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<SEC-DOCUMENT>0000935069-03-000074.txt : 20030128
<SEC-HEADER>0000935069-03-000074.hdr.sgml : 20030128
<ACCEPTANCE-DATETIME>20030128135602
ACCESSION NUMBER:		0000935069-03-000074
CONFORMED SUBMISSION TYPE:	N-30D
PUBLIC DOCUMENT COUNT:		1
CONFORMED PERIOD OF REPORT:	20021130
FILED AS OF DATE:		20030128
EFFECTIVENESS DATE:		20030128

FILER:

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

	FILING VALUES:
		FORM TYPE:		N-30D
		SEC ACT:		1940 Act
		SEC FILE NUMBER:	811-06495
		FILM NUMBER:		03527521

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

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


Dear Shareholder:

     The financial markets presented investors with myriad opportunities to make
or lose money during the Preferred Income  Opportunity Fund's recently completed
fiscal year.  The Fund by and large managed to avoid both and ended up producing
a rather  ho-hum  total  return of 0.6% on net asset value  ("NAV").  The market
thought more highly of the Fund's performance; during the same period, the total
return on market  price  was  12.6% as the Fund  went from  trading  at a slight
discount from NAV to a significant premium.

     Selecting the appropriate  yardsticks to evaluate the Fund's performance on
NAV is a challenging task.  Investment returns on preferred securities generally
do not  correlate  well with  returns on other  broad asset  classes.  (This is,
incidentally,  one very  good  reason to  include  preferred  securities  in any
diversified  investment  portfolio!) As the table below  demonstrates,  over the
course of the Fund's fiscal year,  high quality  investments  (U.S.  Treasuries)
performed  well,  while  deeply  subordinated   securities  (common  stocks)  or
investments of lower quality ("High Yield" or junk bonds) fared poorly.

- --------------------------------------------------------------------------------
                   TOTAL RETURNS ON NET ASSET VALUE, INCLUDING
                       REINVESTMENT OF INCOME RECEIVED(1)
                                                          TWELVE MONTHS ENDED
                                                           NOVEMBER 30, 2002
                                                          -------------------
      Preferred Income Opportunity Fund ..............           +0.6%
      Lipper US Govt. Funds ..........................           +8.8%
      Lipper Corp Debt BBB Rated Funds ...............           +3.6%
      Lipper High Yield Funds ........................           -6.1%
      S&P 500 Index ..................................          -16.5%

- ----------------
(1) Source - Lipper Inc.
- --------------------------------------------------------------------------------

     When U.S.  Government  Securities  substantially  outperform  other  market
segments,  as they did last year,  one would  expect a  leveraged  portfolio  of
preferred securities employing a U.S. Treasury based hedge, such as the Fund, to
be down significantly. When viewed against this backdrop, the return on the Fund
looks much more  respectable.  Over the long term,  the  results  continue to be
excellent, as total returns on the Fund's NAV since its February  1992 inception
were 9.3% compounded annually.


<PAGE>


     Both  traditional  preferred  stocks  (those  eligible  for  the  dividends
received deduction - "DRD") and hybrid, or fully-taxable,  preferred  securities
underperformed  the Treasury market in fiscal year ended November 30, 2002. This
result is typical  during  periods of  weakening  corporate  balance  sheets and
credit  rating  downgrades,  as  investors  demand  larger  premiums to purchase
securities with a credit risk component.  The Fund's  performance has held up in
this  environment  for several  reasons.  The first is our emphasis on intensive
credit research.  Although not perfect, our research has helped us avoid most of
the credit problems which have impacted the preferred  market,  and we have also
uncovered several  undervalued  issues.  Next is the Fund's ability to alter the
portfolio  allocation  among the different  types of preferred  securities  when
market  relationships  warrant  such a move (as was the case in  2002).  Finally
there is the hedging  strategy.  By purchasing put options on U.S. Treasury Bond
futures, the Fund's loss on its hedge position is limited to the amount paid for
the options.

     The Fund owns  securities in two struggling  companies which were forced to
file for bankruptcy during the year. Conseco, Inc. and Farmland Industries, Inc.
represented our losses due to defaults.  These two investments combined to lower
the total  return on the Fund by about 0.8% in fiscal  year ended  November  30,
2002 and are now carried on the Fund's balance sheet at very reduced values.  We
continue to hold both securities in the hope,  especially in Farmland's case, of
meaningful recovery as the bankruptcy proceedings evolve.

