<DOCUMENT>
<TYPE>N-30D
<SEQUENCE>1
<FILENAME>prefopp.txt
<DESCRIPTION>PREFERRED INCOME OPPORTUNITY FUND ANNUAL REPORT
<TEXT>
PREFERRED INCOME OPPORTUNITY FUND
INCORPORATED


Dear Shareholder:

     The  Preferred  Income  Opportunity  Fund was a bright  spot in a year that
really needed some good news.  For the fiscal year ended  November 30, 2001, the
Fund  earned  total  returns of 16.9% on net asset  value  ("NAV")  and 27.0% on
market price. Those returns were very good by just about any measure.

     The  following  table shows the Fund's  returns on NAV over a range of time
periods ending November 30, 2001. As in the past, we have compared the Fund to a
Lipper  composite  of  investment  grade  closed-end  bond funds.  Although  the
investment  strategies used by the Fund differ  significantly  from those of the
typical  bond fund,  we  believe  that the  Preferred  Income  Opportunity  Fund
provides a better way of accomplishing a similar investment objective.

--------------------------------------------------------------------------------

                   TOTAL RETURN PER YEAR ON NET ASSET VALUE(1)
                           FOR PERIODS ENDED 11/30/01
                                                         One   Five   Life of
                                                        Year   Years  Fund(2)
                                                        -----  -----  -------
  Preferred Income Opportunity Fund ..................   16.9%   7.8%   10.2%
  Lipper Composite of Investment Grade Bond Funds(3) .   11.2%   6.9%    7.4%



----------------
(1)  Based on monthly data provided by Lipper Inc. Distributions are assumed to
     be reinvested at NAV in accordance with Lipper's practice, which differs
     from the procedures used elsewhere in this report.
(2)  Since inception on February 13, 1992.
(3)  Includes all U.S. Government bond, mortgage bond and term trust, and
     investment grade bond funds in Lipper's closed-end fund database at each
     point in time.
--------------------------------------------------------------------------------

     Although the tragedies of September 11th overshadowed  everything else, the
main  events  in the  markets  for  bonds  and  preferreds  last  year were high
volatility  and  declining  interest  rates.   Short-term   interest  rates,  in
particular,  fell dramatically.  In contrast,  long-term rates showed a moderate
decline for the year,  partially due to a recent bounce back from their previous
lows. The Fund benefited from these trends, including even the volatility.

     The preferred market gave a good account of itself under these  conditions.
Hybrid  fixed rate  preferreds  (which are fully  taxable) led the parade with a
very strong  performance,  followed by a very commendable  showing by adjustable
rate preferreds  ("ARPs").  Traditional fixed rate preferreds  (eligible for the
Dividends  Received Deduction  available to corporate  taxpayers) lagged behind,
but still did a pretty  good job of  keeping  up with the  fixed-income  markets
generally.  Preferreds were definitely a very good place to be in such difficult
times.



<PAGE>




     The  disparity  in the  performance  of hybrid and  traditional  preferreds
created some  opportunities.  As prices seemed right, we sold some of the Fund's
holdings  of hybrid  preferreds  and  added to both  adjustable  and fixed  rate
traditional  preferreds.  This shift was a reversal  in part of the  increase in
hybrid  preferreds  accomplished  several  years  ago when  hybrids  were on the
"bargain  counter."  The  following  pie  charts  illustrate  the  change in the
composition of the Fund's portfolio over the course of the year.

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

11/30/2001

Adjustable Rates                               14.5
Traditional Fixed Rates                        50.9
Inverse Floating Rate Preferred                 1.1
Hybrid Preferreds                              30.3
Cash & Other                                    3.2

11/30/2000

Adjustable Rates                               10.9
Traditional Fixed Rates                        42.6
Common Stock                                    0.3
Hybrid Preferreds                              43.8
Cash & Other                                    2.4


     The Board of Directors  recently updated the Fund's investment  guidelines.
The Fund is now required  under normal  circumstances  to invest at least 80% of
its  total  net  assets  in  preferreds  of all  types,  including  both  hybrid
preferreds  and  traditional  preferreds.  In the past,  the  guideline was 65%.
Furthermore,  investments  in debt  securities  are  now  limited  under  normal
circumstances to 20% (versus 35% previously) of total net assets. As a practical
matter, these revisions merely reflect more closely the Fund's actual practices.
They are not expected to cause any changes in our portfolio strategies.

     The Fund's  leverage  magnifies  results,  good or bad;  and that was a big
positive  this year.  Our income  benefited  greatly  from the lower cost of the
Money Market Cumulative  Preferred(TRADE MARK) shares ("MMP") issued by the Fund
to create its  leverage.  The  annualized  rate paid on the MMP,  which is reset
every 49 days through an auction  process,  is approximately  1.7% currently.  A
year ago, it was around 5%. Beyond that, the leverage  further enhanced the very
good total returns earned on the Fund's preferred portfolio. It was definitely a
good year to be leveraged.

     A portion of the  appreciation  on our holdings of preferreds was offset by
losses on the Fund's hedges (which  consisted  entirely of purchased put options
on Treasury bond futures). That was to be expected in the face of declining long
term interest  rates.  The goal in markets like this is simply to keep losses on
our  "safety  net" hedge from  eating up too much of what we make on the rest of
the portfolio. On that count, we have declared victory.

     The market price of the Fund's common stock has recently stayed in a fairly
narrow  range  around the net asset value of the  shares,  as shown by the graph
that follows.  The recovery from a discount to NAV a year ago contributed to the
especially  attractive  total  returns on market  value set forth in the opening
paragraph of this letter.




                                        2

<PAGE>


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

                       Preferred Income Opportunity Fund
                    Premium/Discount of Market Price to NAV

