 12.3%
          BANKING -- 7.0%
             Bank One Corporation:
    28,486     Series B, Adj. Rate Pfd. .....   $ 2,549,497*
    19,700     Series C, Adj. Rate Pfd. .....     1,901,050*
    55,776   Citigroup Inc.,
               Series Q, Adj. Rate Pfd. .....     1,188,726*
             J.P. Morgan Chase & Co.:
    14,100     Series A, Adj. Rate Pfd. .....     1,092,750*
     7,000     Series L, Adj. Rate Pfd. .....       596,750*
    30,000     Series N, Adj. Rate Pfd. .....       652,500*
   124,500   Wells Fargo & Company, Series B,
               Adj. Rate Pfd. ...............     5,478,000*
                                               ------------
             TOTAL BANKING ADJUSTABLE RATE
              PREFERRED STOCKS ..............    13,459,273
                                               ------------
          UTILITIES -- 5.3%
    30,000   Delmarva Power & Light,
               Adj. Rate Pfd. ...............     2,677,500*
             Niagara Mohawk Power Corporation:
    95,275     Series A, Adj. Rate Pfd. .....     2,215,144*
   179,125     Series B, Adj. Rate Pfd. .....     4,433,344*
    25,000     Series C, Adj. Rate Pfd. .....       618,750*
     6,800   Northern Indiana Public
               Service Company,
               Series A, Adj. Rate Pfd. .....       300,900*
                                               ------------
             TOTAL UTILITIES ADJUSTABLE RATE
              PREFERRED STOCKS ..............    10,245,638
                                               ------------
             TOTAL ADJUSTABLE RATE
              PREFERRED STOCKS ..............    23,704,911
                                               ------------
  FIXED RATE PREFERRED STOCKS AND SECURITIES -- 82.7%
          BANKING -- 16.2%
             BancWest Corporation:
$6,500,000     First Hawaiian Capital I,
               8.343% 7/1/27 Capital Security,
               Series B .....................     6,391,060

                                                   VALUE
SHARES/$ PAR                                     (NOTE 1)
- ------------                                     --------

             Citigroup Inc.:
    64,970     5.864% Pfd., Series M ........  $  2,796,634*
    81,150     6.231% Pfd., Series H ........     3,695,977*
             First Union Corporation:
$1,500,000     First Union Capital II,
               7.95% 11/15/29 Capital Security    1,512,967
$1,885,000     First Union Institutional
                 Capital II,
                 7.85% 1/1/27 Capital Security    1,833,719
$2,575,000     First Union Institutional
               Capital I,
               8.04% 12/1/26 Capital Security     2,557,632
     1,000   Firstar Realty LLC,
               8.875% Pfd. REIT, 144A*** ....     1,052,585
             Fleet Boston Financial Corporation:
 $1,000,000    Summit Capital Trust I,
               8.40% 3/15/27 Capital Security     1,037,280
             GreenPoint Financial Corporation:
 $2,725,000    GreenPoint Capital Trust I,
               9.10% 6/1/27 Capital Security      2,545,818
    52,400   HSBC USA, Inc.,
               $2.8575 Pfd. .................     2,389,440*
    48,925   J.P. Morgan Chase & Co.
               Pfd.10.84% ...................     1,253,458*
$2,750,000   Keycorp Institutional Capital B,
               8.25% 12/15/26 Capital Security    2,778,407
             Bank of America Corporation:
$1,365,000     NB Capital Trust IV 8.25%,
               4/15/27 Capital Security .....     1,386,396
                                               ------------
             TOTAL BANKING FIXED RATE
              PREFERRED STOCKS
              AND SECURITIES ................    31,231,373
                                               ------------
          FINANCIAL SERVICES -- 16.0%
             Bear Stearns Companies, Inc.:
   180,020     5.49% Pfd., Series G .........     6,947,872*
    55,573     5.72% Pfd., Series F .........     2,234,312*
$6,000,000   Countrywide Credit Capital I,
               8.00% 12/15/26 Capital Security    5,808,360
     2,500   Heller Financial, Inc.,
               6.95% Pfd., Series D .........       239,600*
    10,000   Household International, Inc.,
               $4.30 Pfd. ...................       596,600*

                        See Notes to Financial Statements.

                                        6

<PAGE>

- --------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated
                                            PORTFOLIO OF INVESTMENTS (CONTINUED)
                                                        MAY 31, 2001 (UNAUDITED)
                                  ----------------------------------------------

                                                   VALUE
SHARES/$ PAR                                     (NOTE 1)
- ------------                                     --------

PREFERRED STOCKS AND SECURITIES (CONTINUED)
  FIXED RATE PREFERRED STOCKS (CONTINUED)
          FINANCIAL SERVICES (CONTINUED)
             Lehman Brothers Holdings, Inc.:
    49,650     5.67%, Series D ..............   $ 2,017,776*
   136,030     5.94% Pfd., Series C .........     5,751,348*
   150,850   USA Education, Inc., 6.97% Pfd.,
               Series A .....................     7,311,699*
                                               ------------
             TOTAL FINANCIAL SERVICES
              FIXED RATE PREFERRED STOCKS
              AND SECURITIES ................    30,907,567
                                               ------------
          INSURANCE -- 10.9%
             Allstate Corporation:
$2,020,000     Allstate Financing II,
               7.83% 12/1/45 Capital Security     1,930,746
             AON Corporation:
$2,400,000     AON Capital Trust A,
               8.205% 1/1/27 Capital Security     2,350,140
             Conseco, Inc.:
    17,600     Conseco Financing Trust I,
               9.16% TOPrS ..................       387,992
    25,000     Conseco Financing Trust VI,
               9.00% TOPrS ..................       537,625
    24,750     Conseco Financing Trust V,
               8.70% TOPrS ..................       531,630
        15   Prudential Human Resources
               Management Company, Inc.,
               6.30% Private Placement, Sinking
               Fund Pfd., Series A ..........     1,460,492*
             SAFECO Corporation:
$2,300,000     SAFECO Capital Trust I,
               8.072% 7/15/37 Capital Security    1,955,368
             The St. Paul Companies, Inc.:
$6,700,000     MMI Capital Trust I, 7.625%
               12/15/27 Capital Security,
               Series B .....................     6,335,553
             UnumProvident Corporation:
$5,889,000     Provident Financing Trust I,
               7.405% 3/15/38 Capital Security    4,992,076

                                                   VALUE
SHARES/$ PAR                                     (NOTE 1)
- ------------                                     --------

