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

Dear Shareholder:

     Sometimes it is good to be boring!  Despite the highly  unsettled  state of
the  world,  financially  and  otherwise,   Preferred  Income  Opportunity  Fund
essentially  treaded water in the first half of fiscal 2002.  In that  six-month
period,  the Fund earned a total return of -0.2% on the net asset value  ("NAV")
of its shares.  For the twelve months ending May 31, 2002, the return was a more
substantial +9.5%.

     GOOD NEWS ON OUR DIVIDEND RATE! The Fund recently  raised the dividend rate
on its common stock by about 7.4%  effective  with the dividend  payable on June
28,  2002.  The new monthly  rate will be 7.3 cents per share.  The most obvious
contributor to the increase has been the low cost of the Fund's  leverage caused
by very low short-term interest rates. However,  there is more to the story than
just that,  as  discussed  in the  Question & Answer  section  that follows this
letter.

           PREFERRED INCOME OPPORTUNITY FUND MONTHLY DIVIDEND INCOME

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

                    MONTHLY    30-YEAR
                   DIVIDEND    TREASURY
       DATE         INCOME      YIELD

       Dec-91
       Jan-92                  7.76%
       Feb-92                  7.79%
       Mar-92                  7.96%
       Apr-92                  8.03%
       May-92     $82.50       7.84%
       Jun-92     $82.50       7.78%
       Jul-92     $82.50       7.46%
       Aug-92     $82.50       7.41%
       Sep-92     $82.50       7.38%
       Oct-92     $82.50       7.62%
       Nov-92     $82.50       7.60%
       Dec-92     $82.50       7.39%
       Jan-93     $83.14       7.19%
       Feb-93     $83.14       6.90%
       Mar-93     $83.14       6.92%
       Apr-93     $83.14       6.93%
       May-93     $83.14       6.98%
       Jun-93     $83.14       6.67%
       Jul-93     $83.14       6.56%
       Aug-93     $83.14       6.09%
       Sep-93     $83.14       6.02%
       Oct-93     $83.14       5.97%
       Nov-93     $83.14       6.30%
       Dec-93     $83.14       6.35%
       Jan-94     $79.87       6.24%
       Feb-94     $79.87       6.66%
       Mar-94     $79.87       7.09%
       Apr-94     $79.87       7.30%
       May-94     $85.89       7.43%
       Jun-94     $85.89       7.61%
       Jul-94     $85.89       7.39%
       Aug-94     $85.89       7.48%
       Sep-94     $85.89       7.82%
       Oct-94     $85.89       7.96%
       Nov-94     $89.17       7.94%
       Dec-94     $89.17       7.88%
       Jan-95     $88.36       7.73%
       Feb-95     $88.36       7.55%
       Mar-95     $88.36       7.43%
       Apr-95     $88.36       7.33%
       May-95     $88.36       6.63%
       Jun-95     $83.83       6.54%
       Jul-95     $83.83       6.90%
       Aug-95     $83.83       6.61%
       Sep-95     $83.83       6.50%
       Oct-95     $83.83       6.36%
       Nov-95     $83.83       6.08%
       Dec-95     $78.73       5.95%
       Jan-96     $78.73       6.05%
       Feb-96     $78.73       6.36%
       Mar-96     $78.73       6.67%
       Apr-96     $78.73       6.83%
       May-96     $83.83       7.00%
       Jun-96     $83.83       6.95%
       Jul-96     $83.83       7.01%
       Aug-96     $83.83       7.12%
       Sep-96     $83.83       6.90%
       Oct-96     $83.83       6.81%
       Nov-96     $83.83       6.51%
       Dec-96     $83.83       6.60%
       Jan-97     $84.06       6.79%
       Feb-97     $84.06       6.80%
       Mar-97     $84.06       7.09%
       Apr-97     $84.06       6.89%
       May-97     $84.06       6.98%
       Jun-97     $84.06       6.74%
       Jul-97     $84.06       6.45%
       Aug-97     $84.06       6.61%
       Sep-97     $84.06       6.30%
       Oct-97     $84.06       6.15%
       Nov-97     $84.06       6.04%
       Dec-97     $84.06       5.95%
       Jan-98     $79.79       5.90%
       Feb-98     $79.79       6.02%
       Mar-98     $79.79       5.93%
       Apr-98     $79.79       5.95%
       May-98     $79.79       5.80%
       Jun-98     $79.79       5.62%
       Jul-98     $79.79       5.72%
       Aug-98     $79.79       5.26%
       Sep-98     $79.79       4.98%
       Oct-98     $79.79       5.15%
       Nov-98     $79.79       5.07%
       Dec-98     $79.79       5.09%
       Jan-99     $81.35       5.09%
       Feb-99     $81.35       5.58%
       Mar-99     $81.35       5.62%
       Apr-99     $81.35       5.66%
       May-99     $81.35       5.82%
       Jun-99     $88.18       5.97%
       Jul-99     $88.18       6.10%
       Aug-99     $88.18       6.06%
       Sep-99     $88.18       6.05%
       Oct-99     $88.18       6.16%
       Nov-99     $88.18       6.29%
       Dec-99     $88.18       6.48%
     Jan-2000     $88.45       6.49%
     Feb-2000     $88.45       6.15%
     Mar-2000     $88.45       5.84%
     Apr-2000     $88.45       5.96%
     May-2000     $88.45       6.02%
     Jun-2000     $88.45       5.89%
     Jul-2000     $88.45       5.79%
     Aug-2000     $88.45       5.67%
     Sep-2000     $88.45       5.88%
     Oct-2000     $88.45       5.79%
     Nov-2000     $88.45       5.59%
     Dec-2000     $88.45       5.46%
     Jan-2001     $88.45       5.53%
     Feb-2001     $88.45       5.34%
     Mar-2001     $88.45       5.46%
     Apr-2001     $88.45       5.77%
     May-2001     $88.45       5.77%
     Jun-2001     $88.45       5.74%
     Jul-2001     $88.45       5.50%
     Aug-2001     $88.45       5.37%
     Sep-2001     $88.45       5.41%
     Oct-2001     $88.45       4.88%
     Nov-2001     $88.45       5.26%
     Dec-2001     $88.45       5.47%
     Jan-2002     $88.97       5.43%
     Feb-2002     $88.97       5.41%
     Mar-2002     $88.97       5.80%
     Apr-2002     $88.97       5.59%
     May-2002     $88.97       5.61%
     Jun-2002     $95.52       5.41%
     Jul-2002     $95.52

     The above  graph  updates  the  history  of the Fund's  dividend  income to
reflect the increase at the end of June. The Fund's income  (represented  by the
solid line) has performed  remarkably well over the years.  Income has generally
managed to avoid being  dragged down in periods of declining  interest  rates on
long-term  Treasury  bonds (the dotted  line).  In  contrast,  when the Treasury
interest rates have  increased,  the Fund's income has typically also increased.
This is exactly what we are trying to do.

<PAGE>

     Market  conditions  included a little bit of  everything  in the six months
ended May 31st. For example,  the two primary  preferred market sectors moved in
opposite  directions.  Hybrid preferreds rose in price, causing a slight decline
in their yields. In contrast,  the prices of traditional  fixed-rate  preferreds
fell,  and their yields  increased by more than one-half of a percentage  point.
The chart below  illustrates the diverse yield changes  produced by these trends
since the beginning of fiscal 2002. For  reference,  it also shows the change in
the yields of long-term Treasury bonds.

                   CUMULATIVE CHANGES IN YIELDS OF PREFFERREDS
                       AND TREASURY BONDS SINCE 11/30/01

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

                      HYBRID               TRADITIONAL                30-YEAR
   DATE             PREFERREDS             PREFERREDS             TREASURY BONDS
  11/30/01            0.000%                 0.000%                   0.000%
   12/7/01            0.224%                 0.250%                   0.320%
  12/14/01            0.205%                 0.250%                   0.300%
   2/21/01            0.086%                 0.150%                   0.180%
  12/28/01            0.164%                 0.200%                   0.260%
    1/4/02            0.139%                 0.300%                   0.280%
   1/11/02           -0.123%                 0.200%                   0.090%
   1/18/02           -0.141%                 0.200%                   0.080%
   1/25/02           -0.031%                 0.400%                   0.180%
    2/1/02           -0.097%                 0.400%                   0.120%
    2/8/02           -0.040%                 0.400%                   0.100%
   2/15/02           -0.057%                 0.450%                   0.090%
   2/22/02           -0.106%                 0.500%                   0.060%
    3/1/02           -0.109%                 0.650%                   0.230%
    3/8/02            0.156%                 0.750%                   0.440%
   3/15/02            0.179%                 0.800%                   0.490%
   3/22/02            0.176%                 0.800%                   0.530%
   3/29/02            0.177%                 0.750%                   0.530%
    4/5/02            0.030%                 0.650%                   0.390%
   4/12/02            0.005%                 0.650%                   0.370%
   4/19/02            0.022%                 0.650%                   0.410%
   4/26/02           -0.093%                 0.550%                   0.310%
    5/3/02           -0.173%                 0.500%                   0.260%
   5/10/02           -0.133%                 0.600%                   0.320%
   5/17/02           -0.019%                 0.750%                   0.470%
   5/24/02           -0.116%                 0.650%                   0.390%
   5/31/02           -0.152%                 0.550%                   0.340%

     Traditional  preferreds  typically yield less than hybrid  preferreds,  and
well they should.  Traditional  preferreds,  including both fixed and adjustable
rate issues, offer corporate investors the tax benefit of the Dividends Received
Deduction ("DRD"),  which is not available from hybrids.  (The DRD also benefits
the Fund through a complicated  formula that reduces the cost of its  leverage.)
Because  of  this  tax  advantage,  it  is  entirely  possible  for  traditional
preferreds to be very attractive  among  fixed-rate  issues even when they yield
somewhat less than hybrids.  We believe that traditional  fixed-rate  preferreds
reached that point some time ago and have since become increasingly undervalued.