Date                   Prem/Disc
12/27/1991
01/03/1992
01/10/1992
01/17/1992
01/24/1992
01/31/1992
02/07/1992
02/14/1992
02/21/92                 0.0726
02/28/92                 0.0805
03/06/92                 0.0874
03/13/92                 0.098
03/20/92                 0.0819
03/27/92                 0.0556
04/03/92                 0.0538
04/10/92                 0.0705
04/17/92                 0.0547
04/24/92                 0.059
05/01/92                 0.0546
05/08/92                 0.0536
05/15/92                 0.0306
05/22/92                 0.0248
05/29/92                 0.0307
06/05/92                 0.0181
06/12/92                 0.04
06/19/92                 0.0357
06/26/92                 0.0442
07/03/92                 0.0475
07/10/92                 0.0626
07/17/92                 0.08
07/24/92                 0.0592
07/31/92                 0.0647
08/07/92                 0.0613
08/14/92                 0.0628
08/21/92                 0.0514
08/28/92                 0.0539
09/04/92                 0.0409
09/11/92                 0.0684
09/18/92                 0.0572
09/25/92                 0.0539
10/02/92                 0.062
10/09/92                 0.0675
10/16/92                 0.049
10/23/92                 0.0188
10/30/92                 0.0474
11/06/92                 0.018
11/13/92                 0.0188
11/20/92                 0.0408
11/27/92                 0.0844
12/04/92                 0.063
12/11/92                 0.0515
12/18/92                 0.0691
12/25/92                 0.0638
01/01/93                 0.0621
01/08/93                 0.0679
01/15/93                 0.0595
01/22/93                 0.0434
01/29/93                 0.0475
02/05/93                 0.0483
02/12/93                 0.0284
02/19/93                 0.0202
02/26/93                 0.031
03/05/93                 0.0473
03/12/93                 0.0651
03/19/93                 0.0303
03/26/93                 0.036
04/02/93                 0.0514
04/09/93                 0.0675
04/16/93                 0.057
04/23/93                 0.0853
04/30/93                 0.0651
05/07/93                 0.0513
05/14/93                 0.061
05/21/93                 0.057
05/28/93                 0.0441
06/04/93                 0.0497
06/11/93                 0.0561
06/18/93                 0.0497
06/25/93                 0.0417
07/02/93                 0.0472
07/09/93                 0.0425
07/16/93                 0.0362
07/23/93                 0.0068
07/30/93                 0.0306
08/06/93                 0.0212
08/13/93                 0.0181
08/20/93                 0.0008
08/27/93                 0.037
09/03/93                 0.0331
09/10/93                 0.0401
09/17/93                 0.0338
09/24/93                 0.0244
10/01/93                 0.0214
10/08/93                 0.0261
10/15/93                 0.0263
10/22/93                 0.0246
10/29/93                 0.009
11/05/93                      0
11/12/93                -0.0107
11/19/93                -0.0282
11/26/93                -0.0179
12/03/93                -0.0076
12/10/93                -0.0334
12/17/93                -0.0338
12/24/93                -0.0431
12/31/93                 0.0249
01/07/94                -0.0036
01/14/94                 0.0157
01/21/94                -0.023
01/28/94                -0.0377
02/04/94                -0.0323
02/11/94                -0.0361
02/18/94                -0.0863
02/25/94                -0.05
03/04/94                -0.0392
03/11/94                -0.0315
03/18/94                -0.0585
03/25/94                -0.0562
04/01/94                -0.0556
04/08/94                -0.0612
04/15/94                -0.0771
04/22/94                -0.1012
04/29/94                -0.1145
05/06/94                -0.0775
05/13/94                -0.0633
05/20/94                -0.0636
05/27/94                -0.0312
06/03/94                -0.0683
06/10/94                -0.0288
06/17/94                -0.0457
06/24/94                -0.0393
07/01/94                -0.0409
07/08/94                -0.045
07/15/94                -0.049
07/22/94                -0.0294
07/29/94                -0.0327
08/05/94                -0.0221
08/12/94                -0.0303
08/19/94                -0.0269
08/26/94                -0.0348
09/02/94                -0.0204
09/09/94                -0.0318
09/16/94                -0.0409
09/23/94                -0.0628
09/30/94                -0.062
10/07/94                -0.1322
10/14/94                -0.1149
10/21/94                -0.141
10/28/94                -0.104
11/04/94                -0.0786
11/11/94                -0.0976
11/18/94                -0.099
11/25/94                -0.077
12/02/94                -0.0402
12/09/94                -0.0868
12/16/94                -0.0732
12/23/94                -0.0604
12/30/94                -0.0851
01/06/95                -0.001
01/13/95                -0.0141
01/20/95                -0.0303
01/27/95                -0.0619
02/03/95                -0.0119
02/10/95                -0.0314
02/17/95                -0.0702
02/24/95                -0.0376
03/03/95                -0.0297
03/10/95                -0.0585
03/17/95                -0.0523
03/24/95                -0.0534
03/31/95                -0.0393
04/07/95                -0.0341
04/14/95                -0.0393
04/21/95                -0.069
04/28/95                -0.0341
05/05/95                -0.0576
05/12/95                -0.0501
05/19/95                -0.0933
05/26/95                -0.0753
06/02/95                -0.0481
06/09/95                -0.0729
06/16/95                -0.0702
06/23/95                -0.0749
06/30/95                -0.0686
07/07/95                -0.069
07/14/95                -0.0869
07/21/95                -0.1087
07/28/95                -0.0911
08/04/95                -0.0973
08/11/95                -0.1018
08/18/95                -0.1011
08/25/95                -0.078
09/01/95                -0.0706
09/08/95                -0.0833
09/15/95                -0.071
09/22/95                -0.0749
09/29/95                -0.0641
10/06/95                -0.0718
10/13/95                -0.1006
10/20/95                -0.0909
10/27/95                -0.1012
11/03/95                -0.1232
11/10/95                -0.0962
11/17/95                -0.1071
11/24/95                -0.1093
12/01/95                -0.1014
12/08/95                -0.1277
12/15/95                -0.1233
12/22/95                -0.1265
12/29/95                -0.1454
01/05/96                -0.1197
01/12/96                -0.1279
01/19/96                -0.1312
01/26/96                -0.1146
02/02/96                -0.1233
02/09/96                -0.1233
02/16/96                -0.1279
02/23/96                -0.1303
03/01/96                -0.1124
03/08/96                -0.1465
03/15/96                -0.1508
03/22/96                -0.1487
03/29/96                -0.1515
04/05/96                -0.1315
04/12/96                -0.1286
04/19/96                -0.1279
04/26/96                -0.1383
05/03/96                -0.1257
05/10/96                -0.113
05/17/96                -0.1408
05/24/96                -0.1386
05/31/96                -0.1386
06/07/96                -0.1255
06/14/96                -0.1337
06/21/96                -0.1301
06/28/96                -0.0918
07/05/96                -0.1079
07/12/96                -0.0911
07/19/96                -0.1122
07/26/96                -0.0939
08/02/96                -0.0876
08/09/96                -0.0688
08/16/96                -0.0673
08/23/96                -0.0881
08/30/96                -0.0836
09/06/96                -0.0836
09/13/96                -0.0661
09/20/96                -0.0889
09/27/96                -0.0991
10/04/96                -0.0876
10/11/96                -0.0876
10/18/96                -0.0935
10/25/96                -0.0834
11/01/96                -0.0796
11/08/96                -0.0932
11/15/96                -0.0726
11/22/96                -0.0586
11/29/96                -0.0608
12/06/96                -0.0792
12/13/96                -0.0813
12/20/96                -0.1009
12/27/96                -0.0837
01/03/97                -0.0693
01/10/97                -0.0562
01/17/97                -0.0693
01/24/97                -0.0834
01/31/97                -0.0678
02/07/97                -0.0623
02/14/97                -0.0551
02/21/97                -0.0645
02/28/97                -0.0605
03/07/97                -0.0581
03/14/97                -0.0654
03/21/97                -0.0715
03/28/97                -0.0715
04/04/97                -0.0573
04/11/97                -0.0973
04/18/97                -0.0806
04/25/97                -0.0748
05/02/97                -0.0672
05/09/97                -0.052
05/16/97                -0.0647
05/23/97                -0.0573
05/30/97                -0.0362
06/06/97                -0.0615
06/13/97                -0.0385
06/20/97                -0.0473
06/27/97                -0.0418
07/04/97                -0.0498
07/11/97                -0.0585
07/18/97                -0.0486
07/25/97                -0.063
08/01/97                -0.0273
08/08/97                -0.0701
08/15/97                -0.0715
08/22/97                -0.0767
08/29/97                -0.0472
09/05/97                -0.058
09/12/97                -0.0656
09/19/97                -0.0557
09/26/97                -0.0492
10/03/97                -0.0292
10/10/97                -0.0492
10/17/97                -0.0506
10/24/97                -0.0574
10/31/97                -0.0477
11/07/97                -0.0442
11/14/97                -0.0377
11/21/97                -0.0688
11/28/97                -0.0484
12/05/97                -0.0406
12/12/97                -0.0652
12/19/97                -0.0648
12/26/97                -0.0456
01/02/98                -0.0171
01/09/98                -0.0197
01/16/98                -0.0185
01/23/98                -0.062
01/30/98                -0.0477
02/06/98                -0.053
02/13/98                -0.0604
02/20/98                -0.0456
02/27/98                -0.0477
03/06/98                -0.0473
03/13/98                -0.0568
03/20/98                -0.0487
03/27/98                -0.0579
04/03/98                -0.0682
04/10/98                -0.0508
04/17/98                -0.062
04/24/98                -0.0768
05/01/98                -0.0618
05/08/98                -0.054
05/15/98                -0.0717
05/22/98                -0.0664
05/29/98                -0.0648
06/05/98                -0.0643
06/12/98                -0.0627
06/19/98                -0.0573
06/26/98                -0.06
07/03/98                -0.0575
07/10/98                -0.0562
07/17/98                -0.0563
07/24/98                -0.0465
07/31/98                -0.0526
08/07/98                -0.0472
08/14/98                -0.0864
08/21/98                -0.0954
08/28/98                -0.054
09/04/98                -0.0618
09/11/98                -0.0487
09/18/98                -0.0392
09/25/98                -0.0402
10/02/98                -0.0554
10/09/98                -0.0744
10/16/98                -0.0485
10/23/98                -0.0406
10/30/98                -0.0616
11/06/98                -0.0396
11/13/98                -0.0481
11/20/98                -0.0641
11/27/98                -0.0478
12/04/98                -0.0413
12/11/98                -0.0363
12/18/98                -0.0537
12/25/98                -0.0132
01/01/99                -0.0196
01/08/99                -0.0297
01/15/99                -0.0392
01/22/99                -0.0627
01/29/99                -0.0677
02/05/99                -0.061
02/12/99                -0.0887
02/19/99                -0.0937
02/26/99                -0.1078
03/05/99                -0.0846
03/12/99                -0.065
03/19/99                -0.1022
03/26/99                -0.0888
04/02/99                -0.0724
04/09/99                -0.1029
04/16/99                -0.0781
04/23/99                -0.093
04/30/99                -0.1156
05/07/99                -0.1015
05/14/99                -0.1277
05/21/99                -0.1256
05/28/99                -0.1093
06/04/99                -0.1007
06/11/99                -0.0558
06/18/99                -0.0835
06/25/99                -0.0602
07/02/99                -0.0532
07/09/99                -0.0532
07/16/99                -0.0761
07/23/99                -0.0558
07/30/99                -0.0829
08/06/99                -0.0464
08/13/99                -0.078
08/20/99                -0.0864
08/27/99                -0.0345
09/03/99                -0.1057
09/10/99                -0.0938
09/17/99                -0.0683
09/24/99                -0.0401
10/01/99                -0.077
10/08/99                -0.086
10/15/99                -0.1231
10/22/99                -0.1254
10/29/99                -0.1223
11/05/99                -0.1192
11/12/99                -0.1252
11/19/99                -0.0826
11/26/99                -0.0979
12/03/99                -0.097
12/10/99                -0.0807
12/17/99                -0.1118
12/24/99                -0.1212
12/31/99                -0.0354
01/07/00                -0.0028
01/14/00                -0.0385
01/21/00                -0.0996
01/28/00                -0.1047
02/04/00                -0.0923
02/11/00                -0.0845
02/18/00                -0.1038
02/25/00                -0.0962
03/03/00                -0.1021
03/10/00                -0.0858
03/17/00                -0.1055
03/24/00                -0.1272
03/31/00                -0.1361
04/07/00                -0.1047
04/14/00                -0.0894
04/21/00                -0.0781
04/28/00                -0.064
05/05/00                -0.0385
05/12/00                -0.0566
05/19/00                -0.0734
05/26/00                -0.0759
06/02/00                -0.0905
06/09/00                -0.1037
06/16/00                -0.0943
06/23/00                -0.0775
06/30/00                -0.0841
07/07/00                -0.0909
07/14/00                -0.0893
07/21/00                -0.097
07/28/00                -0.0927
08/04/00                -0.0912
08/11/00                -0.0879
08/18/00                -0.1046
08/25/00                -0.1046
09/01/00                -0.1105
09/08/00                -0.1113
09/15/00                -0.0836
09/22/00                -0.1189
09/29/00                -0.1155
10/06/00                -0.0896
10/13/00                -0.0921
10/20/00                -0.0895
10/27/00                -0.0725
11/30/00                -0.0739
11/10/00                -0.0747
11/17/00                -0.0962
11/24/00                -0.0937
12/01/00                -0.0928
12/08/00                -0.0903
12/15/00                -0.0913
12/22/00                -0.0672
12/29/00                -0.0276
01/05/01                -0.0411
01/12/01                -0.02
01/19/01                -0.0077
01/26/01                 0.0192
02/02/01                -0.0528
02/09/01                -0.0346
02/16/01                -0.0184
02/23/01                -0.0257
03/02/01                -0.0109
03/09/01                -0.036
03/16/01                -0.0393
03/23/01                -0.036
03/30/01                -0.0109
04/06/01                 0.02
04/13/01                 0.0046
04/20/01                 0.0243
04/27/01                -0.0278
05/04/01                -0.0218
05/11/01                 0.0037
05/18/01                -0.0228
05/25/01                -0.0111
06/01/01                -0.0345
06/08/01                -0.0325
06/15/01                -0.0654
06/22/01                -0.0623
06/29/01                -0.0379
07/06/01                -0.0307
07/13/01                -0.0098
07/20/01                -0.0264
07/27/01                 0.0237
08/03/01                 0.0035
08/10/01                -0.0567
08/17/01                -0.0439
08/24/01                -0.0365
08/31/01                -0.0603
09/07/01                -0.0353
09/14/01                -0.0353
09/21/01                      0
09/28/01                -0.0414
10/05/01                -0.0433
10/12/01                -0.0114
10/19/01                -0.0191
10/26/01                -0.0138
11/02/01                 0.0017
11/09/01                -0.0068
11/16/01                 0.026
11/23/01                 0.0304
11/30/01                -0.0284
12/07/01                -0.0009
12/14/01                -0.0201
12/21/01                 0.021
12/28/01                 0.0289
01/04/02
01/11/02
01/18/02
01/25/02
02/01/02
02/08/02
02/15/02


     Shareholders  will see a tangible  sign of the Fund's good  fortunes in the
form of a special  year-end  dividend on December 31, 2001 in the amount of 13.6
cents per share,  double the regular  monthly  rate.  This special  distribution
consists  entirely of ordinary  income.  There were no distributions of realized
capital  gains for the year.  The  regular  rate of 6.8 cents per share  will be
reinstated  in  January,  2002.  Please see the  following  Question  and Answer
section for a more detailed discussion.