             Zurich Financial Services AG:
       500     Zurich Registered Caps II,
               6.58% Pfd. ...................  $    510,847*
                                               ------------
             TOTAL INSURANCE FIXED
              RATE PREFERRED STOCKS
              AND SECURITIES ................    20,992,469
                                               ------------
          OIL AND GAS -- 6.3%
     3,700   Anadarko Petroleum Corporation,
               5.46% Pfd. ...................       312,668*
    45,100   Apache Corporation,
               5.68% Pfd., Series B .........     3,916,033*
             El Paso Corporation:
    53,500     Coastal Finance I,
               8.375% TOPrS .................     1,365,320
     3,200   EOG Resources, Inc.,
               7.195% Pfd., Series B ........     3,318,960*
             Kinder Morgan, Inc.:
$3,750,000     KN Capital Trust III,
               7.63% 4/15/28 Capital Security     3,299,175
                                               ------------
             TOTAL OIL AND GAS FIXED RATE
              PREFERRED STOCKS
              AND SECURITIES ................    12,212,156
                                               ------------
          MISCELLANEOUS INDUSTRIES -- 2.2%
         6   BHP Operations,
               6.76% Pfd. 144A*** ...........       614,574*
    17,500   E.I. Du Pont de Nemours and Company,
               $4.50 Pfd., Series B .........     1,232,525*
    57,600   Farmland Industries, Inc.,
               8.00% Pfd. 144A*** ...........     1,276,128*
     9,520   Viad Corporation,
               $4.75 Sinking Fund Pfd. ......       522,981*
             Worldcom, Inc.:
    22,500     Corts Worldcom,
               7.60% Pfd. CorTS .............       547,425
                                               ------------
             TOTAL MISCELLANEOUS INDUSTRIES
              FIXED RATE PREFERRED STOCKS
              AND SECURITIES ................     4,193,633
                                               ------------

                       See Notes to Financial Statements.

                                        7

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2001 (UNAUDITED)
- ----------------------------------------------

                                                   VALUE
SHARES/$ PAR                                     (NOTE 1)
- ------------                                     --------

PREFERRED STOCKS AND SECURITIES (CONTINUED)
  FIXED RATE PREFERRED STOCKS (CONTINUED)
          UTILITIES -- 31.1%
             Alabama Power Company:
     4,474     4.60% Pfd. ...................  $    318,482*
     6,485     4.72% Pfd. ...................       473,664*
       100     4.92% Pfd. ...................         7,613*
   116,400     5.20% Pfd. ...................     2,298,318*
    64,375   Appalachian Power Company,
               8.00% QUIDS, Series B ........     1,608,409
     6,250   Avista Corporation,
               $6.95 Pfd., Series K .........       572,406*
    15,000   Baltimore Gas & Electric Company,
               6.99% Pfd., Series 1995 ......     1,548,600*
    10,000   Boston Edison Company,
               4.78% Pfd. ...................       704,850*
     7,282   Carolina Power and Light,
               $5.44 Pfd. ...................       573,640*
     1,428   Central Hudson Gas &
               Electric Corporation,
               4.35% Pfd., Series D, Pvt. ...        92,763*
    12,450   Columbus Southern Power Company,
               7.92%, Jr. Sub. Debt., Series B      309,258
             Connecticut Light and
               Power Company:
     8,000     $2.06 Pfd. ...................       223,640*
     5,100     $3.24 Pfd. ...................       222,640*
             Duke Energy Corporation:
     7,019     4.50% Pfd., Series C .........       476,730*
    13,003     7.85% Pfd., Series S .........     1,370,386*
             Entergy Arkansas, Inc.:
     1,000     $6.08 Pfd. ...................        79,745*
     3,050     4.56% Pfd., Series 1965 ......       183,564*
     2,840     4.56% Pfd. ...................       170,925*
    13,500     7.40% Pfd. ...................     1,269,945*
       150     7.80% Pfd. ...................        14,783*
     2,441   Entergy Gulf States, Inc.,
               $7.56 Pfd. ...................       220,020*
             Entergy Louisiana, Inc.:
       299     5.16% Pfd. ...................        20,371*
     3,771     7.36% Pfd. ...................       366,466*
   175,000     8.00% Pfd., Series 92 ........     4,288,375*
     8,500   Entergy Mississippi, Inc.,
               7.44% Pfd. ...................       819,103*

                                                   VALUE
SHARES/$ PAR                                     (NOTE 1)
- ------------                                     --------

             Florida Power & Light Company:
     4,654     4.35% Pfd., Series E, Pvt. ...    $  292,364*
     4,000     4.50% Pfd. ...................       265,660*
     5,000   Green Mountain Power,
               7.32% Pfd.,  Series 1 ........       393,225*
             Hawaiian Electric Company, Inc.:
    23,600     HECO Capital Trust I,
               8.05% QUIPS ..................       587,404
    67,300   Indiana Michigan Power Company,
               7.60% Pfd., Series B .........     1,682,500
    12,000   Indianapolis Power &
               Light Company,
               5.65% Pfd. ...................       955,860*
     6,577   Jersey Central Power &
               Light Company,
               7.52% Sinking Fund Pfd.,
               Series K .....................       680,983*
    15,000   Mississippi Power Company,
               6.32% Pfd. ...................       354,825*
    20,000   Monongahela Power Company,
               $7.73 Pfd., Series L .........     2,097,200*
    11,000   Montana Power Co.,
               $6.875 Pfd. ..................     1,084,270*
     6,250   Niagara Mohawk Power Corporation,
               4.10% Pfd. ...................       333,344*
    76,200   Ohio Power Company,
               7.92% QUIDS, Series B ........     1,902,333
     6,308   Pacificorp,
               $4.72 Pfd. ...................       434,905*
             PECO Energy Company:
     1,100     $4.30 Pfd., Series B .........        68,690*
     5,000     $4.40 Pfd., Series C .........       317,225*
$1,000,000     Capital Trust III,
               $7.38 4/6/28 Capital Security,
               Series D .....................       867,880
     7,500     $7.48 Pfd. ...................       770,775*
     2,493   Potomac Electric Power Company,
               $2.44 Pfd., Series 1957 ......        93,301*
       570   PSI Energy, Inc.,
               4.32% Pfd. ...................         9,086*
             Public Service Enterprise Group, Inc.:
    26,000     Enterprise Capital Trust I,
               7.44% TOPrS, Series A ........       611,260
    14,020     Public Service Electric &
               Gas Company,
               5.28% Pfd., Series E .........     1,081,994*

                        See Notes to Financial Statements.