     Not surprisingly,  we have continued to sell gradually some of our holdings
of hybrids and buy particularly  attractive traditional fixed-rate preferreds as
opportunities  have appeared in the market.  By picking our spots  carefully and
executing the strategy well, we have been able to avoid a significant  impact on
the Fund's income despite the normally lower yields on  traditional  issues.  As
shown by the bar chart on the next page,  the change in the  composition  of the
Fund's portfolio has been enough to make a difference, particularly versus three
years ago when our position in hybrids was close to its highest level.  We think
the Fund is in a good  position  to  benefit  from the  bargains  that we see in
traditional preferreds now.

                                        2
<PAGE>

                       PREFERRED INCOME OPPORTUNITY FUND
              COMPARATIVE PORTFOLIO WEIGHTINGS, 5/31/99 TO 5/31/02

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

                 ADJUSTABLE        TRADITIONAL
                   RATE            FIXED-RATE            HYBRID
                 PREFERREDS        PREFERREDS          PREFERREDS
May 1999           10.2%             40.1%               45.0%
Nov 2001           14.5%             50.9%               29.8%
May 2002           10.5%             58.4%               26.7%

     As  described  more  fully in Note 6 on page 23,  one of  Preferred  Income
Opportunity Fund's policies was recently revised in order to preserve investment
flexibility. In recent years, both Moody's and Standard & Poor's have integrated
their rating  scales for bonds and  preferreds.  In the process,  the ratings on
many preferreds were reduced,  although the rating agencies  indicated that this
was not by itself  intended  to signal  changes  in the credit  standing  of the
issuers. The Fund's Board of Directors has taken this into account by increasing
from 15% to 25% the limit on the Fund's holdings of securities that meet certain
minimum ratings requirements,  but are not rated investment grade themselves. As
always,  all of the Fund's investments must be in companies that, at the time of
purchase,  have  investment  grade  rated  senior  debt  outstanding  or  are of
comparable quality.

     The Question and Answer section provides further  important  information on
the Preferred Income Opportunity Fund. In addition, please visit our web site at
WWW.PREFERREDINCOME.COM to get the most current data on the Fund.

                                        Sincerely,
                                        /s/Robert T. Flaherty
                                        Robert T. Flaherty
                                        CHAIRMAN OF THE BOARD

June 19, 2002
                                        3
<PAGE>

                               QUESTIONS & ANSWERS

WHY WAS THE FUND ABLE TO RAISE ITS DIVIDEND RATE?

     The higher dividend is really the net result of several factors.  A decline
in the cost of leverage was a big help. Ongoing management of the portfolio also
helped,  mostly by avoiding  things that would  normally  have  reduced  income.
Hedging tended to reduce income.

CAN YOU GIVE US MORE DETAILS ON THE DIVIDEND INCREASE?

     The  reduction  in the cost of the  Fund's  leverage  was the most  visible
factor.  The Fed's easier money  policies over the last 1 1/2 years have sharply
reduced  short-term  rates. The rates paid by the Fund on its outstanding  Money
Market Cumulative  Preferred(TM) stock, which are reset every 49 days through an
auction process,  have stayed in the range of 1 1/2% to 1 3/4% so far this year.
When money was  relatively  tight  about a year and a half ago,  we were  paying
close to 5% for this money.

     Day-to-day  management  of the portfolio  also made an important,  but less
obvious,  contribution  to  income.  We have  moved a lot of money  from  hybrid
preferreds to traditional  DRD eligible  preferreds over the last several years.
We believe this has created a more attractive  portfolio,  but it would normally
have made a real dent in income and offset a significant  part of the savings on
our  leverage  costs.  We were  able to avoid  that by taking  advantage  of the
inefficiencies  inherent in the preferred market.  This phase of the war was won
through "hand-to-hand" combat in the trenches.

     Hedging was a negative. The cost of hedging increased significantly in this
environment.  Furthermore,  long-term  interest rates declined slightly over the
last year and a half. As we would expect under these conditions, our hedges were
something of a drag on the Fund's  income.  Our hedges are designed to cope with
upward spurts in long-term  interest  rates.  The only spurt this time was down,
not up, and it was in short-term rates, not long rates.

WILL THE FUND PAY AN EXTRA DIVIDEND AGAIN AT YEAR-END?

     We try to take a  conservative  approach  in  setting  the  Fund's  monthly
dividend  rate.  The new dividend rate leaves a little room for the  unexpected,
including some increase in leverage  costs.  That cushion could disappear by the
end of this  fiscal year on November  30th.  Nonetheless,  our best guess at the
moment is that the Fund will wind up the fiscal year with some income left over.
If that happens, we will distribute the extra income to shareholders in December
as we have in the past.

WHAT DO YOU MAKE OF THE CURRENT WAVE OF BANKRUPTCIES AND ACCOUNTING PROBLEMS?

     Credit analysis has never been more important. A steady stream of financial
and accounting  problems has surfaced in the wake of the Enron catastrophe,  and
each new announcement creates rumors of ten more. Clearly, the system is in need
of repair.  At the moment,  the market is punishing the suspects  along with the
guilty.

     We fully  expect the  headlines  to get worse  before the  problems  in the
system are fixed.  Time will  resolve the economic  problems  left over from the
speculative  bubble of the late 1990s. Other problems may require an increase in
the prison population.  We would expect the latter to have an extremely positive
influence on the restoration of financial responsibility and business ethics.

                                        4
<PAGE>

HAVE THESE CREDIT PROBLEMS AFFECTED THE FUND?

     Remember  that  the  Preferred  Income   Opportunity  Fund  only  purchases
securities of companies that have senior debt rated  investment  grade by either
Moody's or S&P or are of  comparable  quality.  Beyond that,  roughly 90% of the
Fund's  current  portfolio  is made  up of  issues  that  are  themselves  rated
investment  grade by at least one of the two  agencies.  In the  current  market
environment,  we think that the lower rated issues in the Fund's  portfolio  are
more of an opportunity than a problem.

     Like most investors,  we have had a few unpleasant surprises;  but the Fund
has so far dodged the big bullets.  We avoided  direct hits from the  California
energy crisis,  Enron and its nefarious  colleagues,  and the telecom  disaster.
Furthermore,  the  indirect  exposure  to these  problems  through  our  utility
investments seems  manageable.  The only holding in the Fund's portfolio that is
not  up-to-date on its dividends is Farmland  Industries,  Inc.,  which recently
filed for Chapter 11 bankruptcy. Fortunately, we had sold much of our holding of
Farmland's  preferred earlier. Our remaining shares of Farmland account for less
than 2/10 of 1% of the current market value of the Fund's portfolio.

HOW DOES THE MARKET PRICE OF THE FUND'S SHARES COMPARE TO ITS NET ASSET VALUE?

     The  following  chart shows the evolution of the market price of the Fund's
shares  from  moderate  discounts  from net asset  value  last year to  moderate
premiums this year. This pattern is not unusual among income oriented closed-end
funds (although we would naturally like to think that it is more deserved in the
case of the Preferred Income Opportunity Fund).

     The emergence of the premium has naturally had a positive effect on returns
based on the market price of the Fund's shares. The total returns on market were
10.6% for the  first six  months  of  fiscal  2002 and 21.9% for  latest  twelve
months.