     The Dividend  Reinvestment  Plan ("DRIP")  provides our shareholders with a
convenient  and  efficient  way to  increase  their  investments  in the Fund by
reinvesting  regular dividends and special  distributions in additional  shares.
More information on the DRIP is readily available.  If your shares are held in a
brokerage account, ask your broker if his firm is set up to participate.  If you
hold  your  shares  in  certificate  form,  or  if  you  would  just  like  more
information, call the DRIP's agent, PFPC Inc., at 1-800-331-1710.

     As described in greater detail on page 25 of this report,  the Fund changed
accountants  during the past year.  We are pleased to welcome our new  auditors,
KPMG LLP.

     The following Q&A section explores in greater detail several key aspects of
the  Fund's   operations.   We  also   recommend   visiting   our  web  site  at
www.preferredincome.com for an ongoing source of current data on the Fund.





                                                Sincerely,
                                                /S/ SIGNATURE

                                                Robert T. Flaherty
                                                Chairman of the Board

December 19, 2001


                                        3

<PAGE>



                               QUESTIONS & ANSWERS

HOW DO CHANGES IN INTEREST RATES AFFECT THE FUND'S INCOME?

     It's a mouthful,  but here goes!  Generally speaking,  we expect the Fund's
income to increase when interest rates rise significantly while being relatively
resistant to significant  declines in interest rates. As we have said many times
before, this is a very ambitious mission. Nonetheless, we have achieved our goal
for many years as the following graph demonstrates.



                                [GRAPHIC COMITTED]
          EGDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

           PREFERRED INCOME OPPORTUNITY FUND MONTHLY DIVIDEND INCOME
                 On A 1,000 Share ($12,500) Initial Investment


              DATE         MONTHLY DIVIDEND INCOME
             -----         -----------------------
            Jan-92
            Feb-92
            Mar-92
            Apr-92
            May-92                82.5
            Jun-92                82.5
            Jul-92                82.5
            Aug-92                82.5
            Sep-92                82.5
            Oct-92                82.5
            Nov-92                82.5
            Dec-92                82.5
            Jan-93                83.14
            Feb-93                83.14
            Mar-93                83.14
            Apr-93                83.14
            May-93                83.14
            Jun-93                83.14
            Jul-93                83.14
            Aug-93                83.14
            Sep-93                83.14
            Oct-93                83.14
            Nov-93                83.14
            Dec-93                83.14
            Jan-94                79.87
            Feb-94                79.87
            Mar-94                79.87
            Apr-94                79.87
            May-94                85.89
            Jun-94                85.89
            Jul-94                85.89
            Aug-94                85.89
            Sep-94                85.89
            Oct-94                85.89
            Nov-94                89.17
            Dec-94                89.17
            Jan-95                88.36
            Feb-95                88.36
            Mar-95                88.36
            Apr-95                88.36
            May-95                88.36
            Jun-95                83.83
            Jul-95                83.83
            Aug-95                83.83
            Sep-95                83.83
            Oct-95                83.83
            Nov-95                83.83
            Dec-95                78.73
            Jan-96                78.73
            Feb-96                78.73
            Mar-96                78.73
            Apr-96                78.73
            May-96                83.83
            Jun-96                83.83
            Jul-96                83.83
            Aug-96                83.83
            Sep-96                83.83
            Oct-96                83.83
            Nov-96                83.83
            Dec-96                83.83
            Jan-97                84.06
            Feb-97                84.06
            Mar-97                84.06
            Apr-97                84.06
            May-97                84.06
            Jun-97                84.06
            Jul-97                84.06
            Aug-97                84.06
            Sep-97                84.06
            Oct-97                84.06
            Nov-97                84.06
            Dec-97                84.06
            Jan-98                79.79
            Feb-98                79.79
            Mar-98                79.79
            Apr-98                79.79
            May-98                79.79
            Jun-98                79.79
            Jul-98                79.79
            Aug-98                79.79
            Sep-98                79.79
            Oct-98                79.79
            Nov-98                79.79
            Dec-98                79.79
            Jan-99                81.35
            Feb-99                81.35
            Mar-99                81.35
            Apr-99                81.35
            May-99                81.35
            Jun-99                88.18
            Jul-99                88.18
            Aug-99                88.18
            Sep-99                88.18
            Oct-99                88.18
            Nov-99                88.18
            Dec-99                88.18
            Jan-2000              88.45
            Feb-2000              88.45
            Mar-2000              88.45
            Apr-2000              88.45
            May-2000              88.45
            Jun-2000              88.45
            Jul-2000              88.45
            Aug-2000              88.45
            Sep-2000              88.45
            Oct-2000              88.45
            Nov-2000              88.45
            Dec-2000              88.45
            Jan-2001              88.45
            Feb-2001              88.45
            Mar-2001              88.45
            Apr-2001              88.45
            May-2001              88.45
            Jun-2001              88.45
            Jul-2001              88.45
            Aug-2001              88.45
            Sep-2001              88.45
            Oct-2001              88.45
            Nov-2001              88.45
            Dec-2001              88.45
            Jan-2001
            Feb-2001
            Mar-2001




              DATE          30 YEAR TREASURY YIELD
             -----          ----------------------
            Jan-92                 7.76
            Feb-92                 7.79
            Mar-92                 7.96
            Apr-92                 8.03
            May-92                 7.84
            Jun-92                 7.78
            Jul-92                 7.46
            Aug-92                 7.41
            Sep-92                 7.38
            Oct-92                 7.62
            Nov-92                 7.6
            Dec-92                 7.39
            Jan-93                 7.19
            Feb-93                 6.9
            Mar-93                 6.92
            Apr-93                 6.93
            May-93                 6.98
            Jun-93                 6.67
            Jul-93                 6.56
            Aug-93                 6.09
            Sep-93                 6.02
            Oct-93                 5.97
            Nov-93                 6.3
            Dec-93                 6.35
            Jan-94                 6.24
            Feb-94                 6.66
            Mar-94                 7.09
            Apr-94                 7.3
            May-94                 7.43
            Jun-94                 7.61
            Jul-94                 7.39
            Aug-94                 7.48
            Sep-94                 7.82
            Oct-94                 7.96
            Nov-94                 7.94
            Dec-94                 7.88
            Jan-95                 7.73
            Feb-95                 7.55
            Mar-95                 7.43
            Apr-95                 7.33
            May-95                 6.63
            Jun-95                 6.54
            Jul-95                 6.9
            Aug-95                 6.61
            Sep-95                 6.5
            Oct-95                 6.36
            Nov-95                 6.08
            Dec-95                 5.95
            Jan-96                 6.05
            Feb-96                 6.36
            Mar-96                 6.67
            Apr-96                 6.83
            May-96                 7
            Jun-96                 6.95
            Jul-96                 7.01
            Aug-96                 7.12
            Sep-96                 6.9
            Oct-96                 6.81
            Nov-96                 6.51
            Dec-96                 6.6
            Jan-97                 6.79
            Feb-97                 6.8
            Mar-97                 7.09
            Apr-97                 6.89
            May-97                 6.98
            Jun-97                 6.74
            Jul-97                 6.45
            Aug-97                 6.61
            Sep-97                 6.3
            Oct-97                 6.15
            Nov-97                 6.04
            Dec-97                 5.95
            Jan-98                 5.9
            Feb-98                 6.02
            Mar-98                 5.93
            Apr-98                 5.95
            May-98                 5.8
            Jun-98                 5.62
            Jul-98                 5.72
            Aug-98                 5.26
            Sep-98                 4.98
            Oct-98                 5.15
            Nov-98                 5.07
            Dec-98                 5.09
            Jan-99                 5.09
            Feb-99                 5.58
            Mar-99                 5.62
            Apr-99                 5.66
            May-99                 5.82
            Jun-99                 5.97
            Jul-99                 6.1
            Aug-99                 6.06
            Sep-99                 6.05
            Oct-99                 6.16
            Nov-99                 6.29
            Dec-99                 6.48
            Jan-2000               6.49
            Feb-2000               6.15
            Mar-2000               5.84
            Apr-2000               5.96
            May-2000               6.02
            Jun-2000               5.89
            Jul-2000               5.79
            Aug-2000               5.67
            Sep-2000               5.88
            Oct-2000               5.79
            Nov-2000               5.59
            Dec-2000               5.46
            Jan-2001               5.53
            Feb-2001               5.34
            Mar-2001               5.46
            Apr-2001               5.77
            May-2001               5.77
            Jun-2001               5.74
            Jul-2001               5.5
            Aug-2001               5.37
            Sep-2001               5.41
            Oct-2001               4.88
            Nov-2001               5.26
            Dec-2001               5.47
            Jan-2002
            Feb-2002
            Mar-2002


     The  solid  red  line  (measured  on the  left-hand  scale)  in  the  graph
represents  the monthly  dollar income  received from an original  investment in
1,000 shares of the Fund. In comparison,  the yields of long-term U.S.  Treasury
bonds are shown by the dotted line (measured on the right-hand scale). The graph
assumes that the  shareholder  spent his or her regular  monthly income from the
Fund and reinvested at net asset value just the portion of each special year-end
distribution that was "above and beyond" the monthly dividends.