                                        8

<PAGE>

- --------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated
                                            PORTFOLIO OF INVESTMENTS (CONTINUED)
                                                        MAY 31, 2001 (UNAUDITED)
                                  ----------------------------------------------

                                                   VALUE
SHARES/$ PAR                                     (NOTE 1)
- ------------                                     --------

PREFERRED STOCKS AND SECURITIES (CONTINUED)
  FIXED RATE PREFERRED STOCKS (CONTINUED)
          UTILITIES (CONTINUED)
             Puget Sound Energy, Inc.:
   108,435     7.45% Pfd., Series II ........  $  2,744,490*
    18,853     7.75% Sinking Fund Pfd. ......     1,955,810*
             Reliant Energy, Inc.:
    45,000     HL&P Capital Trust I,
               8.125% QUIPS .................     1,127,700
$3,750,000     Houston Light & Power,
               Capital Trust II,
               8.257%, 2/1/37 Capital Security,
               Series B .....................     3,546,788
    55,982     REI Trust I,
               7.20% TOPrS, Series C ........     1,307,460
             Rochester Gas &
               Electric Corporation:
     5,060     4.10% Pfd., Series J .........       296,111*
     4,030     4.75% Pfd., Series I .........       273,234*
             Sempra Energy:
     4,090     Pacific Enterprises,
               $4.50 Pfd. ...................       225,502*
             Sierra Pacific Resources:
    50,887     Sierra Pacific Power,
               7.80% Pfd., Series 1 .........     1,249,530*
    32,700     NVP Capital III,
               7.75% TIPS ...................       710,898
    51,280     NVP Capital I,
               8.20% QUIPS, Series A ........     1,166,876
             South Carolina Electric &
               Gas Company:
    14,753     5.125% Purchase Fund Pfd. ....       581,858*
     6,318     6.00% Purchase Fund Pfd. .....       289,554*
             Southern Union Company:
    60,800     Southern Union Financing I,
               9.48% TOPrS ..................     1,552,832
     6,050   TransCanada PipeLines Ltd.,
               8.25% ........................       154,275
        10   TXU Corporation,
               7.24% Pfd., Series B .........     1,046,136*

                                                   VALUE
SHARES/$ PAR                                     (NOTE 1)
- ------------                                     --------

             Union Electric Power Company:
     6,500     $7.64 Pfd. ...................    $  685,393*
$4,700,000     7.69% 12/15/36 Capital Security,
               Series A .....................     4,347,242
             Virginia Electric & Power Company:
     1,665     $4.04 Pfd. ...................        99,617*
     2,270     $4.20 Pfd. ...................       141,194*
     1,573     $4.80 Pfd. ...................       111,817*
             XCEL Energy, Inc.:
     2,480     $4.10 Pfd., Series C .........       151,255*
    12,510     $4.11 Pfd., Series D .........       764,799*
     2,660     $4.16 Pfd., Series E .........       164,601*
    80,900     PSCO Capital Trust I,
               7.60% TOPrS ..................     1,999,444
                                               ------------
             TOTAL UTILITIES FIXED RATE
              PREFERRED STOCKS
              AND SECURITIES ................    59,814,196
                                               ------------
             TOTAL FIXED RATE
              PREFERRED STOCKS
              AND SECURITIES ................   159,351,394
                                               ------------
             TOTAL PREFERRED STOCKS
              AND SECURITIES
              (Cost $182,517,297) ...........   183,056,305
                                               ------------
COMMON STOCKS -- 0.3% (Cost $561,856)
    27,500   Wisconsin Energy Corporation ...       640,063*
                                               ------------
PUT OPTION -- 0.4% (Cost $932,384)
     1,200   Put Options on U.S. Treasury:
               Bond September Futures,
               Expiring 8/25/01 .............       839,063
                                               ------------

                        See Notes to Financial Statements.

                                        9

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2001 (UNAUDITED)
- ----------------------------------------------

PRINCIPAL                                        VALUE
 AMOUNT                                         (NOTE 1)
- ---------                                       --------

COMMERCIAL PAPER -- 0.3% (Cost $484,000)
$  484,000   General Electric
             Commercial Paper ........         $    484,000
                                               ------------
TOTAL INVESTMENTS (Cost $184,495,537**)  96.0%  185,019,431
OTHER ASSETS AND LIABILITIES (Net) ...    4.0     7,651,794
                                        -----  ------------
NET ASSETS ...........................  100.0% $192,671,225
                                        =====  ============
- ----------------------
   * Securities eligible for the Dividends Received Deduction.
  ** 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.
   + Non-income producing.

ABBREVIATIONS (Note 6):
QUIDS   --  Quarterly Income Debt Securities
QUIPS   --  Quarterly Income Preferred Securities
REIT    --  Real Estate Investment Trust
STOPS   --  Semi-Annual Trust Originated  Pass Through Securities
TIPS    --  Trust Issued Preferred Securities
TOPrS   --  Trust Originated Preferred Securities
CorTS   --  Corporate Backed Trust Securities

Capital  Securities  are considered  debt  instruments  for financial  statement
purposes and the amounts shown in the Shares/$ Par column are dollar  amounts of
par value.


                       See Notes to Financial Statements.

                                       10

<PAGE>

- --------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated
                                             STATEMENT OF ASSETS AND LIABILITIES
                                                        MAY 31, 2001 (UNAUDITED)
                                  ----------------------------------------------

<TABLE>
<CAPTION>

<S>                                                                   <C>                 <C>
ASSETS:
   Investments, at value (Cost $184,495,537) (Note 1)
     See accompanying schedule ....................................                       $185,019,431
   Receivable for investments sold ................................                          5,931,061
   Dividends and interest receivable ..............................                          1,899,578
   Prepaid expenses ...............................................                            139,310
                                                                                          ------------
           Total Assets ...........................................                        192,989,380
LIABILITIES:
   Payable for securities purchased ...............................   $    18,711
   Dividends payable to Common Shareholders .......................       140,294
   Investment advisory fee payable (Note 2) .......................        92,304
   Professional fees payable ......................................        24,506
   Accrued expenses and other payables ............................        42,340
                                                                      -----------
           Total Liabilities ......................................                            318,155
                                                                                          ------------
NET ASSETS ........................................................                       $192,671,225
                                                                                          ============

NET ASSETS CONSIST OF:
   Undistributed net investment income (Note 1) ...................                       $     13,256
   Accumulated net realized loss on investments sold (Note 1) .....                         (6,964,805)
   Unrealized appreciation of investments (Note 3) ................                            523,894
   Par value of Common Stock ......................................                            111,717
   Paid-in capital in excess of par value of Common Stock .........                        128,987,163
   Money Market Cumulative Preferred(TRADE MARK) Stock (Note 5) ...                         70,000,000
                                                                                          ------------
           Total Net Assets .......................................                       $192,671,225
                                                                                          ============
                                                                       PER SHARE
                                                                       ---------

NET ASSETS AVAILABLE TO:
   Money Market Cumulative Preferred(TRADE MARK) Stock (700 shares
     outstanding) redemption value ................................   $100,000.00         $ 70,000,000
   Accumulated undeclared dividends on Money Market
     Cumulative Preferred(TRADE MARK) Stock .......................        312.74              218,916
                                                                      -----------         ------------
                                                                      $100,312.74           70,218,916
                                                                      ===========
   Common Stock (11,171,714 shares outstanding) ...................        $10.96          122,452,309
                                                                           ======         ------------

TOTAL NET ASSETS ..................................................                       $192,671,225
                                                                                          ============
</TABLE>

                       See Notes to Financial Statements.