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

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

                PREMIUM/
    DATE        DISCOUNT
   5/31/02       0.0766
   5/24/02       0.0757
   5/17/02       0.0858
   5/10/02       0.0595
   5/3/02        0.0839
   4/26/02       0.0526
   4/19/02       0.0394
   4/12/02       0.0409
   4/5/02        0.0248
   3/29/02       0.0400
   3/22/02       0.0383
   3/15/02       0.0302
   3/8/02        0.0124
   3/1/02        0.0595
   2/22/02       0.0582
   2/15/02       0.0457
   2/8/02        0.0607
   2/1/02        0.0444
   1/25/02       0.0677
   1/18/02       0.0268
   1/11/02       0.0276
   1/4/02        0.0297
   12/28/01      0.0289
   12/21/01      0.0210
   12/14/01     -0.0201
   12/7/01      -0.0009
   11/30/01     -0.0284
   11/23/01      0.0304
   11/16/01      0.0260
   11/9/01      -0.0068
   11/2/01       0.0017
   10/26/01     -0.0138
   10/19/01     -0.0191
   10/12/01     -0.0114
   10/5/01      -0.0433
   9/28/01      -0.0414
   9/21/01       0.0000
   9/14/01      -0.0353
   9/7/01       -0.0353
   8/31/01      -0.0603
   8/24/01      -0.0365
   8/17/01      -0.0439
   8/10/01      -0.0567
   8/3/01        0.0035
   7/27/01       0.0237
   7/20/01      -0.0264
   7/13/01      -0.0098
   7/6/01       -0.0307
   6/29/01      -0.0379
   6/22/01      -0.0623
   6/15/01      -0.0654
   6/8/01       -0.0325
   6/1/01       -0.0345
   5/25/01      -0.0111
   5/18/01      -0.0228
   5/11/01       0.0037
   5/4/01       -0.0218
   4/27/01      -0.0278
   4/20/01       0.0243
   4/13/01       0.0046
   4/6/01        0.0200
   3/30/01      -0.0109
   3/23/01      -0.0360
   3/16/01      -0.0393
   3/9/01       -0.0360
   3/2/01       -0.0109
   2/23/01      -0.0257
   2/16/01      -0.0184
   2/9/01       -0.0346
   2/2/01       -0.0528
   1/26/01       0.0192
   1/19/01      -0.0077
   1/12/01      -0.0200
   1/5/01       -0.0411
   12/29/00     -0.0276
   12/22/00     -0.0672
   12/15/00     -0.0913
   12/8/00      -0.0903
   12/1/00      -0.0928
   11/24/00     -0.0937
   11/17/00     -0.0962
   11/10/00     -0.0747
   11/3/00      -0.0739
   10/27/00     -0.0725
   10/20/00     -0.0895
   10/13/00     -0.0921
   10/6/00      -0.0896
   9/29/00      -0.1155
   9/22/00      -0.1189
   9/15/00      -0.0836
   9/8/00       -0.1113
   9/1/00       -0.1105
   8/25/00      -0.1046
   8/18/00      -0.1046
   8/11/00      -0.0879
   8/4/00       -0.0912
   7/28/00      -0.0927
   7/21/00      -0.0970
   7/14/00      -0.0893
   7/7/00       -0.0909
   6/30/00      -0.0841
   6/23/00      -0.0775
   6/16/00      -0.0943
   6/9/00       -0.1037
   6/2/00       -0.0905
   5/26/00      -0.0759
   5/19/00      -0.0734
   5/12/00      -0.0566
   5/5/00       -0.0385
   4/28/00      -0.0640
   4/21/00      -0.0781
   4/14/00      -0.0894
   4/7/00       -0.1047
   3/31/00      -0.1361
   3/24/00      -0.1272
   3/17/00      -0.1055
   3/10/00      -0.0858
   3/3/00       -0.1021
   2/25/00      -0.0962
   2/18/00      -0.1038
   2/11/00      -0.0845
   2/4/00       -0.0923
   1/28/00      -0.1047
   1/21/00      -0.0996
   1/14/00      -0.0385
   1/7/00       -0.0028
   12/31/99     -0.0354
   12/24/99     -0.1212
   12/17/99     -0.1118
   12/10/99     -0.0807
   12/3/99      -0.0970
   11/26/99     -0.0979
   11/19/99     -0.0826
   11/12/99     -0.1252
   11/5/99      -0.1192
   10/29/99     -0.1223
   10/22/99     -0.1254
   10/15/99     -0.1231
   10/8/99      -0.0860
   10/1/99      -0.0770
   9/24/99      -0.0401
   9/17/99      -0.0683
   9/10/99      -0.0938
   9/3/99       -0.1057
   8/27/99      -0.0345
   8/20/99      -0.0864
   8/13/99      -0.0780
   8/6/99       -0.0464
   7/30/99      -0.0829
   7/23/99      -0.0558
   7/16/99      -0.0761
   7/9/99       -0.0532
   7/2/99       -0.0532
   6/25/99      -0.0602
   6/18/99      -0.0835
   6/11/99      -0.0558
   6/4/99       -0.1007
   5/28/99      -0.1093
   5/21/99      -0.1256
   5/14/99      -0.1277
   5/7/99       -0.1015
   4/30/99      -0.1156
   4/23/99      -0.0930
   4/16/99      -0.0781
   4/9/99       -0.1029
   4/2/99       -0.0724
   3/26/99      -0.0888
   3/19/99      -0.1022
   3/12/99      -0.0650
   3/5/99       -0.0846
   2/26/99      -0.1078
   2/19/99      -0.0937
   2/12/99      -0.0887
   2/5/99       -0.0610
   1/29/99      -0.0677
   1/22/99      -0.0627
   1/15/99      -0.0392
   1/8/99       -0.0297
   1/1/99       -0.0196
   12/25/98     -0.0132
   12/18/98     -0.0537
   12/11/98     -0.0363
   12/4/98      -0.0413
   11/27/98     -0.0478
   11/20/98     -0.0641
   11/13/98     -0.0481
   11/6/98      -0.0396
   10/30/98     -0.0616
   10/23/98     -0.0406
   10/16/98     -0.0485
   10/9/98      -0.0744
   10/2/98      -0.0554
   9/25/98      -0.0402
   9/18/98      -0.0392
   9/11/98      -0.0487
   9/4/98       -0.0618
   8/28/98      -0.0540
   8/21/98      -0.0954
   8/14/98      -0.0864
   8/7/98       -0.0472
   7/31/98      -0.0526
   7/24/98      -0.0465
   7/17/98      -0.0563
   7/10/98      -0.0562
   7/3/98       -0.0575
   6/26/98      -0.0600
   6/19/98      -0.0573
   6/12/98      -0.0627
   6/5/98       -0.0643
   5/29/98      -0.0648
   5/22/98      -0.0664
   5/15/98      -0.0717
   5/8/98       -0.0540
   5/1/98       -0.0618
   4/24/98      -0.0768
   4/17/98      -0.0620
   4/10/98      -0.0508
   4/3/98       -0.0682
   3/27/98      -0.0579
   3/20/98      -0.0487
   3/13/98      -0.0568
   3/6/98       -0.0473
   2/27/98      -0.0477
   2/20/98      -0.0456
   2/13/98      -0.0604
   2/6/98       -0.0530
   1/30/98      -0.0477
   1/23/98      -0.0620
   1/16/98      -0.0185
   1/9/98       -0.0197
   1/2/98       -0.0171
   12/26/97     -0.0456
   12/19/97     -0.0648
   12/12/97     -0.0652
   12/5/97      -0.0406
   11/28/97     -0.0484
   11/21/97     -0.0688
   11/14/97     -0.0377
   11/7/97      -0.0442
   10/31/97     -0.0477
   10/24/97     -0.0574
   10/17/97     -0.0506
   10/10/97     -0.0492
   10/3/97      -0.0292
   9/26/97      -0.0492
   9/19/97      -0.0557
   9/12/97      -0.0656
   9/5/97       -0.0580
   8/29/97      -0.0472
   8/22/97      -0.0767
   8/15/97      -0.0715
   8/8/97       -0.0701
   8/1/97       -0.0273
   7/25/97      -0.0630
   7/18/97      -0.0486
   7/11/97      -0.0585
   7/4/97       -0.0498
   6/27/97      -0.0418
   6/20/97      -0.0473
   6/13/97      -0.0385
   6/6/97       -0.0615
   5/30/97      -0.0362
   5/23/97      -0.0573
   5/16/97      -0.0647
   5/9/97       -0.0520
   5/2/97       -0.0672
   4/25/97      -0.0748
   4/18/97      -0.0806
   4/11/97      -0.0973
   4/4/97       -0.0573
   3/28/97      -0.0715
   3/21/97      -0.0715
   3/14/97      -0.0654
   3/7/97       -0.0581
   2/28/97      -0.0605
   2/21/97      -0.0645
   2/14/97      -0.0551
   2/7/97       -0.0623
   1/31/97      -0.0678
   1/24/97      -0.0834
   1/17/97      -0.0693
   1/10/97      -0.0562
   1/3/97       -0.0693
   12/27/96     -0.0837
   12/20/96     -0.1009
   12/13/96     -0.0813
   12/6/96      -0.0792
   11/29/96     -0.0608
   11/22/96     -0.0586
   11/15/96     -0.0726
   11/8/96      -0.0932
   11/1/96      -0.0796
   10/25/96     -0.0834
   10/18/96     -0.0935
   10/11/96     -0.0876
   10/4/96      -0.0876
   9/27/96      -0.0991
   9/20/96      -0.0889
   9/13/96      -0.0661
   9/6/96       -0.0836
   8/30/96      -0.0836
   8/23/96      -0.0881
   8/16/96      -0.0673
   8/9/96       -0.0688
   8/2/96       -0.0876
   7/26/96      -0.0939
   7/19/96      -0.1122
   7/12/96      -0.0911
   7/5/96       -0.1079
   6/28/96      -0.0918
   6/21/96      -0.1301
   6/14/96      -0.1337
   6/7/96       -0.1255
   5/31/96      -0.1386
   5/24/96      -0.1386
   5/17/96      -0.1408
   5/10/96      -0.1130
   5/3/96       -0.1257
   4/26/96      -0.1383
   4/19/96      -0.1279
   4/12/96      -0.1286
   4/5/96       -0.1315
   3/29/96      -0.1515
   3/22/96      -0.1487
   3/15/96      -0.1508
   3/8/96       -0.1465
   3/1/96       -0.1124
   2/23/96      -0.1303
   2/16/96      -0.1279
   2/9/96       -0.1233
   2/2/96       -0.1233
   1/26/96      -0.1146
   1/19/96      -0.1312
   1/12/96      -0.1279
   1/5/96       -0.1197
   12/29/95     -0.1454
   12/22/95     -0.1265
   12/15/95     -0.1233
   12/8/95      -0.1277
    12/1/95     -0.1014
   11/24/95     -0.1093
   11/17/95     -0.1071
   11/10/95     -0.0962
   11/3/95      -0.1232
   10/27/95     -0.1012
   10/20/95     -0.0909
   10/13/95     -0.1006
   10/6/95      -0.0718
   9/29/95      -0.0641
   9/22/95      -0.0749
   9/15/95      -0.0710
   9/8/95       -0.0833
   9/1/95       -0.0706
   8/25/95      -0.0780
   8/18/95      -0.1011
   8/11/95      -0.1018
   8/4/95       -0.0973
   7/28/95      -0.0911
   7/21/95      -0.1087
   7/14/95      -0.0869
   7/7/95       -0.0690
   6/30/95      -0.0686
   6/23/95      -0.0749
   6/16/95      -0.0702
   6/9/95       -0.0729
   6/2/95       -0.0481
   5/26/95      -0.0753
   5/19/95      -0.0933
   5/12/95      -0.0501
   5/5/95       -0.0576
   4/28/95      -0.0341
   4/21/95      -0.0690
   4/14/95      -0.0393
   4/7/95       -0.0341
   3/31/95      -0.0393
   3/24/95      -0.0534
   3/17/95      -0.0523
   3/10/95      -0.0585
   3/3/95       -0.0297
   2/24/95      -0.0376
   2/17/95      -0.0702
   2/10/95      -0.0314
   2/3/95       -0.0119
   1/27/95      -0.0619
   1/20/95      -0.0303
   1/13/95      -0.0141
   1/6/95       -0.0010
   12/30/94     -0.0851
   12/23/94     -0.0604
   12/16/94     -0.0732
   12/9/94      -0.0868
   12/2/94      -0.0402
   11/25/94     -0.0770
   11/18/94     -0.0990
   11/11/94     -0.0976
   11/4/94      -0.0786
   10/28/94     -0.1040
   10/21/94     -0.1410
   10/14/94     -0.1149
   10/7/94      -0.1322
   9/30/94      -0.0620
   9/23/94      -0.0628
   9/16/94      -0.0409
   9/9/94       -0.0318
   9/2/94       -0.0204
   8/26/94      -0.0348
   8/19/94      -0.0269
   8/12/94      -0.0303
   8/5/94       -0.0221
   7/29/94      -0.0327
   7/22/94      -0.0294
   7/15/94      -0.0490
   7/8/94       -0.0450
   7/1/94       -0.0409
   6/24/94      -0.0393
   6/17/94      -0.0457
   6/10/94      -0.0288
   6/3/94       -0.0683
   5/27/94      -0.0312
   5/20/94      -0.0636
   5/13/94      -0.0633
   5/6/94       -0.0775
   4/29/94      -0.1145
   4/22/94      -0.1012
   4/15/94      -0.0771
   4/8/94       -0.0612
   4/1/94       -0.0556
   3/25/94      -0.0562
   3/18/94      -0.0585
   3/11/94      -0.0315
   3/4/94       -0.0392
   2/25/94      -0.0500
   2/18/94      -0.0863
   2/11/94      -0.0361
   2/4/94       -0.0323
   1/28/94      -0.0377
   1/21/94      -0.0230
   1/14/94       0.0157
   1/7/94       -0.0036
   12/31/93      0.0249
   12/24/93     -0.0431
   12/17/93     -0.0338
   12/10/93     -0.0334
   12/3/93      -0.0076
   11/26/93     -0.0179
   11/19/93     -0.0282
   11/12/93     -0.0107
   11/5/93       0.0000
   10/29/93      0.0090
   10/22/93      0.0246
   10/15/93      0.0263
   10/8/93       0.0261
   10/1/93       0.0214
   9/24/93       0.0244
   9/17/93       0.0338
   9/10/93       0.0401
   9/3/93        0.0331
   8/27/93       0.0370
   8/20/93       0.0008
   8/13/93       0.0181
   8/6/93        0.0212
   7/30/93       0.0306
   7/23/93       0.0068
   7/16/93       0.0362
   7/9/93        0.0425
   7/2/93        0.0472
   6/25/93       0.0417
   6/18/93       0.0497
   6/11/93       0.0561
   6/4/93        0.0497
   5/28/93       0.0441
   5/21/93       0.0570
   5/14/93       0.0610
   5/7/93        0.0513
   4/30/93       0.0651
   4/23/93       0.0853
   4/16/93       0.0570
   4/9/93        0.0675
   4/2/93        0.0514
   3/26/93       0.0360
   3/19/93       0.0303
   3/12/93       0.0651
   3/5/93        0.0473
   2/26/93       0.0310
   2/19/93       0.0202
   2/12/93       0.0284
   2/5/93        0.0483
   1/29/93       0.0475
   1/22/93       0.0434
   1/15/93       0.0595
   1/8/93        0.0679
   1/1/93        0.0621
   12/25/92      0.0638
   12/18/92      0.0691
   12/11/92      0.0515
   12/4/92       0.0630
   11/27/92      0.0844
   11/20/92      0.0408
   11/13/92      0.0188
   11/6/92       0.0180
   10/30/92      0.0474
   10/23/92      0.0188
   10/16/92      0.0490
   10/9/92       0.0675
   10/2/92       0.0620
   9/25/92       0.0539
   9/18/92       0.0572
   9/11/92       0.0684
   9/4/92        0.0409
   8/28/92       0.0539
   8/21/92       0.0514
   8/14/92       0.0628
   8/7/92        0.0613
   7/31/92       0.0647
   7/24/92       0.0592
   7/17/92       0.0800
   7/10/92       0.0626
   7/3/92        0.0475
   6/26/92       0.0442
   6/19/92       0.0357
   6/12/92       0.0400
   6/5/92        0.0181
   5/29/92       0.0307
   5/22/92       0.0248
   5/15/92       0.0306
   5/8/92        0.0536
   5/1/92        0.0546
   4/24/92       0.0590
   4/17/92       0.0547
   4/10/92       0.0705
   4/3/92        0.0538
   3/27/92       0.0556
   3/20/92       0.0819
   3/13/92       0.0980
   3/6/92        0.0874
   2/28/92       0.0805
   2/21/92       0.0726