     With interest rates,  particularly  short-term  rates, at historically very
low  levels  now,  we face many  interesting  opportunities  and  challenges  in
implementing our income strategies today. Read on!

WHERE DID THE FUND GET THE MONEY TO DOUBLE ITS DIVIDEND IN DECEMBER?

     Give the credit to falling  short-term  interest  rates.  The  surprisingly
sharp  reduction  in the cost of the Fund's  leverage  in the last six months of
fiscal  2001  caused  income to  accumulate  in excess  of the  regular  monthly
dividend  rate.  In a real twist on an old saying,  we ran out of year before we
ran out of income.



                                        4

<PAGE>



     Ordinarily,  a general  decline in  interest  rates would be more likely to
reduce our income than increase it. However, the savings on the cost of leverage
were  sufficient to offset other factors  that,  by  themselves,  would have cut
income.  Those  included  hedge  losses  (which  must be covered by sales in the
preferred  portfolio) and the shift from hybrid preferreds into more traditional
DRD eligible preferreds.

     The Fund was not affected significantly in the last year by issuers calling
their high rate preferreds for redemption, which occurs frequently when interest
rates fall.  We pay lots of attention to redemption  risk,  even to the point of
giving up a little yield to help protect the Fund's income in times like this.

WHY HASN'T THE FUND INCREASED ITS REGULAR MONTHLY DIVIDEND?

     The  "windfall"  from the  current  low cost of  leverage  may very well be
temporary.  As the economy ultimately  recovers from the current  recession,  we
will most likely see an  increase in  short-term  interest  rates (and  probably
long-term rates,  too). At the present,  it is unclear how effective our hedges,
which are keyed to long-term rates, will be in offsetting higher leverage costs.
Of course, the future is always unclear, so maybe it is just our cautious nature
that is operating here.

WHY MOVE MONEY FROM HYBRID PREFERREDS INTO TRADITIONAL PREFERREDS
IF THAT REDUCES INCOME?

     It's not very complicated.  The best way to get more income is to have more
money  to  invest.  The best way to do that is to take  advantage  of  bargains,
wherever they may be found within the preferred market.

     Traditional  preferreds  offer one big advantage not available  from hybrid
preferreds.  They qualify for the Dividends Received  Deduction  ("DRD"),  which
makes their dividends 70% tax-free to a qualifying corporate investor.  When the
market  value is not  properly  recognizing  the  value of the DRD,  traditional
preferreds represent bargains even for fully taxable investors.

     Historically,   there  have  been  times  when  hybrids  have  outperformed
traditional DRD eligible preferreds and other times when traditional issues have
come out on top. Over the years,  we have often moved back and forth, in varying
degrees, between hybrids and traditional preferreds.  This has usually worked to
the Fund's advantage.

     Through a complicated formula, the effective cost of the Fund's leverage is
also  reduced  when more of its  income  qualifies  for the DRD.  The  resulting
savings  to the  Fund  will  become  even  more  significant  if the cost of our
leverage starts to rise again.

WILL THE FUND'S HEDGING STRATEGIES BE DISTURBED BY THE TREASURY'S DECISION NOT
TO ISSUE ANY MORE 30-YEAR BONDS?

     Although we have questions about the wisdom of the decision, it is unlikely
to have a  material  effect  on the Fund in the  near-term.  Not long  ago,  the
crystal ball gazers were  predicting  that the Treasury would retire most of its
public debt within a few short years.  We were able to deal with that  prospect,
and eliminating new issues of 30-year Treasury bonds is less significant.

     Various hedging tools are available to the Fund. Historically,  it has used
put options linked to long-term Treasury bonds.  However,  arrangements are also
in place for the purchase of options on interest  rate swaps  ("swaptions").  We
regularly compare the economics of these alternative hedge instruments.



                                        5

<PAGE>




--------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated

FINANCIAL DATA
PER SHARE OF COMMON STOCK
-------------------------

<TABLE>
<CAPTION>

                                                                                        DIVIDEND
                                   DIVIDENDS      NET ASSET          NYSE             REINVESTMENT
                                     PAID           VALUE        CLOSING PRICE          PRICE (1)
                                --------------  ------------   -------------------  ------------------
<S>                                 <C>            <C>               <C>                  <C>
December 31, 2000                   $0.068        $10.67            $10.38              $10.34
January 31, 2001                     0.068         10.93             10.65               10.58
February 28, 2001                    0.068         11.06             10.50               10.92
March 31, 2001                       0.068         10.96             10.84               10.94
April 30, 2001                       0.068         10.84             10.65               10.77
May 31, 2001                         0.068         10.96             10.60               10.70
June 30, 2001                        0.068         11.09             10.67               10.86
July 31, 2001 .                      0.068         11.47             11.29               11.38
August 31, 2001                      0.068         11.60             10.90               11.20
September 30, 2001                   0.068         11.35             10.88               11.08
October 31, 2001                     0.068         11.81             11.50               11.66
November 30, 2001                    0.068         11.60             11.27               11.46
December 31, 2001                    0.136         11.49             11.85               11.49

</TABLE>

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


                                       6

<PAGE>



--------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated

                                                        PORTFOLIO OF INVESTMENTS
                                                               NOVEMBER 30, 2001
                                             -----------------------------------

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

PREFERRED STOCKS AND SECURITIES -- 96.8%
  ADJUSTABLE RATE PREFERRED STOCKS -- 14.5%
         BANKING -- 10.1%
   35,000   Citigroup Inc.,
              Series Q, Adj. Rate Pfd. ..................... $      848,750*
   75,000   Cobank,
              Adj. Rate Pfd., Pvt., 144A*** ................      4,011,000*
            J.P. Morgan Chase & Co.:
   40,825     Series A, Adj. Rate Pfd. .....................      3,572,187*
   20,275     Series L, Adj. Rate Pfd. .....................      1,814,612*
  126,700     Series N, Adj. Rate Pfd. .....................      3,104,150*
  142,500   Wells Fargo & Company,
              Series B, Adj. Rate Pfd. .....................      6,946,875*
                                                             --------------
            TOTAL BANKING ADJUSTABLE RATE
             PREFERRED STOCKS ..............................     20,297,574
                                                             --------------
         FINANCIAL SERVICES-- 0.5%
   25,000   Bear Stearns Companies Inc.,
              Series A, Adj. Rate Pfd. .....................      1,075,000*
                                                             --------------
         UTILITIES-- 3.9%
            Niagara Mohawk Power Corporation:
   95,275     Series A, Adj. Rate Pfd. .....................      2,358,056*
  173,528     Series B, Adj. Rate Pfd. .....................      4,381,582*
   25,000     Series C, Adj. Rate Pfd. .....................        631,250*
    6,800   Northern Indiana Public Service Company,
              Series A, Adj. Rate Pfd. .....................        336,600*
                                                             --------------
            TOTAL UTILITIES ADJUSTABLE RATE
             PREFERRED STOCKS ..............................      7,707,488
                                                             --------------
            TOTAL ADJUSTABLE RATE
             PREFERRED STOCKS ..............................     29,080,062
                                                             --------------
  FIXED RATE PREFERRED STOCKS AND SECURITIES -- 81.2%
         BANKING -- 13.4%
      500   ABN AMRO North America, Inc.,
              6.46% Pfd., Pvt.,144A*** .....................        502,135*
            BancWest Corporation:
$4,350,000    First Hawaiian Capital I, 8.343%
              7/1/27 Capital Security, Series B ............      4,575,765
            Citigroup Inc.:
  130,314     5.864% Pfd., Series M ........................      6,005,521*
    8,650     6.231% Pfd., Series H ........................        417,449*


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


    1,000   Firstar Realty LLC,,
              8.875% Pfd. REIT, Pvt.,144A*** ............... $    1,149,970
            Wachovia Corporation:
$1,500,000    First Union Capital II,
              7.95% 11/15/29 Capital Security ..............      1,575,180
$2,575,000    First Union Institutional Capital I,
              8.04% 12/1/26 Capital Security ...............      2,651,774
$1,885,000    First Union Institutional Capital II,
              7.85% 1/1/27 Capital Security ................      1,901,824
$3,225,000  GreenPoint Financial Corporation:
              GreenPoint Capital Trust I,
              9.10% 6/1/27 Capital Security ................      3,067,168
   47,400   HSBC USA, Inc.,
              $2.8575 Pfd. .................................      2,207,892*
$2,750,000  Keycorp Institutional Capital B,
              8.25% 12/15/26 Capital Security ..............      2,833,490
                                                             --------------
            TOTAL BANKING FIXED RATE
             PREFERRED STOCKS
             AND SECURITIES ................................     26,888,168
                                                             --------------
         FINANCIAL SERVICES-- 15.4%
            Bear Stearns Companies, Inc.:
  164,920     5.49% Pfd., Series G .........................      6,485,479*
   51,573     5.72% Pfd., Series F .........................      2,098,505*
   18,700     6.15% Pfd., Series E .........................        818,125*
            Household International, Inc.:
   10,000     $4.30 Pfd. ...................................        602,550*
  100,800     7.50%  Pfd., Series 2001-A ...................      2,525,544*
            Lehman Brothers Holdings, Inc.:
   76,500     5.67% Pfd., Series D .........................      3,167,865*
  177,505     5.94% Pfd., Series C .........................      7,701,054*
  144,850   USA Education, Inc.,
              6.97% Pfd., Series A .........................      7,356,207*
                                                             --------------
            TOTAL FINANCIAL SERVICES FIXED
             RATE PREFERRED STOCKS
             AND SECURITIES ................................     30,755,329
                                                             --------------
         INSURANCE -- 8.3%
              AON Corporation:
$2,400,000    AON Capital Trust A,
              8.205% 1/1/27 Capital Security                      2,396,508

                       See Notes to Financial Statements.