                                       11

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 2001 (UNAUDITED)
- -------------------------------------------------

<TABLE>
<CAPTION>

<S>                                                                           <C>          <C>
INVESTMENT INCOME:
     Dividends ...........................................................                 $4,639,715
     Interest ............................................................                  2,513,838
                                                                                           ----------
          Total Investment Income ........................................                  7,153,553

EXPENSES:
     Investment advisory fee (Note 2) ....................................    $539,821
     Administration fee (Note 2) .........................................     114,597
     Money Market Cumulative Preferred(TRADE MARK) broker commissions and
        Auction Agent fees ...............................................      94,547
     Insurance premiums ..................................................      50,526
     Legal and audit fees ................................................      54,944
     Shareholder servicing agent fees and expenses (Note 2) ..............      35,535
     Directors' fees and expenses (Note 2) ...............................      36,078
     Custodian fees and expenses (Note 2) ................................      14,255
     Other ...............................................................      38,317
                                                                              --------
          Total Expenses .................................................                    978,620
                                                                                           ----------

NET INVESTMENT INCOME ....................................................                  6,174,933
                                                                                           ----------

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
   (Notes 1 and 3):
     Net realized loss on investments sold during the period .............                 (1,143,954)
     Change in net unrealized appreciation of investments
        during the period ................................................                  4,442,234
                                                                                           ----------

NET REALIZED LOSS AND UNREALIZED GAIN ON INVESTMENTS .....................                  3,298,280
                                                                                           ----------

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .....................                 $9,473,213
                                                                                           ==========
</TABLE>

                       See Notes to Financial Statements.

                                       12

<PAGE>

- --------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated
                                              STATEMENT OF CHANGES IN NET ASSETS
                                  ----------------------------------------------

<TABLE>
<CAPTION>
                                                                                   SIX MONTHS ENDED
                                                                                     MAY 31, 2001         YEAR ENDED
                                                                                      (UNAUDITED)      NOVEMBER 30, 2000
                                                                                   ----------------    -----------------

<S>                                                                                  <C>                 <C>
INCREASE / (DECREASE) IN NET ASSETS
OPERATIONS:
     Net investment income .....................................................     $  6,174,933        $ 13,148,825
     Net realized loss on investments sold during the period ...................       (1,143,954)         (4,827,466)
     Change in net unrealized appreciation
        of investments during the period .......................................        4,442,234           1,120,006
                                                                                     ------------        ------------
     Net increase in net assets resulting from operations ......................        9,473,213           9,441,365

DISTRIBUTIONS:
     Dividends paid from net investment income to Money Market
        Cumulative Preferred(TRADE MARK) Stock Shareholders (Note 5) ...........       (2,139,277)         (3,834,261)
     Distributions paid from net realized capital gains to Money
        Market Cumulative Preferred(TRADE MARK) Stock Shareholders (Note 5) ....               --            (191,425)
     Dividends paid from net investment income to Common Stock
        Shareholders ...........................................................       (4,553,107)        (10,096,152)
     Distributions paid from net realized capital gains to Common Stock
        Shareholders ...........................................................               --          (4,712,758)
                                                                                     ------------        ------------
     Total Distributions .......................................................       (6,692,384)        (18,834,596)
                                                                                     ------------        ------------

FUND SHARE TRANSACTIONS:
     Increase from Common Stock transactions ...................................          224,118                  --
                                                                                     ------------        ------------

NET INCREASE / (DECREASE) IN NET ASSETS FOR THE PERIOD .........................        3,004,947          (9,393,231)

NET ASSETS:
     Beginning of period .......................................................      189,666,278         199,059,509
                                                                                     ------------        ------------
     End of period (including undistributed net investment income of
        $13,256 and $530,706, respectively) ....................................     $192,671,225        $189,666,278
                                                                                     ============        ============
</TABLE>

                       See Notes to Financial Statements.

                                       13

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
- ------------------------------------------------------

     Contained below is per share operating  performance  data, total investment
returns,  ratios to  average  net  assets  and  other  supplemental  data.  This
information  has  been  derived  from  information  provided  in  the  financial
statements and market price data for the Fund's shares.

<TABLE>
<CAPTION>
                                                          SIX MONTHS
                                                            ENDED                    YEAR ENDED NOVEMBER 30,
                                                         MAY 31, 2001   ------------------------------------------------------
                                                         (UNAUDITED)      2000         1999        1998       1997      1996
                                                         ------------   --------     --------    --------   --------  --------
<S>                                                        <C>          <C>          <C>         <C>        <C>       <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year .....................   $ 10.68      $  11.50     $  13.50    $  13.53   $  12.91  $  12.35
                                                           -------      --------     --------    --------   --------  --------
INVESTMENT OPERATIONS:
Net investment income. .................................      0.55          1.18         1.14        1.14       1.10      1.16
Net realized and unrealized gain / (loss) on investments      0.30         (0.33)       (1.24)       0.17       0.87      0.53
                                                           -------      --------     --------    --------   --------  --------
Total from investment operations. ......................      0.85          0.85        (0.10)       1.31       1.97      1.69
                                                           -------      --------     --------    --------   --------  --------
DISTRIBUTIONS:
Dividends paid from net investment income to
  MMP* Shareholders ....................................     (0.19)        (0.34)       (0.19)      (0.18)     (0.21)    (0.21)
Distributions paid from net realized capital gains to
  MMP* Shareholders. ...................................        --         (0.02)       (0.09)      (0.11)     (0.04)    (0.03)
Dividends paid from net investment income to
  Common Stock Shareholders. ...........................     (0.41)        (0.91)       (0.96)      (0.89)     (0.92)    (0.87)
Distributions paid from net realized capital gains to
  Common Stock Shareholders. ...........................        --         (0.42)       (0.60)      (0.18)     (0.16)       --
Change in accumulated undeclared dividends on MMP*. ....      0.03 +        0.02 +      (0.06)+      0.02      (0.02)    (0.02)
                                                           -------      --------     --------    --------   --------  --------
Total distributions ....................................     (0.57)        (1.67)       (1.90)      (1.34)     (1.35)    (1.13)
                                                           -------      --------     --------    --------   --------  --------
Net asset value, end of period. ........................   $ 10.96      $  10.68 +   $  11.50 +  $  13.50   $  13.53  $  12.91
                                                           =======      ========     ========    ========   ========  ========
Market value, end of period ............................   $10.600      $ 9.5625     $ 10.500    $ 12.875   $ 12.875  $ 12.000
                                                           =======      ========     ========    ========   ========  ========
Total investment return based on net asset value** .....     6.60%         5.88%      (2.99)%       8.29%     14.44%    13.11%
                                                           =======      ========     ========    ========   ========  ========
Total investment return based on market value** ........    15.17%         3.80%      (7.12)%       8.53%     17.16%    15.42%
                                                           =======      ========     ========    ========   ========  ========
RATIOS TO AVERAGE NET ASSETS AVAILABLE
  TO COMMON STOCK SHAREHOLDERS:
     Operating expenses. ...............................     1.62%***       1.59%        1.53%       1.45%      1.48%     1.71%
     Net investment income**** .........................     7.46%***       7.93%        6.81%       6.37%      6.44%     7.36%