                                        5
<PAGE>

     We  would  like  to  remind  our  shareholders  that  the  Fund's  Dividend
Reinvestment  Plan (the "DRIP") provides a means of acquiring  additional shares
of the Fund  without  paying the full market  premium.  When the market price is
above NAV, DRIP  participants  reinvest their  dividends in new shares  acquired
directly  from the Fund at NAV.  The only  limitation  is the IRS rule  that the
purchase  can not be more than 5% below the  market  price.  If the  shares  are
selling at a discount from NAV, reinvestments are executed in the market to take
advantage of the discount.

     More  information  on the DRIP is  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.

                                        6
<PAGE>

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

                                                                     DIVIDEND
                            DIVIDEND     NET ASSET      NYSE        REINVESTMENT
                              PAID         VALUE    CLOSING PRICE     PRICE (1)
                            -------      ---------  -------------   ------------
December 31, 2001 .....     $0.1360      $11.49        $11.85          $11.49
January 31, 2002 ......      0.0680       11.43         12.05           11.49
February 28, 2002 .....      0.0680       11.33         12.00           11.40
March 31, 2002 ........      0.0680       11.24         11.69           11.24
April 30, 2002 ........      0.0680       11.21         11.95           11.26
May 31, 2002 ..........      0.0680       11.10         11.95           11.16
-------------
(1)  Whenever  the net asset value per share of the Fund's  common stock is less
     than or equal to the market price per share on the 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.

                                        7
<PAGE>

--------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS
MAY 31, 2002 (UNAUDITED)
----------------------------------------------

                                                           VALUE
SHARES/$ PAR                                             (NOTE 1)
------------                                            ------------
PREFERRED SECURITIES -- 96.7%
  ADJUSTABLE RATE PREFERRED SECURITIES -- 10.5%
         BANKING -- 10.1%
    35,000  Citigroup Inc.,
              Series Q, Adj. Rate Pfd. .............    $    853,125*
    75,000  Cobank,
              Adj. Rate Pfd., Pvt. 144A*** .........       3,984,750*
            J.P. Morgan Chase & Co.:
    40,825    Series A, Adj. Rate Pfd. .............       3,266,000*
    16,000    Series L, Adj. Rate Pfd. .............       1,448,000*
   134,200    Series N, Adj. Rate Pfd. .............       3,027,887*
   142,500  Wells Fargo & Company,
              Series B, Adj. Rate Pfd. .............       7,110,750*
                                                        ------------
            TOTAL BANKING ADJUSTABLE RATE
             PREFERRED SECURITIES ..................      19,690,512
                                                        ------------
         FINANCIAL SERVICES-- 0.3%
    10,500  Bear Stearns Companies, Inc.,
              Series A, Adj. Rate Pfd. .............         483,000*
                                                        ------------
         UTILITIES -- 0.1%
     4,800  Northern Indiana Public Service
              Company,
              Series A, Adj. Rate Pfd. .............         237,600*
                                                        ------------
            TOTAL ADJUSTABLE RATE
             PREFERRED SECURITIES ..................      20,411,112
                                                        ------------
  FIXED RATE PREFERRED SECURITIES -- 85.1%
         BANKING -- 14.1%
       500  ABN AMRO North America, Inc.,
              6.46% Pfd., Pvt., 144A*** ............         472,945*
            BancWest Corporation,
$4,350,000    First Hawaiian Capital I,
              8.343% 7/1/27 Capital Security,
              Series B .............................       4,600,560
            Citigroup Inc.:
    10,500    6.213% Pfd., Series G ................         487,410*
     8,650    6.231% Pfd., Series H ................         405,123*
   130,314    5.864% Pfd., Series M ................       5,743,589*
            Deutsche Bank,
$  660,000    BT Preferred Capital Trust II,
              7.875% 2/25/27 Capital Security ......         682,628