                                       7

<PAGE>

--------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2001
------------------------------------


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

PREFERRED STOCKS AND SECURITIES (CONTINUED)
  FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
         INSURANCE (CONTINUED)
            Conseco, Inc.:
   17,600     Conseco Financing Trust I,
              9.16% TOPrS .................................. $      172,656
   24,750     Conseco Financing Trust V,
              8.70% TOPrS ..................................        232,031
   25,000     Conseco Financing Trust VI,
              9.00% TOPrS ..................................        249,500
       15   Prudential Human Resources
              Management Company, Inc.,
              6.30% Sinking Fund Pfd.,
              Series A, Pvt. ...............................      1,562,366*
$2,300,000  SAFECO Corporation:
              SAFECO Capital Trust I,
              8.072% 7/15/37 Capital Security ..............      2,091,275
            The St. Paul Companies, Inc.:
$4,795,000    MMI Capital Trust I, 7.625%
              12/15/27 Capital Security, Series B ..........      4,628,350
            UnumProvident Corporation:
$5,889,000    Provident Financing Trust I,
              7.405% 3/15/38 Capital Security ..............      5,305,901
                                                             --------------
            TOTAL INSURANCE FIXED RATE
             PREFERRED STOCKS
             AND SECURITIES ................................     16,638,587
                                                             --------------
         OIL AND GAS-- 6.0%
   11,200   Anadarko Petroleum Corporation,
              5.46% Pfd. ...................................      1,004,752*
   45,100   Apache Corporation,
              5.68% Pfd., Series B .........................      4,121,914*
    3,200   EOG Resources, Inc.,
              7.195% Pfd., Series B ........................      3,383,808*
$3,750,000  Kinder Morgan, Inc.:
              KN Capital Trust III,
              7.63% 4/15/28 Capital Security ...............      3,456,862
                                                             --------------
            TOTAL OIL AND GAS FIXED RATE
             PREFERRED STOCKS
             AND SECURITIES ................................     11,967,336
                                                             --------------



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

         MISCELLANEOUS INDUSTRIES-- 3.0%
   17,500   E.I. Du Pont de Nemours and Company,
              $4.50 Pfd., Series B ......................... $    1,317,400*
   43,850   Farmland Industries, Inc.,
              8.00% Pfd., Pvt.,144A*** .....................      1,040,560*
   20,500   Ocean Spray Cranberries, Inc.,
              6.25% Pfd., Pvt., 144A*** ....................      1,682,845*
   42,500   Telephone & Data Systems, Inc.,
              7.60% Pfd., Series A .........................      1,056,550
    9,520   Viad Corporation,
              $4.75 Sinking Fund Pfd. ......................        516,270*
   17,500   Worldcom, Inc.:
              Corts Worldcom,
              7.60% CorTS                                           426,125
                                                             --------------
            TOTAL MISCELLANEOUS INDUSTRIES
             FIXED RATE PREFERRED STOCKS
             AND SECURITIES ................................      6,039,750
                                                             --------------
         UTILITIES -- 35.1%
            Alabama Power Company:
    4,474     4.60% Pfd. ...................................        338,145*
    6,485     4.72% Pfd. ...................................        502,912*
      100     4.92% Pfd. ...................................          8,083*
  246,400     5.20% Pfd. ...................................      5,180,560*
   49,875   Appalachian Power Company,
              8.00% QUIDS, Series B ........................      1,258,596
   25,000   Avista Corporation,
              $6.95, Sinking Fund Pfd. Series K ............      2,324,750*
   17,000   Baltimore Gas & Electric Company,
              6.99% Pfd., Series 1995 ......................      1,810,075*
   10,000   Boston Edison Company,
              4.78% Pfd. ...................................        763,900*
    7,282   Carolina Power and Light Company,
              $5.44 Pfd. ...................................        606,663*
    1,428   Central Hudson Gas & Electric Corporation,
              4.35% Pfd., Series D, Pvt. ...................         96,026*
    2,500   Central Illinois Light Company,
              5.85%  Sinking Fund Pfd. .....................        248,725*
   12,450   Columbus Southern Power Company,
              7.92%, Jr. Sub. Debt., Series B ..............        318,222


                       See Notes to Financial Statements.


                                       8

<PAGE>



--------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated

                                            PORTFOLIO OF INVESTMENTS (CONTINUED)
                                                               NOVEMBER 30, 2001
                                            ------------------------------------

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


PREFERRED STOCKS AND SECURITIES (CONTINUED)
  FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
         UTILITIES (CONTINUED)
            Connecticut Light and Power Company:
    8,000     $2.06 Pfd. ................................... $      230,840*
    5,100     $3.24 Pfd. ...................................        232,789*
            Duke Energy Corporation:
    7,019     4.50% Pfd., Series C .........................        526,285*
   17,003     7.85% Pfd., Series S .........................      1,806,909*
    5,000   Energy East Capital Trust I,
              8.25% TOPrS ..................................        126,575
            Entergy Arkansas, Inc.:
    3,050     4.56% Pfd., Series 1965 ......................        183,229*
    2,840     4.56% Pfd. ...................................        170,613*
    1,050     $6.08 Pfd. ...................................         82,010*
   13,500     7.40% Pfd. ...................................      1,283,377*
      150     7.80% Pfd. ...................................         14,938*
    2,441   Entergy Gulf States, Inc.,
              $7.56 Pfd. ...................................        227,892*
            Entergy Louisiana, Inc.:
      299     5.16% Pfd. ...................................         20,870*
    3,771     7.36% Pfd. ...................................        363,411*
  175,000     8.00% Pfd., Series 1992 ......................      4,386,375*
    8,500   Entergy Mississippi, Inc.,
              7.44% Pfd. ...................................        817,530*
            Florida Power & Light Company:
    4,654     4.35% Pfd., Series E, Pvt. ...................        314,331*
    4,000     4.50% Pfd. ...................................        283,820*
    5,000   Green Mountain Power Corporation,
              7.32% Pfd.,  Series 1 ........................        473,375*
   23,600   Hawaiian Electric Company, Inc.:
              HECO Capital Trust I,
              8.05% QUIPS ..................................        600,030
    1,239   IES Utilities, Inc.,
              6.10% Pfd. ...................................         63,895*
   67,300   Indiana Michigan Power Company,
              7.60% Pfd., Series B .........................      1,673,078
   14,500   Indianapolis Power & Light Company,
              5.65% Pfd. ...................................      1,284,193*

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


     6,010   Jersey Central Power & Light Company,
               7.52% Sinking Fund Pfd., Series K ........... $      623,087*
     4,500   Kentucky Energy Corporation,
               6.53% Pfd. ..................................        448,808*
    15,000   Mississippi Power Company,
               6.32% Pfd. ..................................        370,125*
    38,000   Monongahela Power Company,
               $7.73 Pfd., Series L ........................      4,026,480*
    26,000   Montana Power Company,
               $6.875 Pfd. .................................      2,608,320*
             Niagara Mohawk Power Corporation:
     9,800     4.10% Pfd. ..................................        530,033*
     6,500     5.25% Pfd. ..................................        474,305*
    76,200   Ohio Power Company,
               7.92% QUIDS, Series B .......................      1,928,241
             PacifiCorp:
     6,308     $4.72 Pfd. ..................................        389,267*
    56,035     8.25% QUIPS .................................      1,389,388
             PECO Energy Company:
     1,100     $4.30 Pfd., Series B ........................         69,713*
     5,000     $4.40 Pfd., Series C ........................        331,400*
     7,500     $7.48 Pfd. ..................................        801,750*
$1,000,000     Capital Trust III,
               $7.38, 4/6/28 Capital Security,
               Series D                                              920,130
     2,493   Potomac Electric Power Company,
               $2.44 Pfd., Series 1957 .....................         96,766*
       570   PSI Energy, Inc.,
              4.32% Pfd. ...................................          9,271*
             Public Service Enterprise Group, Inc.:
    10,900     Enterprise Capital Trust I,
               7.44% TOPrS, Series A .......................        268,249
   14,020    Public Service Electric & Gas Company,
               5.28% Pfd., Series E ........................      1,136,111*
             Puget Sound Energy, Inc.:
   108,435     7.45% Pfd., Series II .......................      2,644,187*
    23,279     7.75% Sinking Fund Pfd. .....................      2,412,985*
             Reliant Energy, Inc.:
    45,000     Houston Light & Power,
               Capital Trust II,
               8.125% QUIPS ................................      1,122,750

                       See Notes to Financial Statements.

                                       9

<PAGE>

--------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2001
------------------------------------


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

PREFERRED STOCKS AND SECURITIES (CONTINUED)
  FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
         UTILITIES (CONTINUED)
$3,750,000    Houston Light & Power,
              Capital Trust II,
              8.257%, 2/1/37 Capital Security,
              Series B ..................................... $    3,723,413
   55,982     REI Trust I,
              7.20% TOPrS, Series C ........................      1,299,622
            Rochester Gas & Electric Corporation:
    4,030     4.75% Pfd., Series I .........................        264,973*
    5,060     4.10% Pfd., Series J .........................        293,202*
   10,000     4.55% Pfd., Series M .........................        629,850*
            Sempra Energy:
   11,910     Pacific Enterprises,
              $4.50 Pfd. ...................................        705,191*
            Sierra Pacific Resources:
   32,700     NVP Capital III,
              7.75% TIPS ...................................        802,785
   50,887     Sierra Pacific Power,
              7.80% Pfd., Series 1 .........................      1,255,637*
            South Carolina Electric & Gas Company:
   14,753     5.125% Purchase Fund Pfd., Pvt. ..............        602,660*
    6,318     6.00% Purchase Fund Pfd., Pvt. ...............        299,600*
            Southern Union Company:
   60,800     Southern Union Financing I,
              9.48% TOPrS ..................................      1,556,176
    6,050   TransCanada PipeLines Ltd.,
              8.25% Pfd. ...................................        156,846
$4,700,000  Union Electric Power Company, 7.69%
              12/15/36 Capital Security, Series A ..........      4,628,231
            Virginia Electric & Power Company:
    1,665     $4.04 Pfd. ...................................        104,978*
    2,270     $4.20 Pfd. ...................................        148,799*
    1,573     $4.80 Pfd. ...................................        117,841*


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

            XCEL Energy, Inc.:
    8,040     $4.10 Pfd., Series C ......................... $      492,932*
   12,510     $4.11 Pfd., Series D .........................        768,865*
    2,660     $4.16 Pfd., Series E .........................        165,465*
   43,400     PSCO Capital Trust I,
              7.60% TOPrS ..................................      1,089,774
                                                             --------------
            TOTAL UTILITIES FIXED RATE
             PREFERRED STOCKS
             AND SECURITIES ................................     70,331,228
                                                             --------------
            TOTAL FIXED RATE
             PREFERRED STOCKS
             AND SECURITIES ................................    162,620,398
                                                             --------------
  INVERSE FLOATING RATE PREFERRED SECURITY -- 1.1%
       18   Premium Assets, Series A,
              Zurich Financial Reg Caps ....................      2,170,952
                                                             --------------
            TOTAL PREFERRED STOCKS
             AND SECURITIES
             (COST $186,394,343) ...........................    193,871,412
                                                             --------------
OPTION CONTRACTS-- 0.6% (COST $1,015,628)
    1,250   Put Options on U.S. Treasury:
              Bond March Futures,
              Expiring 2/23/2002(DAGGER) ...................      1,145,313
                                                             --------------


                       See Notes to Financial Statements.