- ------------------------------
SUPPLEMENTAL DATA:++
     Portfolio turnover rate. ..........................        15%           67%          64%          87%       74%       87%
     Net assets, end of period (in 000's) ..............  $192,671      $189,666     $199,060    $220,690   $221,230  $214,195
     Ratio of operating expenses to
        Total Average Net Assets .......................      1.02%***      1.00%        1.01%        0.99%     1.00%  1.13%

<FN>
*    Money Market Cumulative Preferred(TRADE MARK) Stock.
**   Assumes  reinvestment of  distributions at the price obtained by the Fund's
     Dividend Reinvestment Plan.
***  Annualized.
**** The net investment  income ratios reflect income net of operating  expenses
     and payments to MMP* Shareholders.
+    Includes effect of additional  distribution  available to MMP* Shareholders
     ($0.04 per Common Share in 2000 and $0.05 per Common  Share in 1999).  (See
     Note 5 to the Financial Statements.)
++   Information presented under heading Supplemental Data includes MMP*.
</FN>
</TABLE>

                       See Notes to Financial Statements.

                                       14

<PAGE>

- --------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated
                                                FINANCIAL HIGHLIGHTS (CONTINUED)
                                  ----------------------------------------------

      The  table  below  sets out  information  with  respect  to  Money  Market
Cumulative Preferred(TRADE MARK) Stock currently outstanding.

                                           INVOLUNTARY          AVERAGE
                                ASSET      LIQUIDATING          MARKET
               TOTAL SHARES   COVERAGE     PREFERENCE            VALUE
                OUTSTANDING   PER SHARE   PER SHARE (1)   PER SHARE (1) & (2)
               ------------   ---------   -------------   -------------------
05/31/01*           700        $275,245      $100,000           $100,000
11/30/00            700         270,952       100,000            100,000
11/30/99            700         284,371       100,000            100,000
11/30/98            700         315,271       100,000            100,000
11/30/97            700         316,044       100,000            100,000
11/30/96            700         305,992       100,000            100,000

- ----------------
(1) Excludes accumulated undeclared dividends.
(2) See Note 5.
*   Unaudited.

                       See Notes to Financial Statements.

                                       15

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------

1.  SIGNIFICANT ACCOUNTING POLICIES

     Preferred  Income   Opportunity  Fund   Incorporated   (the  "Fund")  is  a
diversified,  closed-end  management  investment company organized as a Maryland
corporation  and is  registered  with the  Securities  and  Exchange  Commission
("SEC")  under the  Investment  Company Act of 1940,  as amended.  The  policies
described below are followed  consistently by the Fund in the preparation of its
financial   statements  in  conformity   with  generally   accepted   accounting
principles.

     PORTFOLIO  VALUATION:  The net asset  value of the Fund's  Common  Stock is
determined  by the  Fund's  administrator  no less  frequently  than on the last
business day of each week and month.  It is  determined by dividing the value of
the Fund's net assets  attributable  to common shares by the number of shares of
Common Stock  outstanding.  The value of the Fund's net assets  attributable  to
common  shares is deemed to equal the value of the Fund's  total assets less (i)
the Fund's liabilities,  (ii) the aggregate liquidation value of the outstanding
Money Market  Cumulative  Preferred(TRADE  MARK) Stock and (iii) accumulated and
unpaid  dividends on the  outstanding  Money Market  Cumulative  Preferred(TRADE
MARK) Stock.  Securities listed on a national  securities exchange are valued on
the  basis of the last sale on such  exchange  on the day of  valuation.  In the
absence of sales of listed  securities  and with respect to securities for which
the most recent sale prices are not deemed to  represent  fair market  value and
unlisted securities (other than money market instruments), securities are valued
at the mean  between  the closing  bid and asked  prices when quoted  prices for
investments are readily available.  Investments in  over-the-counter  derivative
instruments, such as interest rate swaps and options thereon (i.e., "swaptions")
are valued at the prices  obtained  from the  broker/dealer  or bank that is the
counterparty to such instrument,  subject to comparison of such valuation with a
valuation  obtained from a  broker/dealer  or bank that is not a counterparty to
the particular  derivative  instrument.  Investments for which market quotations
are not readily available or for which management determines that the prices are
not  reflective  of  current  market  conditions  are  valued  at fair  value as
determined  in good faith by or under the direction of the Board of Directors of
the Fund,  including  reference  to  valuations  of other  securities  which are
comparable  in  quality,   maturity  and  type.   Investments  in  money  market
instruments, which mature in 60 days or less, are valued at amortized cost.

     SECURITIES TRANSACTIONS AND INVESTMENT INCOME:  Securities transactions are
recorded as of the trade date.  Realized gains and losses from  securities  sold
are  recorded  on the  identified  cost  basis.  Dividend  income is recorded on
ex-dividend dates. Interest income is recorded on the accrual basis.

     In November  2000, a revised AICPA Audit and  Accounting  Guide,  AUDITS OF
INVESTMENT  COMPANIES,  was issued,  and is effective for fiscal years beginning
after  December  15, 2000.  The revised  Guide will require the Fund to amortize
premium and discount on bonds and notes. Upon initial adoption, the Fund will be
required to adjust the cost of its bonds and notes by the  cumulative  amount of
amortization  that would have been  recognized had  amortization  been in effect
from the purchase date of each holding.  Adopting this accounting principle will
not affect the Fund's net asset  value,  but will change the  classification  of
certain amounts between interest income and realized and unrealized gain/loss in
the

                                       16

<PAGE>

- --------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated
                           NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
                           -----------------------------------------------------


Statement of  Operations.  The Fund has not at this time  undertaken to quantify
the  impact,  if any,  resulting  from the  adoption  of this  principle  on the
financial statements.

     OPTION ACCOUNTING  PRINCIPLES:  Upon the purchase of an option by the Fund,
the total purchase price paid is recorded as an investment. The market valuation
is determined as set forth in the preceding portfolio valuation paragraph.  When
the Fund enters into a closing sale transaction,  the Fund will record a gain or
loss depending on the difference  between the purchase and sale price. The risks
associated with purchasing options and the maximum loss the Fund would incur are
limited to the purchase price originally paid.