                                                           VALUE
SHARES/$ PAR                                             (NOTE 1)
------------                                            ------------
     1,000  Firstar Realty LLC,
              8.875% Pfd., REIT, Pvt., 144A*** .....    $  1,108,935
            GreenPoint Financial Corporation,
$3,349,000    GreenPoint Capital Trust I,
              9.10% 6/1/27 Capital Security ........       3,393,810
    32,400  HSBC USA, Inc.,
              $2.8575 Pfd. .........................       1,474,686*
$2,750,000  Keycorp Institutional Capital B,
              8.25% 12/15/26 Capital Security ......       2,849,000
            Wachovia Corporation:
$1,500,000    First Union Capital II,
              7.95% 11/15/29 Capital Security ......       1,602,720
$2,575,000    First Union Institutional
              Capital I,
              8.04% 12/1/26 Capital Security .......       2,710,484
$1,885,000    First Union Institutional
              Capital II,
              7.85% 1/1/27 Capital Security ........       1,966,036
                                                        ------------
            TOTAL BANKING FIXED RATE
             PREFERRED SECURITIES ..................      27,497,926
                                                        ------------
         FINANCIAL SERVICES-- 16.0%
            Bear Stearns Companies, Inc.:
   164,620    5.49% Pfd., Series G .................       6,303,300*
    51,573    5.72% Pfd., Series F .................       2,057,247*
            Household International, Inc.:
   100,800    7.50% Pfd., Series 2001-A ............       2,482,704*
    96,000    7.60% Pfd. ...........................       2,393,280*
    10,000    $4.30 Pfd. ...........................         579,750*
            Lehman Brothers Holdings, Inc.:
   177,505    5.94% Pfd., Series C .................       7,382,433*
    83,150    5.67% Pfd., Series D .................       3,301,886*
   135,450  SLM Corporation,
              6.97% Pfd. Series A ..................       6,815,844*
                                                        ------------
            TOTAL FINANCIAL SERVICES FIXED
             RATE PREFERRED SECURITIES .............      31,316,444
                                                        ------------
         INSURANCE -- 8.5%
            AON Corporation,
$2,400,000    AON Capital Trust A,
              8.205% 1/1/27 Capital Security .......       2,397,288

                       See Notes to Financial Statements.

                                        8
<PAGE>

--------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated
                                            PORTFOLIO OF INVESTMENTS (CONTINUED)
                                                        MAY 31, 2002 (UNAUDITED)
                                  ----------------------------------------------

                                                           VALUE
SHARES/$ PAR                                             (NOTE 1)
------------                                            ------------
PREFERRED SECURITIES (CONTINUED)
  FIXED RATE PREFERRED SECURITIES (CONTINUED)
         INSURANCE (CONTINUED)
            Conseco, Inc.:
    24,750    Conseco Financing Trust V,
              8.70% TOPrS ..........................    $    186,987
    25,000    Conseco Financing Trust VI,
              9.00% TOPrS ..........................         195,750
    17,600    Conseco Financing Trust I,
              9.16% TOPrS ..........................         137,896
     1,250  Fortis Funding Trust,
              7.68% Pfd., Pvt. 144A*** .............       1,415,925*
        15  Prudential Human Resources
              Management Company, Inc.,
              6.30% Sinking Fund Pfd.
              Series A, Pvt. .......................       1,532,889*
            The St. Paul Companies, Inc.,
$3,895,000    MMI Capital Trust I,
              7.625% 12/15/27 Capital Security,
              Series B .............................       3,650,978
            UnumProvident Corporation,
$5,889,000    Provident Financing Trust I,
              7.405% 3/15/38 Capital Security ......       5,565,517
     1,500  Zurich Financial Reg Caps I,
              6.01% Pfd., Pvt. 144A*** .............       1,532,085*
                                                        ------------
            TOTAL INSURANCE FIXED RATE
             PREFERRED SECURITIES ..................      16,615,315
                                                        ------------
         MISCELLANEOUS INDUSTRIES-- 2.9%
    17,500  E.I. Du Pont de Nemours and Company,
              $4.50 Pfd., Series B .................       1,343,038*
    36,200  Farmland Industries, Inc.,
              8.00% Pfd., Pvt., 144A*** ............         461,369*
    20,500  Ocean Spray Cranberries, Inc.,
              6.25% Pfd., Pvt., 144A*** ............       1,668,290*
    26,000  Touch America Holdings,
              $6.875 Pfd. ..........................       1,637,220*
     9,520  Viad Corporation,
              $4.75 Sinking Fund Pfd. ..............         552,350*
                                                        ------------
            TOTAL MISCELLANEOUS
             INDUSTRIES FIXED RATE
             PREFERRED SECURITIES ..................       5,662,267
                                                        ------------

                                                           VALUE
SHARES/$ PAR                                             (NOTE 1)
------------                                            ------------
         OIL AND GAS-- 4.3%
    11,200  Anadarko Petroleum Corporation,
              5.46% Pfd. ...........................    $    989,352*
    45,100  Apache Corporation,
              5.68% Pfd., Series B .................       4,092,374*
     3,200  EOG Resources, Inc.,
              7.195% Pfd., Series B ................       3,392,400*
                                                        ------------
            TOTAL OIL AND GAS FIXED RATE
             PREFERRED SECURITIES ..................       8,474,126
                                                        ------------
         UTILITIES -- 39.3%
            Alabama Power Company:
     4,980    4.60% Pfd. ...........................         364,885*
     6,485    4.72% Pfd. ...........................         487,575*
       250    4.92% Pfd. ...........................          19,592*
   243,400    5.20% Pfd. ...........................       5,040,814*
    25,000  Alabama Power Capital Trust I,
              7.375% Pfd., TOPrS ...................         626,625
    19,700  Alabama Power Capital Trust II,
              7.60% Pfd., TOPrS ....................         496,243
    49,875  Appalachian Power Company,
              8.00% QUIDS, Series B ................       1,264,830
    25,000  Avista Corporation,
              $6.95 Sinking Fund Pfd., Series K ....       2,263,625*
            Baltimore Gas & Electric Company,
    22,675    6.99% Pfd., Series 1995 ..............       2,368,630*
    35,000    BGE Capital Trust I,
              7.16% TOPrS ..........................        872,200
    10,000  Boston Edison Company,
              4.78% Pfd. ...........................         729,650*
     7,282  Carolina Power and Light Company,
              $5.44 Pfd. ...........................         594,175*
     1,628  Central Hudson Gas &
              Electric Corporation,
              4.35% Pfd., Series D, Pvt. ...........         105,332*
            Central Illinois Light Company:
    10,000    4.64% Pfd. ...........................         658,600*
     2,500    5.85% Sinking Fund Pfd. ..............         253,412*
    12,450  Columbus Southern Power Company,
              7.92%, Jr. Sub. Debt., Series B ......         316,479


                       See Notes to Financial Statements.

                                        9
<PAGE>

--------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2002 (UNAUDITED)
----------------------------------------------

                                                           VALUE
SHARES/$ PAR                                             (NOTE 1)
------------                                            ------------
PREFERRED SECURITIES (CONTINUED)
  FIXED RATE PREFERRED SECURITIES (CONTINUED)
         UTILITIES (CONTINUED)
     5,000  Commonwealth Edison Company,
              Financing I,
              8.48% Pfd. ...........................    $    127,125*
            Connecticut Light and Power Company:
     8,000    $2.06 Pfd. ...........................         232,440*
     5,100    $3.24 Pfd. ...........................         234,523*
            Duke Energy Corporation:
     7,019    4.50% Pfd., Series C .................         486,276*
     8,400    6.75% Pfd., Series X,
              Sinking Fund Pfd. ....................         885,024*
    17,003    7.85% Pfd., Series S .................       1,778,599*
     5,000  Energy East Capital Trust I,
              8.25% TOPrS ..........................         126,250
            Entergy Arkansas, Inc.:
     2,840    4.56% Pfd. ...........................         163,385*
     3,050    4.56% Pfd., Series 1965 ..............         175,466*
    13,500    7.40% Pfd. ...........................       1,245,172*
       150    7.80% Pfd. ...........................          14,496*
     1,050    $6.08 Pfd. ...........................          79,574*
     2,441  Entergy Gulf States, Inc.,
              7.56% Pfd. ...........................         222,412*
            Entergy Louisiana, Inc.:
       299    5.16% Pfd. ...........................          20,344*
     3,771    7.36% Pfd. ...........................         354,531*
   175,000    8.00% Pfd., Series 92 ................       4,388,125*
     8,500  Entergy Mississippi, Inc.,
              7.44% Pfd. ...........................         788,078*
            Florida Power & Light Company:
     4,654    4.35% Pfd., Series E, Pvt. ...........         298,321*
     4,000    4.50% Pfd. ...........................         275,300*
     7,500    6.75% Pfd., Series U .................         768,450*
     5,000  Green Mountain Power Corporation,
              7.32% Pfd., Series 1 .................         443,325*
            Hawaiian Electric Company, Inc.,
    23,600    HECO Capital Trust I,
              8.05% QUIPS ..........................         599,558
     5,291  Idaho Power Co.,
              7.68% Pfd., Series 1 .................         539,656*