                                        10

<PAGE>


--------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated

                                            PORTFOLIO OF INVESTMENTS (CONTINUED)
                                                              NOVEMBER 30, 2001
                                  ----------------------------------------------

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


MONEY MARKET FUNDS-- 2.6% (Cost $5,259,017)
$5,259,017  Provident TempFund, 2.28% ...................... $    5,259,017
                                                             --------------
TOTAL INVESTMENTS (Cost $192,668,988**) ...........  100.0%     200,275,742
OTHER ASSETS AND LIABILITIES (Net) ................    0.0          (47,751)
                                                    ------   --------------
NET ASSETS ........................................  100.0%  $  200,227,991
                                                    ======   ==============
----------------------

*    Securities eligible for the Dividends Received Deduction.
**   Aggregate cost for federal tax purposes is $192,625,305.
***  Securities exempt from  registration  under Rule 144A of the Securities Act
     of 1933.  These  securities  may be  resold  in  transactions  exempt  from
     registr3ation to qualified institutional buyers.
(DAGGER) 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
Pfd.    --  Preferred securities
Pvt.    --  Private Placement 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.


                                        11

<PAGE>


--------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated

STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 2001
-----------------------------------

<TABLE>
<CAPTION>


ASSETS:
<S>                                                                         <C>                 <C>
   Investments, at value (Cost $192,668,988) (Note 1)
     See accompanying schedule ................................................................   $200,275,742
   Dividends and interest receivable ..........................................................      1,517,478
   Prepaid expenses ...........................................................................         64,548
                                                                                                  ------------
           Total Assets .......................................................................    201,857,768
LIABILITIES:
   Payable for securities purchased .....................................  $    1,279,867
   Dividends payable to Common Shareholders .............................         136,165
   Investment advisory fee payable (Note 2) .............................          93,585
   Professional fees payable ............................................          52,034
   Accrued expenses and other payables ..................................          68,126
                                                                           --------------
           Total Liabilities ..................................................................      1,629,777
                                                                                                  ------------
NET ASSETS ....................................................................................   $200,227,991
                                                                                                  ============
NET ASSETS consist of:
   Undistributed net investment income (Note 1) ...............................................   $    911,704
   Accumulated net realized loss on investments sold (Note 1) .................................     (7,572,485)
   Unrealized appreciation of investments (Note 3) ............................................      7,606,754
   Par value of Common Stock ..................................................................        111,891
   Paid-in capital in excess of par value of Common Stock .....................................    129,170,127
   Money Market Cumulative Preferred(TRADE MARK) Stock (Note 5) ...............................     70,000,000
                                                                                                  ------------
           Total Net Assets ...................................................................   $200,227,991
                                                                                                  ============
                                                                              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 .............................             622.13           435,494
                                                                                ------------      ------------
                                                                                $ 100,622.13        70,435,494
                                                                                ============
  Common Stock (11,189,069 shares outstanding) ..........................             $11.60       129,792,497
                                                                                      ======      ============
TOTAL NET ASSETS ........................................................                         $200,227,991
                                                                                                  ============
</TABLE>


                       See Notes to Financial Statements.


                                        12

<PAGE>


--------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated

                                                         STATEMENT OF OPERATIONS
                                            FOR THE YEAR ENDED NOVEMBER 30, 2001
                                            ------------------------------------

<TABLE>
<CAPTION>



INVESTMENT INCOME:
<S>                                                                                     <C>               <C>
     Dividends .......................................................................................   $  9,737,038
     Interest ........................................................................................      4,552,827
                                                                                                         ------------
          Total Investment Income ....................................................................     14,289,865

EXPENSES:
     Investment advisory fee (Note 2) ................................................  $1,098,332
     Administration fee (Note 2) .....................................................     233,600
     Money Market Cumulative Preferred(TRADE MARK) broker commissions and
        Auction Agent fees ...........................................................     189,954
     Legal and audit fees ............................................................     109,600
     Insurance premiums ..............................................................     102,001
     Directors' fees and expenses (Note 2) ...........................................      72,354
     Shareholder servicing agent fees and expenses (Note 2) ..........................      75,459
     Custodian fees and expenses (Note 2) ............................................      23,899
     Other ...........................................................................      97,585
                                                                                        ----------
          Total Expenses .............................................................................      2,002,784
                                                                                                         ------------

NET INVESTMENT INCOME ................................................................................     12,287,081
                                                                                                         ------------

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
   (Notes 1 and 3):
     Net realized loss on investments sold during the year ...........................................     (1,599,316)
     Change in net unrealized appreciation of investments
        during the year ..............................................................................     11,525,093
                                                                                                         ------------

NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS ......................................................      9,925,777
                                                                                                         ------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .................................................   $ 22,212,858
                                                                                                         ============
</TABLE>


                       See Notes to Financial Statements.


                                       13
<PAGE>



--------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated

STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------------


<TABLE>
<CAPTION>


                                                                                     YEAR ENDED          YEAR ENDED
                                                                                  NOVEMBER 30, 2001   NOVEMBER 30, 2000
                                                                                  -----------------   -----------------
OPERATIONS:
<S>                                                                               <C>                 <C>
     Net investment income .....................................................  $      12,287,081   $      13,148,825
     Net realized loss on investments sold during the year .....................         (1,599,316)         (4,827,466)
     Change in net unrealized appreciation
        of investments during the year .........................................         11,525,093           1,120,006
                                                                                  -----------------   -----------------
     Net increase in net assets resulting from operations ......................         22,212,858           9,441,365

DISTRIBUTIONS:
     Dividends paid from net investment income to Money Market
        Cumulative Preferred(TRADE MARK) Stock Shareholders (Note 5) ...........         (2,961,335)         (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 ...........................................................         (9,113,985)        (10,096,152)
     Distributions paid from net realized capital gains to Common Stock
        Shareholders ...........................................................                 --          (4,712,758)
                                                                                  -----------------   -----------------
     Total Distributions .......................................................        (12,075,320)        (18,834,596)
                                                                                  -----------------   -----------------

FUND SHARE TRANSACTIONS:
     Increase from Common Stock transactions (Note 4) ..........................            424,175                  --
                                                                                  -----------------   -----------------

NET INCREASE / (DECREASE) IN NET ASSETS FOR THE YEAR ...........................         10,561,713          (9,393,231)

NET ASSETS:
     Beginning of year .........................................................        189,666,278         199,059,509
                                                                                  -----------------   -----------------
     End of year (including undistributed net investment income of
        $911,704 and $530,706, respectively) ...................................  $     200,227,991   $     189,666,278
                                                                                  =================   =================
</TABLE>


                       See Notes to Financial Statements.


                                        14


<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>
                                                                                             Year Ended November 30,
                                                                                ------------------------------------------------
                                                                                   2001             2000             1999
                                                                                 --------         --------         --------
PER SHARE OPERATING PERFORMANCE:
<S>                                                                              <C>              <C>              <C>
Net asset value, beginning of year ............................................. $  10.68         $  11.50         $  13.50
                                                                                 --------         --------         --------
INVESTMENT OPERATIONS:
Net investment income. .........................................................     1.10             1.18             1.14
Net realized and unrealized gain / (loss) on investments .......................     0.89            (0.33)           (1.24)
                                                                                 --------         --------         --------
Total from investment operations. ..............................................     1.99             0.85            (0.10)
                                                                                 --------         --------         --------
DISTRIBUTIONS:
Dividends paid from net investment income to MMP* Shareholders .................    (0.26)           (0.34)           (0.19)
Distributions paid from net realized capital gains to MMP* Shareholders. .......       --            (0.02)           (0.09)
Dividends paid from net investment income to Common Stock Shareholders. ........    (0.82)           (0.91)           (0.96)
Distributions paid from net realized capital gains to Common Stock Shareholders.       --            (0.42)           (0.60)
   Change in accumulated undeclared dividends on MMP*. .........................     0.01(DAGGER)     0.02(DAGGER)    (0.06)(DAGGER)
                                                                                 --------         --------         --------
Total distributions ............................................................    (1.07)           (1.67)           (1.90)
                                                                                 --------         --------         --------
Net asset value, end of year. .................................................. $  11.60(DAGGER) $  10.68(DAGGER) $  11.50 (DAGGER)
                                                                                 ========         ========         ========
Market value, end of year ...................................................... $ 11.270         $  9.563         $ 10.500
                                                                                 ========         ========         ========
Total investment return based on net asset value** .............................   16.97%            5.88%          (2.99)%
                                                                                 ========         ========         ========
Total investment return based on market value** ................................   26.95%            3.80%          (7.12)%
                                                                                 ========         ========         ========
RATIOS TO AVERAGE NET ASSETS AVAILABLE
  TO COMMON STOCK SHAREHOLDERS:
     Operating expenses. .......................................................     1.61%            1.59%            1.53%
     Net investment income*** ..................................................     7.63%            7.93%            6.81%