     REPURCHASE  AGREEMENTS:   The  Fund  may  engage  in  repurchase  agreement
transactions. The Fund's Investment Adviser reviews and approves the eligibility
of the banks and dealers  with which the Fund enters into  repurchase  agreement
transactions.  The value of the collateral  underlying  such  transactions is at
least  equal at all times to the total  amount  of the  repurchase  obligations,
including interest.  The Fund maintains possession of the collateral through its
custodian and, in the event of counterparty  default,  the Fund has the right to
use the collateral to offset losses  incurred.  There is the possibility of loss
to the Fund in the event the Fund is delayed or prevented  from  exercising  its
rights to dispose of the collateral securities.

     DIVIDENDS AND  DISTRIBUTIONS TO  SHAREHOLDERS:  The Fund expects to declare
dividends on a monthly basis to shareholders of Common Stock.  The  shareholders
of Money Market Cumulative  Preferred(TRADE  MARK) Stock are entitled to receive
cumulative  cash  dividends  as  declared  BY the  Fund's  Board  of  Directors.
Distributions  to  shareholders  are recorded on the  ex-dividend  date. Any net
realized  short-term  capital gains will be distributed to shareholders at least
annually.  Any net  realized  long-term  capital  gains  may be  distributed  to
shareholders  at least  annually or may be retained by the Fund as determined by
the Fund's Board of Directors. Capital gains retained by the Fund are subject to
tax at the  corporate  tax rate.  Subject to the Fund  qualifying as a regulated
investment  company,  any taxes paid by the Fund on such net realized  long-term
gains may be used by the Fund's  Shareholders  as a credit against their own tax
liabilities.

     FEDERAL  INCOME  TAXES:  The Fund  intends  to  continue  to  qualify  as a
regulated investment company by complying with the requirements under subchapter
M of the Internal  Revenue  Code of 1986,  as amended,  applicable  to regulated
investment companies and intends to distribute  substantially all of its taxable
net  investment  income to its  shareholders.  Therefore,  no Federal income tax
provision is required.

     Income and capital gain  distributions  are determined and characterized in
accordance with income tax regulations which may differ from generally  accepted
accounting  principles.  These  differences  are  primarily due to (1) differing
treatments  of income and gains on  various  investment  securities  held by the
Fund,  including  timing  differences,  (2) the attribution of expenses  against
certain components of taxable  investment  income,  and (3) federal  regulations
requiring  proportional  allocation  of  income  and  gains  to all  classes  of
Shareholders.

                                       17

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- -----------------------------------------------------

     The Internal  Revenue Code of 1986, as amended,  imposes a 4% nondeductible
excise tax on the Fund to the extent the Fund does not  distribute by the end of
any calendar year at least (1) 98% of the sum of its net  investment  income for
that year and its  capital  gains (both long term and short term) for its fiscal
year and (2) certain undistributed amounts from previous years.

     OTHER: The preparation of financial statements in accordance with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the reported  amounts and  disclosures in the financial
statements. Actual results could differ from those estimates.

2.   INVESTMENT ADVISORY FEE, DIRECTORS' FEES, ADMINISTRATION FEE AND TRANSFER
     AGENT FEE

     Flaherty  &  Crumrine  Incorporated  (the  "Adviser")  serves as the Fund's
Investment Adviser. The Fund pays the Adviser a monthly fee at an annual rate of
0.625% of the value of the Fund's average  monthly net assets up to $100 million
and 0.50% of the value of the  Fund's  average  monthly  net assets in excess of
$100 million.

     The Fund  currently  pays each  Director who is not a director,  officer or
employee of the Adviser a fee of $9,000 per annum,  plus $500 for each in-person
meeting of the Board of Directors or any committee  and $100 for each  telephone
meeting.  In addition,  the Fund will  reimburse  all  Directors  for travel and
out-of-pocket expenses incurred in connection with such meetings.

     PFPC Inc., a member of the PNC  Financial  Services  Group ("PNC  Financial
Services"),   serves  as  the  Fund's   Administrator  and  Transfer  Agent.  As
Administrator, PFPC Inc. calculates the net asset value of the Fund's shares and
generally assists in all aspects of the Fund's administration and operation.  As
compensation for PFPC Inc.'s services as Administrator,  the Fund pays PFPC Inc.
a monthly  fee at an annual  rate of 0.12% of the  Fund's  average  monthly  net
assets.  PFPC Inc.  also  serves as the  Fund's  Common  Stock  servicing  agent
(transfer agent),  dividend-paying  agent and registrar and, as compensation for
PFPC Inc.'s services as such, the Fund pays PFPC Inc. a fee at an annual rate of
0.02% of the Fund's  average  monthly  net  assets  plus  certain  out-of-pocket
expenses.

     PFPC Trust Company ("PFPC Trust") began serving as the Fund's  Custodian on
April 9, 2001. PFPC Trust is an indirect  subsidiary of PNC Financial  Services.
As compensation for PFPC Trust's services as custodian, the Fund pays PFPC Trust
a monthly  fee at the annual  rate of 0.01% of the Fund's  average  monthly  net
assets.  Prior to April 9, 2001,  Boston Safe Deposit and Trust Company ("Boston
Safe"),  a  wholly-owned  subsidiary of Mellon Bank  Corporation,  served as the
Fund's Custodian.

     Bankers Trust  Corporate & Agency  Services,  a wholly-owned  subsidiary of
Deutsche  Bank,  AG  ("Auction  Agent"),  serves  as  the  Fund's  Money  Market
Cumulative  Preferred(TRADE  MARK) Stock  transfer  agent,  registrar,  dividend
disbursing agent and redemption agent.

                                       18

<PAGE>

- --------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated
                           NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
                           -----------------------------------------------------


3.   PURCHASES AND SALES OF SECURITIES

     Cost of purchases and proceeds from sales of securities  for the six months
ended May 31, 2001, excluding short-term investments, aggregated $28,166,102 and
$34,475,398, respectively.

     At May 31, 2001 aggregate gross unrealized  appreciation for all securities
in which  there is an excess of value  over cost was  $6,312,799  and  aggregate
gross unrealized  depreciation for all securities in which there is an excess of
cost over value was $5,788,905.

4.   COMMON STOCK

     At May 31,  2001,  240,000,000  shares of $0.01 par value Common Stock were
authorized.

     Common Stock transactions were as follows:

                                                              SIX MONTHS ENDED
                                                                  5/31/01
                                                            --------------------
                                                            SHARES       AMOUNT
                                                            ------      --------
Issued as reinvestment of dividends under the Dividend
   Reinvestment and Cash Purchase Plan                      20,427      $224,118
                                                            ======      ========

     There were no Common  Stock  transactions  for the year ended  November 30,
2000.