                                                           VALUE
SHARES/$ PAR                                             (NOTE 1)
------------                                            ------------
    25,000  Indianapolis Power & Light Company,
              5.65% Pfd. ...........................    $  1,867,875*
    54,900  Indiana Michigan Power Company,
              7.60% Pfd., Series B .................       1,356,305
     2,268  Interstate Power & Light,
              6.10% Pfd. ...........................         116,983*
     6,010  Jersey Central Power & Light Company,
              7.52% Sinking Fund Pfd., Series K ....         618,579*
     4,500  Kentucky Utilities Company,
              6.53% Pfd. ...........................         426,443*
    15,000  Mississippi Power Company,
              6.32% Pfd. ...........................         355,575*
    41,500  Monongahela Power Company,
              $7.73 Pfd., Series L .................       4,326,998*
    20,000  Northern States Power Company,
              NSP Financing I,
              7.875% Pfd. ..........................         499,300
    76,200  Ohio Power Company,
              7.92% QUIDS, Series B ................       1,938,528
            PECO Energy Company:
     1,100    $4.30 Pfd., Series B .................          71,297*
     5,000    $4.40 Pfd., Series C .................         321,675*
     7,500    $7.48 Pfd. ...........................         784,163*
$1,000,000    Capital Trust III,
              $7.38 4/6/28, Capital Security,
              Series D .............................         925,935
       570  PSI Energy, Inc.,
              4.32% Pfd. ...........................           9,274*
            PacifiCorp:
     6,308    $4.72 Pfd. ...........................         425,002*
   116,035    8.25% QUIPS ..........................       2,918,280
    15,000  Portland General Electric,
              7.75%, Sinking Fund Pfd. .............       1,262,025*
     2,493  Potomac Electric Power Company,
              $2.44 Pfd., Series 1957 ..............          92,453*
    43,400  Public Service Company of Colorado,
              Capital Trust I,
              7.60% TOPrS ..........................       1,076,537
            Public Service Enterprise Group, Inc.:
    10,900    Enterprise Capital Trust I,
              7.44% TOPrS, Series A ................         264,380
    14,020    Public Service Electric & Gas
              Company,
              5.28% Pfd., Series E .................       1,136,601*


                       See Notes to Financial Statements.

                                        10
<PAGE>

--------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated
                                            PORTFOLIO OF INVESTMENTS (CONTINUED)
                                                        MAY 31, 2002 (UNAUDITED)
                                  ----------------------------------------------

                                                           VALUE
SHARES/$ PAR                                             (NOTE 1)
------------                                            ------------
PREFERRED SECURITIES (CONTINUED)
  FIXED RATE PREFERRED SECURITIES (CONTINUED)
         UTILITIES (CONTINUED)
            Puget Sound Energy, Inc.:
   123,435    7.45% Pfd., Series II ................    $  3,079,703*
    34,698    7.75% Sinking Fund Pfd. ..............       3,427,121*
            Reliant Energy, Inc.:
    45,000    Houston Light & Power,
              Capital Trust I,
              8.125% QUIPS .........................         965,700
$3,750,000    Houston Light & Power,
              Capital Trust II,
              8.257%, 2/1/37 Capital Security,
              Series B .............................       3,394,313
    55,982    REI Trust I,
              7.20% TOPrS, Series C ................       1,042,665
            Rochester Gas & Electric Corporation:
     5,060    4.10% Pfd., Series J .................         306,282*
    10,000    4.55% Pfd. Series M, Pvt. ............         648,100*
     4,030    4.75% Pfd., Series I .................         280,548*
            Sempra Energy:
            Pacific Enterprises,
    11,910    $4.50 Pfd. ...........................         803,151*
    10,000    $4.75 Pfd. ...........................         711,800*
            San Diego Gas & Electric,
    30,000    $1.70 Pfd ............................         742,650*
    15,000    $1.7625 Sinking Fund Pfd. ............         383,250*
            South Carolina Electric & Gas Company:
    14,502    5.125% Purchase Fund Pfd., Pvt. ......         579,717*
     6,318    6.00% Purchase Fund Pfd., Pvt. .......         293,250*
            Southern Union Company,
    60,800    Southern Union Financing I,
              9.48% TOPrS ..........................       1,552,528

                                                           VALUE
SHARES/$ PAR                                             (NOTE 1)
------------                                            ------------
            Virginia Electric & Power Company:
     1,665    $4.04 Pfd. ...........................    $    101,732*
     2,270    $4.20 Pfd. ...........................         144,190*
     1,573    $4.80 Pfd. ...........................         114,184*
     2,878    $6.98 Pfd. ...........................         300,837*
            TXU US Holdings Company,
$  750,000    TXU Electric Capital V,
              8.175% 1/30/37 Capital Security ......         757,249
     6,050  TransCanada PipeLines Ltd.,
              8.25% Pfd. ...........................         156,483
            XCEL Energy, Inc.:
    15,000    $4.08 Pfd., Series B .................         794,700*
    35,510    $4.11 Pfd., Series D .................       1,894,991*
    17,750    $4.16 Pfd., Series E .................         958,766*
    10,000    $4.56 Pfd., Series G .................         592,150*
    20,040    $4.10 Pfd., Series C .................       1,066,829*
                                                        ------------
            TOTAL UTILITIES FIXED RATE
             PREFERRED SECURITIES ..................      76,596,194
                                                        ------------
            TOTAL FIXED RATE
             PREFERRED SECURITIES ..................     166,162,272
                                                        ------------
  INVERSE FLOATING RATE PREFERRED-- 1.1%
        18  Premium Assets, Series A,
              Zurich Financial Reg Caps ............       2,151,472*
                                                        ------------
            TOTAL PREFERRED SECURITIES
             (Cost $184,740,829) ...................     188,724,856
                                                        ------------
DEBT SECURITIES-- 0.0% (Cost $73,800)
     3,000  Telephone & Data Systems, Inc.,
              7.60% Sr. Unsecured Notes,
              Series A .............................          74,490
                                                        ------------

                       See Notes to Financial Statements.

                                        11
<PAGE>

--------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2002 (UNAUDITED)
----------------------------------------------

                                                           VALUE
SHARES/$ PAR                                             (NOTE 1)
------------                                            ------------
OPTION CONTRACTS-- 0.4% (Cost $1,230,765)
     1,204  Put Options on U.S. Treasury
              Bond Futures,
              Expiring 08/24/2002 ..................    $    679,375
                                                        ------------
MONEY MARKET FUNDS-- 2.3% (Cost $4,548,024)
$4,548,024  Provident TempFund, 1.81% ..............       4,548,024
                                                        ------------
TOTAL INVESTMENTS (Cost $190,593,418**) ...   99.4%      194,026,745
OTHER ASSETS AND LIABILITIES (Net) ........    0.6         1,121,123
                                             ------     ------------
TOTAL NET ASSETS ..........................  100.0%     $195,147,868
                                             ======     ============
--------------
*    Securities eligible for the Dividends Received Deduction.
**   Aggregate cost of securities held.
***  Securities exempt from registration under Rule 144A of the Securities Act
     of 1933. These securities may by resold in transactions exempt from
     registration to qualified institutional buyers.
+    Non-income producing.

ABBREVIATIONS (Note 6):
CORTS   --  Corporate Backed Trust Securities
QUIDS   --  Quarterly Income Debt Securities
QUIPS   --  Quarterly Income Preferred Securities
STOPS   --  Semi-Annual Trust Originated Pass Through Securities
TIPS    --  Trust Issued Preferred Securities
TOPRS   --  Trust Originated Preferred Securities
PFD.    --  Preferred securities
PVT.    --  Private placement securities

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

                       See Notes to Financial Statements.

                                        12
<PAGE>

--------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated
                                             STATEMENT OF ASSETS AND LIABILITIES
                                                        MAY 31, 2002 (UNAUDITED)
                                  ----------------------------------------------
<TABLE>
<CAPTION>
<S>                                                             <C>             <C>
ASSETS:
   Investments, at value (Cost $190,593,418) (Note 1)
     See accompanying schedule ..........................                       $194,026,745
   Dividends and interest receivable ....................                          1,291,475
   Prepaid expenses .....................................                            158,216
                                                                                ------------
           Total Assets .................................                        195,476,436
LIABILITIES:
   Dividends payable to Common Shareholders .............       $137,630
   Investment advisory fee payable (Note 2) .............         93,367
   Professional fees payable ............................         23,401
   Accrued expenses and other payables ..................         74,170
   Accumulated undeclared distributions to Money Market
     Cumulative Preferred(TM) Stock (Note 5) ............        109,434
                                                                --------
           Total Liabilities ............................                            438,002
                                                                                ------------
   MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (700 SHARES
     OUTSTANDING) REDEMPTION VALUE (NOTE 5) .............                         70,000,000
                                                                                ------------
NET ASSETS AVAILABLE TO COMMON STOCK ....................                       $125,038,434
                                                                                ============
NET ASSETS AVAILABLE TO COMMON STOCK consist of:
   Undistributed net investment income (Note 1) .........                       $    524,509
   Accumulated net realized loss on investments
        sold (Note 1) ...................................                         (9,053,839)
   Unrealized appreciation on investments (Note 3) ......                          3,433,327
   Par value of Common Stock ............................                            112,639
   Paid-in capital in excess of par value
        of Common Stock .................................                        130,021,798
                                                                                ------------
           Total Net Assets Available to Common Stock ...                       $125,038,434
                                                                                ============

NET ASSET VALUE PER SHARE OF COMMON STOCK:
   Common Stock (11,263,852 shares outstanding) .........                       $      11.10
                                                                                ============
</TABLE>

                       See Notes to Financial Statements.