--------------------------------------

SUPPLEMENTAL DATA:(DAGGER)(DAGGER)
     Portfolio turnover rate. ..................................................       41%              67%              64%
     Net assets, end of year (in 000's) . ...................................... $200,228         $189,666         $199,060
     Ratio of operating expenses to Total Average Net Assets including MMP* ....     1.03%            1.00%            1.01%

</TABLE>


<TABLE>
<CAPTION>
                                                                                  Year Ended November 30,
                                                                                --------------------------
                                                                                    1998           1997
                                                                                  --------       --------
PER SHARE OPERATING PERFORMANCE:
<S>                                                                               <C>            <C>
Net asset value, beginning of year .............................................  $  13.53       $  12.91
                                                                                  --------       --------
INVESTMENT OPERATIONS:
Net investment income. .........................................................      1.14           1.10
Net realized and unrealized gain / (loss) on investments .......................      0.17           0.87
                                                                                  --------       --------
Total from investment operations. ..............................................      1.31           1.97
                                                                                  --------       --------
DISTRIBUTIONS:
Dividends paid from net investment income to MMP* Shareholders .................     (0.18)         (0.21)
Distributions paid from net realized capital gains to MMP* Shareholders. .......     (0.11)         (0.04)
Dividends paid from net investment income to Common Stock Shareholders. ........     (0.89)         (0.92)
Distributions paid from net realized capital gains to Common Stock Shareholders.     (0.18)         (0.16)
   Change in accumulated undeclared dividends on MMP*. .........................      0.02          (0.02)
                                                                                  --------       --------
Total distributions ............................................................     (1.34)         (1.35)
                                                                                  --------       --------
Net asset value, end of year. ..................................................  $  13.50       $  13.53
                                                                                  ========       ========
Market value, end of year ......................................................  $ 12.875       $ 12.875
                                                                                  ========       ========
Total investment return based on net asset value** .............................     8.29%         14.44%
                                                                                  ========       ========
Total investment return based on market value** ................................     8.53%         17.16%
                                                                                  ========       ========
RATIOS TO AVERAGE NET ASSETS AVAILABLE
  TO COMMON STOCK SHAREHOLDERS:
     Operating expenses. .......................................................      1.45%          1.48%
     Net investment income*** ..................................................      6.37%          6.44%

--------------------------------------

SUPPLEMENTAL DATA:(DAGGER)(DAGGER)
     Portfolio turnover rate. ..................................................        87%            74%
     Net assets, end of year (in 000's) . ......................................  $220,690       $221,230
     Ratio of operating expenses to Total Average Net Assets including MMP* ....      0.99%          1.00%

</TABLE>





*    Money Market Cumulative Preferred(TRADE MARK) Stock.
**   Assumes  reinvestment of  distributions at the price obtained by the Fund's
     Dividend Reinvestment Plan.
***  The net investment  income ratios reflect income net of operating  expenses
     and payments to MMP* Shareholders.
(DAGGER)  Includes   effect  of  additional   distribution   available  to  MMP*
     Shareholders  ($0.03 per Common  Share in 2001,  $0.04 per Common  Share in
     2000 and $0.05 per  Common  Share in  1999).  (See Note 5 to the  Financial
     Statements.)
(DAGGER)(DAGGER)  Information presented under heading Supplemental Data includes
     MMP*.

                       See Notes to Financial Statements.


                                       15

<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
 YEAR ENDED    TOTAL SHARES   COVERAGE      PREFERENCE              VALUE
 NOVEMBER 30    OUTSTANDING   PER SHARE    PER SHARE (1)     PER SHARE (1) & (2)
 -----------   -------------  ---------   ---------------   --------------------
    2001            700        $286,040      $100,000              $100,000
    2000            700         270,952       100,000               100,000
    1999            700         284,371       100,000               100,000
    1998            700         315,271       100,000               100,000
    1997            700         316,044       100,000               100,000


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


                       See Notes to Financial Statements.


                                        16

<PAGE>


--------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated

                                                   NOTES TO FINANCIAL STATEMENTS
                                 -----------------------------------------------


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 accounting principles generally accepted
in the United States of America.

     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,  except as described
hereafter.  In the absence of sales of listed securities and with respect to (a)
securities  for which the most recent  sale  prices are not deemed to  represent
fair  market  value  and  (b)  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  ("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 accrete discount on those fixed income  securities,  such as capital
securities,  that trade on an "accrued income" basis. Upon initial adoption, the
Fund will be required to adjust the cost of such  securities  by the  cumulative
amount  of  accretion  or  amortization  that  would  have been  recognized  had
accretion or 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



                                       17

<PAGE>




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Preferred Income Opportunity Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)
-----------------------------------------



classification  of  certain  amounts  between  net  investment  income  and
realized and unrealized  gain/loss in the Statement of Operations.  The adoption
of this principle is not material to the financial statements.

     OPTIONS:  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 capital gains 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.

     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



                                        18

<PAGE>




--------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated

                                       NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                       -----------------------------------------



     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
accounting  principles  generally  accepted  in the  United  States  of  America
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,  Inc.  ("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 paid PFPC Inc.
a monthly  fee at an annual  rate of 0.12% of the  Fund's  average  monthly  net
assets.  During fiscal year 2001,  effective December 1, 2001, this rate changed
to 0.10%.  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.

     As of April 9, 2001, PFPC Trust Company ("PFPC Trust") began serving as the
Fund's  Custodian.  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.

3.   PURCHASES AND SALES OF SECURITIES

     Cost of purchases and proceeds from sales of securities  for the year ended
November 30, 2001, excluding short-term investments,  aggregated $77,526,424 and
$82,259,901, respectively.



                                        19

 <PAGE>

--------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------



     At November  30,  2001, aggregate  gross  unrealized  appreciation  for all
securities  in which  there is an excess of value over tax cost was  $11,403,131
and aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over value was $3,752,694.

4.   COMMON STOCK

     At November 30, 2001, 240,000,000 shares of $0.01 par value Common Stock
were authorized.

     Common Stock transactions were as follows:

                                                                 YEAR ENDED
                                                                   11/30/01
                                                            --------------------
                                                             SHARES      AMOUNT
                                                             --------   --------
Issued as reinvestment of dividends under the Dividend
   Reinvestment and Cash Purchase Plan .....................   37,782   $424,175
                                                             ========   ========


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.   Net  assets   available  to  Money   Market   Cumulative
Preferred(TRADE  MARK) Stock at November 30, 2001 included an accrued additional
distribution of $288,008.  The amount  subsequently  calculated and then paid to
the Money Market Cumulative  Preferred(TRADE  MARK) Shareholders for fiscal 2001
was $269,367. (See Note 9 - "Subsequent Events.")



                                        20
                                     <PAGE>



--------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated

                                       NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                       -----------------------------------------


     Prior to November 30, 1999,  additional  distributions 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 November 30, 2001, 700 shares of Money Market Cumulative Preferred(TRADE
MARK)  Stock  were  outstanding  at the  annual  rate of  2.05%.  (See  Note 9 -
"Subsequent  Events.")  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 traditional DRD-eligible preferred securities
(i.e.,  adjustable and fixed rate  preferred and preference  stocks) and similar
hybrid,  i.e.,  fully  taxable,   preferred  securities.   Under  normal  market
conditions,  at least 80% of the value of the Fund's net assets will be invested
in preferred securities.  Also, 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  stocks  and,  under
normal market conditions, up to 20% 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



                                       21

<PAGE>



--------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------

20%  limitation to the extent that, in the opinion of the Fund's  Adviser,  such
investments  are deemed to be debt-like  in key  characteristics.  Typically,  a
security will not be considered  debt-like (a) if an issuer can defer payment of
income for eighteen  months or more without  triggering  an event of default and
(b) if such issue is a junior and fully  subordinated  liability of an issuer or
its ultimate guarantor.

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 ("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  November  30,  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 November 30, 2001, the Commerce  Group,  Inc. and its  affiliates  owned
approximately  36.2%  of the  Fund's  outstanding  Common  Stock,  according  to
Schedule D filings dated September 30, 2001.

9.   SUBSEQUENT EVENTS

     As a result of the income realized by the Fund that did not qualify for the
Corporate  Dividends  Received Deduction ("DRD"), a portion of the distributions
paid  to  the  Fund's  Money  Market  Cumulative   Preferred(TRADE  MARK)  Stock
shareholders  from January 1, 2001 through November 30, 2001 has been designated
as being from non-DRD income,  as required by Internal  Revenue  Services Ruling
89-81,  with  respect to the  Internal  Revenue  Code of 1986,  as  amended.  On
December 17, 2001,  the Fund  declared an additional  distribution  of $269,367,
payable  December 19, 2001,  to Money Market  Cumulative  Preferred(TRADE  MARK)
Stock shareholders as required by the Fund's Articles  Supplementary.  (See Note
5.)

     On  December  12,  2001,  the  dividend  rate on the  Fund's  Money  Market
Cumulative  Preferred(TRADE  MARK)  Stock was set by the  auction  process to an
annual rate of 1.70%.



                                        22

<PAGE>





                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
   Preferred Income Opportunity Fund Incorporated:

     We have audited the  accompanying  statement of assets and  liabilities  of
Preferred Income Opportunity Fund  Incorporated,  including the fund's portfolio
of  investments,  as  of  November  30,  2001,  and  the  related  statement  of
operations,  statement of changes in net assets and financial highlights for the
year then ended.  These  financial  statements and financial  highlights are the
responsibility  of the Fund's  management.  Our  responsibility is to express an
opinion on these  financial  statements  and financial  highlights  based on our
audit.  The  statement of changes in net assets for the year ended  November 30,
2000 and  financial  highlights  for each of the years in the  four-year  period
ended  November  30, 2000 were  audited by other  auditors  whose  report  dated
January 12, 2001,  expressed an unqualified  opinion on that financial statement
and those financial highlights.