5.   MONEY MARKET CUMULATIVE PREFERRED(TRADE MARK) STOCK

     The Fund's  Articles  of  Incorporation  authorize  the  issuance  of up to
10,000,000  shares  of  $0.01  par  value  preferred  stock.  The  Money  Market
Cumulative Preferred(TRADE MARK) Stock is senior to the Common Stock and results
in the  financial  leveraging  of the Common  Stock.  Such  leveraging  tends to
magnify both the risks and opportunities to Common Stock Shareholders. Dividends
on shares of Money Market Cumulative Preferred(TRADE MARK) Stock are cumulative.

     The Fund is required to meet certain asset  coverage  tests with respect to
the Money Market  Cumulative  Preferred(TRADE  MARK) Stock. If the Fund fails to
meet these  requirements  and does not  correct  such  failure,  the Fund may be
required to redeem, in part or in full, Money Market Cumulative  Preferred(TRADE
MARK) Stock at a redemption  price of $100,000 per share plus an amount equal to
the  accumulated  and  unpaid  dividends  on such  shares in order to meet these
requirements.  Additionally,  failure to meet the foregoing  asset  requirements
could restrict the Fund's ability to pay dividends to Common Stock  Shareholders
and could lead to sales of portfolio securities at inopportune times.

     If the Fund allocates any net gains or income  ineligible for the Dividends
Received  Deduction  to shares of the Money  Market  Cumulative  Preferred(TRADE
MARK)  Stock,  the Fund is required to make  additional  distributions  to Money
Market Cumulative  Preferred(TRADE  MARK) Stock  Shareholders or to pay a higher
dividend rate in amounts  needed to provide a return,  net of tax,  equal to the
return had such  originally paid  distributions  been eligible for the Dividends
Received Deduction. Prior to November 30, 1999, additional distributions

                                       19

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- -----------------------------------------------------


were not reported as available to Money Market Cumulative  Preferred(TRADE MARK)
Stock  until  declared  by the Board of  Directors.  The  amount  of  additional
distributions payable for any year may be highly uncertain and will not be known
until after a fiscal year has been completed.

     An auction of the Money Market  Cumulative  Preferred(TRADE  MARK) Stock is
generally held every 49 days. Existing shareholders may submit an order to hold,
bid or sell  such  shares  at par  value  on each  auction  date.  Money  Market
Cumulative Preferred(TRADE MARK) Stock Shareholders may also trade shares in the
secondary market between auction dates.

     At May 31,  2001,  700 shares of Money  Market  Cumulative  Preferred(TRADE
MARK) Stock were outstanding at the annual rate of 3.085%. The dividend rate, as
set by the  auction  process,  is  generally  expected  to vary with  short-term
interest  rates.  These  rates  may vary in a  manner  unrelated  to the  income
received  on the  Fund's  assets,  which  could  have  either  a  beneficial  or
detrimental  impact on net investment income and gains available to Common Stock
Shareholders.  While the Fund expects to structure  its  portfolio  holdings and
hedging  transactions to lessen such risks to Common Stock  Shareholders,  there
can be no assurance that such results will be attained.

6.   PORTFOLIO INVESTMENTS, CONCENTRATION AND INVESTMENT QUALITY

     The Fund invests  primarily in adjustable and fixed rate  preferred  stocks
and similar hybrid,  i.e.,  fully taxable,  preferred  securities.  Under normal
market  conditions,  the Fund  invests at least 25% of its assets in  securities
issued by utilities and may invest a significant portion of its assets, but less
than 25% of its  assets,  in  companies  in the  banking  industry.  The  Fund's
portfolio may therefore be subject to greater risk and market fluctuation than a
portfolio of securities representing a broader range of investment alternatives.
Because of the Fund's  concentration  of investments in the utility industry and
significant  holdings  in the  banking  industry,  the  ability  of the  Fund to
maintain its dividend and the value of the Fund's investments could be adversely
affected by the  possible  inability of  companies  in these  industries  to pay
dividends  and  interest  on their  securities  and the  ability  of  holders of
securities of such  companies to realize any value from the assets of the issuer
upon  liquidation or bankruptcy.  The Fund may invest up to 15% of its assets at
the time of purchase in securities rated below investment  grade,  provided that
no such  investment may be rated below both "Ba" by Moody's  Investors  Service,
Inc. and "BB" by Standard & Poor's or judged to be  comparable in quality at the
time of  purchase;  however,  any such  securities  must be  issued by an issuer
having an outstanding  class of senior debt rated investment grade. The Fund may
invest up to 15% of its assets in common  stock.  Under normal  conditions,  the
Fund may  invest up to 35% of its  assets  in debt  securities.  Certain  of its
investments in hybrid, i.e., fully taxable, preferred securities, such as TOPrS,
TIPS, QUIPS, MIPS, QUIDS,  QUICS, QIB's, STOPS, CorTS, REIT, Capital Securities,
and other similar or related  investments,  will be subject to the foregoing 35%
limitation  to the extent  that,  in the  opinion of the  Fund's  Adviser,  such
investments are deemed to be debt-like in key characteristics.


                                       20

<PAGE>

- --------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated
                           NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
                           -----------------------------------------------------


7.   SPECIAL INVESTMENT TECHNIQUES

     The Fund may employ certain  investment  techniques in accordance  with its
fundamental  investment  policies.  These may include the use of when-issued and
delayed delivery transactions.  Securities purchased or sold on a when-issued or
delayed  delivery  basis may be  settled  within  45 days  after the date of the
transaction.  Such  transactions  may  expose  the  Fund to  credit  and  market
valuation  risk  greater than that  associated  with  regular  trade  settlement
procedures.  The Fund may also enter into  transactions,  in accordance with its
fundamental investment policies,  involving any or all of the following: lending
of portfolio securities, short sales of securities,  futures contracts, interest
rate swaps,  options on futures contracts,  options on securities and options on
interest rate swaps, i.e., swaptions.  As in the case of when-issued securities,
the  use of  over-the-counter  derivatives,  such as  interest  rate  swaps  and
swaptions, may expose the Fund to greater credit,  operations,  and market value
risk than is the case with regulated,  exchange traded futures and options. With
the exception of purchasing  securities  on a  when-issued  or delayed  delivery
basis or lending portfolio  securities,  these transactions are used for hedging
or  other   appropriate   risk-management   purposes  or,  under  certain  other
circumstances,  to  increase  income.  As of May 31,  2001,  the Fund  owned put
options on U.S. Treasury bond futures contracts.  No assurance can be given that
such  transactions  will  achieve  their  desired  purposes or will result in an
overall reduction of risk to the Fund.

8.   SIGNIFICANT SHAREHOLDERS

     At May 31, 2001, the Commerce Group, Inc. owned  approximately 35.8% of the
Fund's  outstanding  Common  Stock,  according  to a Schedule  13D filing  dated
January 16, 2001.