                                        13
<PAGE>

--------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 2002 (UNAUDITED)
-------------------------------------------------

<TABLE>
<CAPTION>
<S>                                                             <C>             <C>

INVESTMENT INCOME:
     Dividends ..........................................                       $ 5,302,446
     Interest ...........................................                         1,733,011
                                                                                -----------
          Total Investment Income .......................                         7,035,457

EXPENSES:
     Investment advisory fee (Note 2) ...................       $553,958
     Administration fee (Note 2) ........................         98,326
     Money Market Cumulative Preferred(TM) broker
        commissions and Auction Agent fees ..............        100,730
     Insurance expense ..................................         77,225
     Legal and audit fees ...............................         60,418
     Directors' fees and expenses (Note 2) ..............         36,078
     Shareholder servicing agent fees and expenses
        (Note 2) ........................................         25,204
     Custodian fees and expenses (Note 2) ...............         14,632
     Other ..............................................         22,004
                                                                --------
          Total Expenses ................................                           988,575
                                                                                -----------

NET INVESTMENT INCOME ...................................                         6,046,882
                                                                                -----------

REALIZED AND UNREALIZED LOSS ON INVESTMENTS
   (Notes 1 and 3):
     Net realized loss on investments sold
        during the period ...............................                        (1,482,272)
     Change in net unrealized depreciation
        of investments during the period ................                        (4,238,262)
                                                                                -----------

NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS .........                        (5,720,534)
                                                                                -----------

DISTRIBUTIONS TO MONEY MARKET CUMULATIVE
        PREFERRED(TM) STOCK SHAREHOLDERS (Note 5):
     From net investment income (including changes in
        accumulated undeclared distributions) ...........                          (589,099)
                                                                                -----------

NET DECREASE IN NET ASSETS TO COMMON STOCK RESULTING
   FROM OPERATIONS ......................................                       $  (262,751)
                                                                                ===========
</TABLE>
                       See Notes to Financial Statements.

                                        14
<PAGE>

--------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated
                                             STATEMENTS OF CHANGES IN NET ASSETS
                                  ----------------------------------------------
<TABLE>
<CAPTION>
                                                                        SIX MONTHS ENDED
                                                                          MAY 31, 2002              YEAR ENDED
                                                                           (UNAUDITED)          NOVEMBER 30, 2001
                                                                        ----------------        -----------------
<S>                                                                     <C>                       <C>
OPERATIONS:
     Net investment income ......................................       $  6,046,882              $ 12,287,081
     Net realized loss on investments sold during the period ....         (1,482,272)               (1,599,316)
     Change in net unrealized (depreciation) appreciation
        of investments during the period ........................         (4,238,262)               11,525,093
     Distributions to Money Market Cumulative Preferred(TM)
        Stock Shareholders from net investment income,
        including changes in accumulated undeclared
        distributions (Note 5) ..................................           (589,099)               (2,799,793)
                                                                        ------------              ------------
     Net (decrease) increase in net assets available to
        Common Stock resulting from operations ..................           (262,751)               19,413,065

DISTRIBUTIONS:
     Dividends paid from net investment income to Common Stock
        Shareholders ............................................         (5,343,730)               (9,113,985)
     Distributions paid from net realized capital gains to
        Common Stock Shareholders ...............................                 --                        --
                                                                        ------------              ------------

FUND SHARE TRANSACTIONS:
     Increase from Common Stock transactions (Note 4) ...........            852,418                   424,175
                                                                        ------------              ------------

NET (DECREASE) INCREASE IN NET ASSETS AVAILABLE TO
     COMMON STOCK FOR THE PERIOD ................................         (4,754,063)               10,723,255

NET ASSETS AVAILABLE TO COMMON STOCK:
     Beginning of period ........................................        129,792,497               119,069,242
                                                                        ------------              ------------
     End of period (including undistributed net investment
        income of $524,509 and $410,456, respectively) ..........       $125,038,434              $129,792,497
                                                                        ============              ============
</TABLE>

                       See Notes to Financial Statements.


                                        15
<PAGE>

--------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
------------------------------------------------------
     Contained below is per share operating  performance  data, total investment
returns,  ratios to  average  net  assets  and  other  supplemental  data.  This
information  has  been  derived  from  information  provided  in  the  financial
statements and market price data for the Fund's shares.

<TABLE>
<CAPTION>
                                                      SIX MONTHS
                                                        ENDED                              YEAR ENDED NOVEMBER 30,
                                                     MAY 31, 2002       ------------------------------------------------------------
                                                      (UNAUDITED)         2001        2000          1999          1998       1997
                                                     ------------       --------    --------      --------      --------   --------
<S>                                                     <C>             <C>         <C>           <C>           <C>        <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .........          $  11.60        $  10.68    $  11.50      $  13.50      $  13.53   $ 12.91
                                                        --------        --------    --------      --------      --------   --------
INVESTMENT OPERATIONS:
Net investment income ........................              0.54            1.10        1.18          1.14          1.14       1.10
Net realized and unrealized gain/(loss)
    on investments ...........................             (0.51)           0.89       (0.33)        (1.24)         0.17       0.87

DISTRIBUTIONS TO MMP* SHAREHOLDERS:
From net investment income ...................             (0.05)+         (0.25)+     (0.32)+       (0.25)+       (0.16)     (0.23)
From net realized capital gains ..............                --              --       (0.02)        (0.09)        (0.11)     (0.04)
                                                        --------        --------    --------      --------      --------   --------
Total from investment operations .............             (0.02)           1.74        0.51         (0.44)         1.04       1.70
                                                        --------        --------    --------      --------      --------   --------
DISTRIBUTIONS TO COMMON SHAREHOLDERS:
From net investment income ...................             (0.48)          (0.82)      (0.91)        (0.96)        (0.89)     (0.92)
From net realized capital gains ..............                --              --       (0.42)        (0.60)        (0.18)     (0.16)
                                                        --------        --------    --------      --------      --------   --------
Total distributions ..........................             (0.48)          (0.82)      (1.33)        (1.56)        (1.07)     (1.08)
                                                        --------        --------    --------      --------      --------   --------
Net asset value, end of period ...............          $  11.10+       $  11.60+   $  10.68+     $  11.50+     $  13.50   $  13.53
                                                        ========        ========    ========      ========      ========   ========
Market value, end of period ..................          $  11.95        $  11.27    $  9.563      $  10.50      $ 12.875   $ 12.875
                                                        ========        ========    ========      ========      ========   ========
Total investment return based on net
    asset value** ............................             (0.23)%         16.97%       5.88%        (2.99)%        8.29%     14.44%
                                                        ========        ========    ========      ========      ========   ========
Total investment return based on
    market value** ...........................             10.55%          26.95%       3.80%        (7.12)%        8.53%     17.16%
                                                        ========        ========    ========      ========      ========   ========
RATIOS TO AVERAGE NET ASSETS AVAILABLE
  TO COMMON STOCK SHAREHOLDERS:
     Operating expenses ......................              1.56%           1.61%       1.59%         1.53%         1.45%      1.48%
     Net investment income*** ................              8.59%           7.63%       7.93%         6.81%         6.37%      6.44%

---------------------------------------------
SUPPLEMENTAL DATA:++
     Portfolio turnover rate. ................                18%             41%         67%           64%           87%        74%
     Total net assets, end of period
        (in 000's) ...........................          $195,148        $200,228    $189,666      $199,060      $220,690   $221,230
     Ratio of operating expenses to
        Total Average Net Assets
        including MMP* .......................              1.00%           1.03%       1.00%         1.01%         0.99%      1.00%
</TABLE>

  *  Money Market Cumulative Preferred(TM) 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.
  +  Includes effect of additional distribution available to MMP* Shareholders
     ($0.00 per Common Share at May 2002, $0.02 per Common Share at November
     2001, $0.04 per Common Share at November 2000 and $0.05 per Common Share at
     November 1999). (See Note 5 to the Financial Statements.)
 ++  Information presented under heading Supplemental Data includes MMP*.

                       See Notes to Financial Statements.

                                        16
<PAGE>


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

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

<TABLE>
<CAPTION>

                                                  INVOLUNTARY             AVERAGE
                                    ASSET         LIQUIDATING              MARKET
             TOTAL SHARES          COVERAGE        PREFERENCE               VALUE
            OUTSTANDING (2)        PER SHARE      PER SHARE (1)       PER SHARE (1) & (2)
            ---------------        ---------      -------------       -------------------
<S>               <C>              <C>               <C>                  <C>
05/31/02*         700              $278,783          $100,000             $100,000
11/30/01          700               286,040           100,000              100,000
11/30/00          700               270,952           100,000              100,000
11/30/99          700               284,371           100,000              100,000
11/30/98          700               315,271           100,000              100,000
11/30/97          700               316,044           100,000              100,000

</TABLE>

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

                       See Notes to Financial Statements.