     We conducted our audit in  accordance  with  auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and perform our audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial statements. Our procedures included confirmation of
securities  owned as of November 30, 2001 by  correspondence  with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

     In our opinion,  the financial statements and financial highlights referred
to above present fairly,  in all material  respects,  the financial  position of
Preferred  Income  Opportunity  Fund  Incorporated  as of November 30, 2001, the
results of its  operations,  changes in its net assets and financial  highlights
for the year then  ended in  conformity  with  accounting  principles  generally
accepted in the United States of America.

[GRAPHIC OMITTED]

KPMG LOGO


Boston, Massachusetts
January 7, 2002


                                        23
                                     <PAGE>


--------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated

TAX INFORMATION (UNAUDITED)
--------------------------


     Of the total  distributions  attributable to the fiscal year ended November
30, 2001,  including  the  Additional  Distribution  to Money Market  Cumulative
Preferred(TRADE  MARK) Stock  Shareholders,  64.52%  qualified for the Dividends
Received Deduction for eligible corporate investors. (See Note 9.)

     For the calendar year ended December 31, 2001,  66.97% of all distributions
paid to Common Stock Shareholders qualified for the Dividends Received Deduction
for  eligible  corporate  investors.  Shareholders  should  refer  to Form  1099
accompanying  additional  information and the information  contained herein when
preparing their tax returns to determine the appropriate tax characterization of
the distributions they received from the Fund in calendar year 2001.

     At November 30, 2001, the Fund had accumulated  realized  capital losses of
$6,221,654 in 2000 and $982,343 in 2001. These losses may be carried forward and
offset against any future capital gains through 2008 and 2009, respectively.



                                        24

<PAGE>




--------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated

                                              ADDITIONAL INFORMATION (UNAUDITED)
                                              ----------------------------------


Change in Independent Auditors

     Based on the  recommendation  of the Audit Committee of the Fund, the Board
of Directors  voted to appoint KPMG LLP as the Fund's  independent  auditors for
the  Fund's  fiscal  year  ended   November  30,  2001.  On  October  17,  2001,
PricewaterhouseCoopers  LLP("PwC")  resigned as the independent  auditors of the
Fund.

     The  reports of PwC on the Fund's  financial  statements  for fiscal  years
ended in 2000 and 1999 did not  contain an adverse  opinion or a  disclaimer  of
opinion,  nor were such reports  qualified or modified as to uncertainty,  audit
scope or accounting principles.

     During the Fund's fiscal years ended in 2000 and 1999, and through  October
17,  2001,  there were no  disagreements  with PwC on any  matter of  accounting
principles or practices,  financial statement  disclosure,  or auditing scope or
procedure,  which  disagreements,  if not resolved to the  satisfaction  of PwC,
would  have  caused  them  to  make  reference  to  the  subject  matter  of the
disagreement in their report on the financial statements for such years.



                                        25

<PAGE>




--------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated

ADDITIONAL INFORMATION (Unaudited) (Continued)
--------------------------------------------------------------------------------


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 year ended November 30, 2001, $3,582.45 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



                                       26

<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.



                                        27

<PAGE>




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


Information about Fund Directors and Officers

     The business and affairs of the Fund are managed under the direction of the
Fund's Board of Directors.  Information pertaining to the Directors and officers
of the Fund is set forth below.

<TABLE>
<CAPTION>

                                                               PRINCIPAL      NUMBER OF FUNDS
                                         TERM OF OFFICE      OCCUPATION(S)    IN FUND COMPLEX
NAME, ADDRESS,            POSITION(S)     AND LENGTH OF        DURING PAST        OVERSEEN       OTHER DIRECTORSHIPS
AND AGE                  HELD WITH FUND   TIME SERVED*         FIVE YEARS        BY DIRECTOR       HELD BY DIRECTOR

<S>                                                                                   <C>
NON-INTERESTED
DIRECTORS:
---------
MARTIN BRODY                Director    Class I Director   Retired                    2        Director, Jaclyn, Inc.
c/o HMK Associates                         since 1992                                          (luggage and
30 Columbia Turnpike                                                                           accessories); Director,
Florham Park, NJ 07932                                                                         Smith Barney Mutual
Age: 80                                                                                        Funds (18 funds).

DAVID GALE                  Director    Class I Director   President & CEO            2        Director, Stone Container
Delta Dividend Group, Inc.                 since 1997      of Delta Dividend                   Corporation, until
301 Pine Street                                            Group, Inc.                         Dec. 31, 2000; Director
San Francisco, CA 94104                                    (Investments).                      Free Real Time.com,
Age: 52                                                                                        until Feb 1, 2001.

MORGAN GUST(DAGGER)         Director   Class III Director  From January 1, 1999,      2                  --
Giant Industries, Inc.                     since 1992      Executive Vice President,
23733 N. Scottsdale Road                                   Giant Industries, Inc.;
Scottsdale, AZ 85255                                       and, for more than
Age: 54                                                    five years prior thereto,
                                                           Vice President, General
                                                           Counsel and Vice
                                                           President-Administration,
                                                           Giant Industries, Inc.

ROBERT F. WULF              Director    Class II Director  Since March 1984,          2                  --
3560 Deerfield Drive South                 since 1992      Financial Consultant;
Salem, OR 97302                                            Trustee, University of
Age: 64                                                    Oregon Foundation;
                                                           Trustee, San Francisco
                                                           Theological Seminary
</TABLE>

---------------------------

*  The Fund's Board of Directors  is divided into three  classes,  each class
having a term of three years.  Each year the term of office of one class expires
and the  successor  or  successors  elected to such class serve for a three year
term. The three year term for each class expires as follows:

                                 CLASS I DIRECTORS - three year term  expires at
                                 the Fund's 2003 Annual Meeting of Shareholders;
                                 directors  may  continue in office  until their
                                 successors  are  duly  elected  and  qualified.
                                 CLASS II DIRECTORS - three year term expires at
                                 the Fund's 2004 Annual Meeting of Shareholders;
                                 directors  may  continue in office  until their
                                 successors  are  duly  elected  and  qualified.
                                 CLASS III  DIRECTORS - three year term  expires
                                 at  the   Fund's   2002   Annual   Meeting   of
                                 Shareholders;  directors may continue in office
                                 until  their  successors  are duly  elected and
                                 qualified.

(DAGGER)Represents  holders  of shares of the  Fund's  Money  Market  Cumulative
        Preferred(TRADE MARK) Stock.


                                        28

<PAGE>


--------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated

                                  ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
                                  ----------------------------------------------


<TABLE>
<CAPTION>

                                                                               PRINCIPAL             NUMBER OF FUNDS       OTHER
                                                     TERM OF OFFICE           OCCUPATION(S)          IN FUND COMPLEX   DIRECTORSHIPS
NAME, ADDRESS,                     POSITION(S)       AND LENGTH OF             DURING PAST              OVERSEEN          HELD BY
AND AGE                           HELD WITH FUND     TIME SERVED*              FIVE YEARS              BY DIRECTOR       DIRECTOR

<S>                                                                                                       <C>

INTERESTED
DIRECTORS:
---------
ROBERT T. FLAHERTY(DAGGER)(DAGGER)  Director,         Class III Director     Prior to December             2                   --
301 E. Colorado Boulevard           Chairman          since 1992             1996, President of
Suite 720                           of the Board,                            Flaherty & Crumrine
Pasadena, CA 91101                  President and                            Incorporated ("Flaherty &
Age: 64                             Chief Executive                          Crumrine"); Director of
                                    Officer                                  Flaherty & Crumrine.

DONALD F. CRUMRINE(DAGGER)(DAGGER)  Director, Chief   Class II Director      Chairman of the Board,        2                   --
301 E. Colorado Boulevard           Financial         since 1992             since December 1996,
Suite 720                           Officer, Chief                           and previously held
Pasadena, CA 91101                  Accounting Officer,                      other officerships of
Age: 54                             Vice President                           Flaherty & Crumrine;
                                    and Secretary                            Director of Flaherty &
                                                                             Crumrine.

OFFICERS:

ROBERT M. ETTINGER                  Vice              Since 1992             President of                  --                  --
301 E. Colorado Boulevard           President                                Flaherty & Crumrine.
Suite 720                           and Assistant
Pasadena, CA 91101                  Treasurer
Age: 43

PETER C. STIMES                     Vice              Since 1992             Vice President of             --                  --
301 E. Colorado Boulevard           President,                               Flaherty & Crumrine.
Suite 720                           Treasurer
Pasadena, CA 91101                  and Assistant
Age: 46                             Secretary

</TABLE>

---------------------------

*     The Fund's Board of Directors  is divided into three  classes,  each class
having a term of three years.  Each year the term of office of one class expires
and the  successor  or  successors  elected to such class serve for a three year
term. The three year term for each class expires as follows:

                                 CLASS I DIRECTORS - three year term  expires at
                                 the Fund's 2003 Annual Meeting of Shareholders;
                                 directors  may  continue in office  until their
                                 successors  are  duly  elected  and  qualified.
                                 CLASS II DIRECTORS - three year term expires at
                                 the Fund's 2004 Annual Meeting of Shareholders;
                                 directors  may  continue in office  until their
                                 successors  are  duly  elected  and  qualified.
                                 CLASS III  DIRECTORS - three year term  expires
                                 at  the   Fund's   2002   Annual   Meeting   of
                                 Shareholders;  directors may continue in office
                                 until  their  successors  are duly  elected and
                                 qualified.

(DAGGER)Represents  holders  of shares of the  Fund's  Money  Market  Cumulative
Preferred(TRADE MARK) Stock.

(DAGGER)(DAGGER)"Interested  person" of the Fund as  defined  in the  Investment
Company Act of 1940.  Messrs.  Flaherty  and  Crumrine  are each  considered  an
"interested  person" because of their affiliation with Flaherty & Crumrine which
acts as the Fund's investment adviser.


                                       29

<PAGE>




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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?

   (BULLET) If your shares are held in a brokerage Account, contact your broker.

   (BULLET) 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 LOGO

                                     ANNUAL
                                     REPORT

                                NOVEMBER 30, 2001


                        WEB SITE: WWW.PREFERREDINCOME.COM


</TEXT>
</DOCUMENT>