                                       21

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED)
- ----------------------------------------------


DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN

     Under the Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
a  shareholder  whose Common Stock is  registered  in his own name will have all
distributions  reinvested  automatically  by PFPC Inc.  as agent under the Plan,
unless the  shareholder  elects to receive cash.  Distributions  with respect to
shares  registered in the name of a broker-dealer  or other nominee (that is, in
"street  name") may be reinvested by the broker or nominee in additional  shares
under the Plan,  but only if the  service is  provided by the broker or nominee,
unless the shareholder  elects to receive  distributions  in cash. A shareholder
who holds Common Stock  registered  in the name of a broker or other nominee may
not be able to  transfer  the  Common  Stock to another  broker or  nominee  and
continue to participate in the Plan.  Investors who own Common Stock  registered
in street  name should  consult  their  broker or nominee for details  regarding
reinvestment.

     The number of shares of Common Stock  distributed  to  participants  in the
Plan in lieu of a cash dividend is determined in the following manner.  Whenever
the market price per share of the Fund's Common Stock is equal to or exceeds the
net asset value per share on the valuation  date,  participants in the Plan will
be issued new shares  valued at the higher of net asset value or 95% of the then
current market value. Otherwise,  PFPC Inc. will buy shares of the Fund's Common
Stock in the open market,  on the New York Stock  Exchange or  elsewhere,  on or
shortly after the payment date of the dividend or  distribution  and  continuing
until the  ex-dividend  date of the Fund's next  distribution  to holders of the
Common Stock or until it has expended  for such  purchases  all of the cash that
would otherwise be payable to the  participants.  The number of purchased shares
that will then be credited to the  participants'  accounts  will be based on the
average per share purchase price of the shares so purchased, including brokerage
commissions.  If PFPC Inc.  commences  purchases in the open market and the then
current  market price of the shares (plus any estimated  brokerage  commissions)
subsequently  exceeds their net asset value most recently  determined before the
completion of the  purchases,  PFPC Inc. will attempt to terminate  purchases in
the  open  market  and  cause  the  Fund to  issue  the  remaining  dividend  or
distribution  in shares.  In this case,  the  number of shares  received  by the
participant  will be based on the  weighted  average  of prices  paid for shares
purchased  in the  open  market  and the  price at which  the  Fund  issues  the
remaining  shares.  These  remaining  shares  will be  issued by the Fund at the
higher of net asset value or 95% of the then current market value.

     Plan  participants are not subject to any charge for reinvesting  dividends
or capital gains  distributions.  Each Plan participant  will,  however,  bear a
proportionate  share of  brokerage  commissions  incurred  with  respect to PFPC
Inc.'s open market purchases in connection with the reinvestment of dividends or
capital gains  distributions.  For the six months ended May 31, 2001,  $1,776 in
brokerage commissions were incurred.

     The automatic  reinvestment  of dividends  and capital gains  distributions
will not relieve Plan  participants of any income tax that may be payable on the
dividends or capital  gains  distributions.  A  participant  in the Plan will be
treated for Federal income tax purposes as having received, on the


                                       22

<PAGE>

- --------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated
                                  ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
                                  ----------------------------------------------


dividend payment date, a dividend or distribution in an amount equal to the cash
that the participant could have received instead of shares.

     In addition to acquiring shares of Common Stock through the reinvestment of
cash dividends and  distributions,  a shareholder may invest any further amounts
from $100 to $3,000  semi-annually  at the then  current  market price in shares
purchased  through the Plan.  Such  semi-annual  investments  are subject to any
brokerage commission charges incurred.

     A  shareholder  whose Common Stock is registered in his or her own name may
terminate  participation  in the  Plan at any time by  notifying  PFPC  Inc.  in
writing,  by completing  the form on the back of the Plan account  statement and
forwarding it to PFPC Inc. or by calling PFPC Inc. directly.  A termination will
be  effective  immediately  if notice is received by PFPC Inc.  not less than 10
days before any dividend or distribution record date. Otherwise, the termination
will be  effective,  and  only  with  respect  to any  subsequent  dividends  or
distributions,  on the first day after the  dividend  or  distribution  has been
credited to the  participant's  account in additional  shares of the Fund.  Upon
termination and according to a participant's instructions, PFPC Inc. will either
(a) issue  certificates for the whole shares credited to the shareholder's  Plan
account and a check representing any fractional shares or (b) sell the shares in
the market.  Shareholders  who hold  common  stock  registered  in the name of a
broker or other  nominee  should  consult  their  broker or nominee to terminate
participation.

     The  Plan  is  described  in  more  detail  in the  Fund's  Plan  brochure.
Information   concerning   the  Plan  may  be   obtained   from  PFPC  Inc.   at
1-800-331-1710.

                                       23

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<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
- ----------------------------------------------


MEETING OF SHAREHOLDERS

     On April 27, 2001,  the Fund held its Annual Meeting of  Shareholders  (the
"Meeting") to (1) elect two Directors of the Fund  ("Proposal 1") and (2) ratify
the selection of  PricewaterhouseCoopers  LLP as independent accountants for the
Fund for the fiscal year ending November 30, 2001 ("Proposal 2"). The results of
each proposal are as follows:

PROPOSAL 1:     ELECTION OF DIRECTORS

NAME                                                    FOR        WITHHELD
- ----                                                    ---        --------
Common Stock
   Robert F. Wulf ..............................     6,439,889        126,312
Preferred Stock
   Donald F. Crumrine ..........................           650             --

Martin  Brody, Robert T. Flaherty,  David Gale and Morgan Gust continue to serve
in their capacities as Directors of the Fund.

PROPOSAL 2:     RATIFY THE SELECTION OF PRICEWATERHOUSECOOPERS LLP AS
                INDEPENDENT AUDITORS.
                                          FOR           AGAINST        ABSTAINED
                                          ----          -------        ---------
Common Stock and Preferred Stock
   (voting together as a single class)
Voted ...............................   6,418,922        19,771         128,157

                                       25

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<PAGE>


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<PAGE>

DIRECTORS
   Martin Brody
   Donald F. Crumrine, CFA
   Robert T. Flaherty, CFA
   David Gale
   Morgan Gust
   Robert F. Wulf, CFA

OFFICERS
   Robert T. Flaherty, CFA
     Chairman of the Board
     and President
   Donald F. Crumrine, CFA
     Vice President
     and Secretary
   Robert M. Ettinger, CFA
     Vice President
   Peter C. Stimes, CFA
     Vice President
     and Treasurer

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

QUESTIONS CONCERNING YOUR SHARES OF PREFERRED
   INCOME OPPORTUNITY 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 1376
               Boston, MA  02104
               1-800-331-1710

THIS  REPORT  IS SENT TO  SHAREHOLDERS  OF  PREFERRED  INCOME  OPPORTUNITY  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 - PREFERRED INCOME OPPORTUNITY FUND]

                                   Semi-Annual
                                     Report

                                  May 31, 2001




                        web site: www.preferredincome.com

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