                                        17
<PAGE>

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

1.   SIGNIFICANT ACCOUNTING POLICIES

     Preferred  Income   Opportunity  Fund   Incorporated   (the  "Fund")  is  a
diversified,  closed-end  management  investment company organized as a Maryland
corporation  and is  registered  with the  Securities  and  Exchange  Commission
("SEC")  under the  Investment  Company Act of 1940,  as amended.  The  policies
described below are followed  consistently by the Fund in the preparation of its
financial statements in conformity with 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(TM)  Stock, and (iii) accumulated and unpaid
dividends on the outstanding Money Market Cumulative Preferred(TM) 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.  Investments in money market  instruments,  which
mature in 60 days or less,  are valued at amortized  cost.  Investments in Money
Market Funds are valued at the net asset value of such funds.

     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.

     As  required,  effective  December  1,  2001,  the  Fund  has  adopted  the
provisions  of the  AICPA  Audit and  Accounting  Guide,  AUDITS  OF  INVESTMENT
COMPANIES,  which require that the Fund amortize premium and accrete discount on
all fixed-income  securities which trade and are quoted on an "accrued interest"
basis.  Prior to December 1, 2001, the Fund did not amortize premium and accrete
discounts for these  securities.  Adopting these accounting  principles will not
affect the Fund's net asset value, but will

                                        18
<PAGE>




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

change  the  classification  of  certain  amounts  between  interest  income and
realized and unrealized gain/loss in the statement of operations and will change
the  classification of certain of the components of capital in the statements of
assets and  liabilities.  The adoption of this  principle is not material to the
financial statements.

<TABLE>
<CAPTION>

   AT NOVEMBER 30, 2001                  FOR THE SIX MONTHS ENDED MAY 31, 2002
  -----------------------               ---------------------------------------
    CHANGE IN AMORTIZED       CHANGE IN UNDISTRIBUTED      CHANGE IN ACCUMULATED      CHANGE IN NET UNREALIZED
  COST OF SECURITIES HELD      NET INVESTMENT INCOME         NET REALIZED GAIN      APPRECIATION OF INVESTMENTS
<S>                                 <C>                           <C>                       <C>
        $(65,752)                   $(6,787)                      $1,159                    $5,628
</TABLE>


     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 may enter 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(TM)  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.

                                        19
<PAGE>

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

     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 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 pays PFPC Inc.
a monthly  fee at an annual  rate of 0.10% of the  Fund's  average  monthly  net
assets.  PFPC Inc.  also  serves as the  Fund's  Common  Stock  servicing  agent
(transfer agent),  dividend-paying  agent and registrar and, as compensation for
PFPC Inc.'s services as such, the Fund pays PFPC Inc. a fee at an annual rate of
0.02% of the Fund's  average  monthly  net  assets  plus  certain  out-of-pocket
expenses.

     PFPC Trust Company  ("PFPC  Trust")  serves 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.

                                        20
<PAGE>

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

3.   PURCHASE AND SALES OF SECURITIES

     Cost of purchases  and  proceeds  from sales of  securities  for the period
ended May 31, 2002, excluding short-term investments, aggregated $29,770,510 and
$31,419,853, respectively.

     At May 31, 2002, aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost was  $8,343,542 and aggregate
gross unrealized  depreciation for all securities in which there is an excess of
tax cost over value was $4,910,215.

4.   COMMON STOCK

     At May 31,  2002,  240,000,000  shares of $0.01 par value Common Stock were
authorized.

     Common Stock transactions were as follows:
                                                              SIX MONTHS ENDED
                                                                   5/31/02
                                                            --------------------
                                                            SHARES       AMOUNT
                                                            ------       ------
Issued as reinvestment of dividends under the
      Dividend Reinvestment and Cash Purchase Plan ......   74,783      $852,419
                                                            ======      ========

5.   MONEY MARKET CUMULATIVE PREFERRED(TM) 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(TM) 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(TM) Stock are cumulative.

     The Fund is required to meet certain asset  coverage  tests with respect to
the Money Market Cumulative Preferred(TM) 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(TM)  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.

     Under  Emerging   Issues  Task  Force  (EITF)   promulgating   Topic  D-98,
CLASSIFICATION  AND  MEASUREMENT OF REDEEMABLE  SECURITIES,  which was issued on
July 19, 2001, preferred securities that are redeemable for cash or other assets
are to be  classified  outside  of  permanent  equity  to the  extent  that  the
redemption is at a fixed or  determinable  price and at the option of the holder
or upon the  occurrence of an event that is not solely within the control of the
issuer.  Subject to the guidance of the EITF, the Fund's Money Market Cumulative
Preferred(TM) Stock, which was previously classified as a

                                        21
<PAGE>

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

component of net assets, has been reclassified  outside of permanent equity (net
assets  available to common  stock) in the  accompanying  financial  statements.
Prior  year   amounts  have  also  been   reclassified   to  conform  with  this
presentation.  The impact of this reclassification  creates no change to the net
assets available to common shareholders.

     If the Fund allocates any net gains or income  ineligible for the Dividends
Received Deduction to shares of the Money Market Cumulative Preferred(TM) Stock,
the Fund is required to make additional distributions to Money Market Cumulative
Preferred(TM)  Stock  shareholders  or to pay a higher  dividend rate in amounts
needed to provide a return,  net of tax, equal to the return had such originally
paid distributions been eligible for the Dividends Received Deduction.  Prior to
November 30, 1999,  additional  distributions  were not reported as available to
Money Market Cumulative  Preferred(TM)  Stock until declared by the Fund's 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(TM) 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(TM)  Stock  shareholders may also trade shares in the secondary market
between auction dates.

     At May 31, 2002, 700 shares of Money Market Cumulative  Preferred(TM) Stock
were  outstanding at the annual rate of 1.59%.  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  rate,  fixed rate,  and inverse  floating 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 a significant percentage,  but not more than 25%, of its
assets in securities issued by companies in the banking industry. 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.

                                        22
<PAGE>

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

     The Fund may  invest  up to 25% of its  assets at the time of  purchase  in
securities rated below investment grade. These securities must be rated at least
either "Ba3" by Moody's Investors Service, Inc. or "BB-" by Standard & Poor's or
judged to be  comparable  in quality,  in either  case at the time of  purchase;
however,  these  securities must be issued by an issuer having a class of senior
debt rated investment grade outstanding.  This percentage  limitation was raised
from 15% by the Fund's Board of Directors at its regular  board meeting on April
19, 2002.

     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, Capital Securities,
and other similar or related  investments,  will be subject to the foregoing 20%
limitation to the extent that, in the opinion of the Fund's investment  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 swaptions.
As  in  the  case  of  when-issued  securities,   the  use  of  over-the-counter
derivatives,  such as interest rate swaps and swaptions,  may expose the Fund to
greater  credit,  operations,  and  market  value  risk  than is the  case  with
regulated, exchange traded futures and options. With the exception of purchasing
securities  on a  when-issued  or delayed  delivery  basis or lending  portfolio
securities,  these  transactions  are used  for  hedging  or  other  appropriate
risk-management  purposes or, under  certain  other  circumstances,  to increase
income.  As of May 31, 2002,  the Fund owned put options on U.S.  Treasury  bond
futures contracts. No assurance can be given that such transactions will achieve
their  desired  purposes or will result in an overall  reduction  of risk to the
Fund.

8.   SIGNIFICANT SHAREHOLDERS

     At May  31,  2002,  the  Commerce  Group,  Inc.  and its  affiliates  owned
approximately  34.6% of the Fund's  outstanding  Common Stock,  according to the
Commerce Group, Inc. annual report to the Securities and Exchange  Commission on
Form 10-K for 2001.

                                        23
<PAGE>

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

DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN

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

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

     Plan  participants are not subject to any charge for reinvesting  dividends
or capital gains  distributions.  Each Plan participant  will,  however,  bear a
proportionate  share of  brokerage  commissions  incurred  with  respect to PFPC
Inc.'s open market purchases in connection with the reinvestment of dividends or
capital  gains  distributions.  For  the  period  ended  May 31,  2002,  $258 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

                                        24
<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.

                                        25
<PAGE>

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

MEETING OF SHAREHOLDERS

     On April 19, 2002,  the Fund held its Annual Meeting of  Shareholders  (the
"Meeting") to (1) elect two Directors of the Fund ("Proposal 1"), and (2) ratify
the  selection of KPMG LLP as  independent  auditors for the Fund for the fiscal
year ending  November 30, 2002  ("Proposal 2"). The results of each proposal are
as follows:

PROPOSAL 1: ELECTION OF DIRECTORS.
NAME                                    FOR                           WITHHELD
------                                  ----                          --------
COMMON STOCK
   Robert T. Flaherty ..........      10,633,470                       114,011

PREFERRED STOCK
   Morgan Gust .................             700                            --

     Martin Brody,  Donald F. Crumrine,  David Gale, and Robert F. Wulf continue
to serve in their capacities as Directors of the Fund.

PROPOSAL 2: RATIFY THE SELECTION OF KPMG LLP AS INDEPENDENT AUDITORS.
                                        FOR           AGAINST         ABSTAINED
                                       ----           -------         ---------
Common Stock and Preferred Stock
   (voting together as a
   single class)
Voted ..........................     10,580,490        34,319          133,371



                                        26
<PAGE>

                      [This page intentionally left blank]
<PAGE>

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

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

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

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

                                 [LOGO OMITTED]
                        Preferred Income Opportunity Fund

                                   Semi-Annual
                                     Report

                                  May 31, 2002

                        web site: www.preferredincome.com

</TEXT>
</DOCUMENT>