     Despite the 5:1 disparity  between  credit rating  downgrades  and upgrades
across corporate America, the average credit quality in the Fund's portfolio has
declined only  slightly  since the end of the prior year.  Having  strategically
lowered our exposure to the utility  industry  over the past several  years,  we
avoided much of the  downgrade  pain  following  the  collapse of Enron.  We are
gratified that the utility  industry is now taking  actions to shore-up  balance
sheets,  streamline operations,  and extricate itself from non-core investments.
Thus, despite the downward trend in credit ratings, we are cautiously optimistic
that we are seeing a positive  turnaround  in the true  credit  strength of this
sector.

     The Fund continues to reap the benefits of low short-term  interest  rates.
The dividend  rates paid by the Fund on its Money Market  Preferred(TRADE  MARK)
Stock were between 1.5% and 2% during 2002.

     The combination of low cost MMP(TRADE MARK) and respectable  returns on our
preferreds  enabled the Fund to increase  the  monthly  dividend  7.4% this past
June,  from $0.068 to $0.073 per share of common  stock.  More good news came in
December,  when the Board of Directors declared an extra cash dividend of $0.107
per share.

     The following  graph updates the history of the Fund's  dividend  income to
reflect the December distribution.  The strategies employed by the Fund continue
to work very effectively.  Income available to shareholders (the solid line) has
not been adversely  impacted by declines in long term interest rates as measured
by U.S. Treasury Bonds (the dotted line).


                                        2
<PAGE>

           PREFERRED INCOME OPPORTUNITY FUND MONTHLY DIVIDEND INCOME
         On a 1,000 Share ($12,500) Initial Investment through 12/31/02

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

        MONTHLY     30-YEAR
        DIVIDEND    TREASURY
DATE     INCOME      YIELD

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-00   $88.45      6.49%
FEB-00   $88.45      6.15%
MAR-00   $88.45      5.84%
APR-00   $88.45      5.96%
MAY-00   $88.45      6.02%
JUN-00   $88.45      5.89%
JUL-00   $88.45      5.79%
AUG-00   $88.45      5.67%
SEP-00   $88.45      5.88%
OCT-00   $88.45      5.79%
NOV-00   $88.45      5.59%
DEC-00   $88.45      5.46%
JAN-01   $88.45      5.53%
FEB-01   $88.45      5.34%
MAR-01   $88.45      5.46%
APR-01   $88.45      5.77%
MAY-01   $88.45      5.77%
JUN-01   $88.45      5.74%
JUL-01   $88.45      5.50%
AUG-01   $88.45      5.37%
SEP-01   $88.45      5.41%
OCT-01   $88.45      4.88%
NOV-01   $88.45      5.26%
DEC-01   $88.45      5.47%
JAN-02   $88.97      5.43%
FEB-02   $88.97      5.41%
MAR-02   $88.97      5.80%
APR-02   $88.97      5.59%
MAY-02   $88.97      5.61%
JUN-02   $95.52      5.52%
JUL-02   $95.52      5.30%
AUG-02   $95.52      4.93%
SEP-02   $95.52      4.66%
OCT-02   $95.52      5.00%
NOV-02   $95.52      5.04%
DEC-02   $95.52      4.78%
JAN-03   $96.47
FEB-03   $96.47

     We  encourage  you to read the  Questions  and Answers  section on the next
page, which contains additional important information on the Fund's strategy and
operations.

     This letter marks a transition  for the Fund. On October 18th, Bob Flaherty
retired as  President  and Chairman of the Board upon  turning  sixty-five.  You
shouldn't  notice much change,  though,  since just about  everything we know we
learned from Bob, and we've been  planning the  transition  for some time.  And,
given his  investment in the Fund, you can bet he'll never let us stray from the
things which have made the Fund and its sister  Preferred Income Fund two of the
top performing  preferred funds in the market.  Thanks, Bob, we're going to miss
having you around all the time!


     Sincerely,

     /S/ DONALD F. CRUMRINE                               /S/ ROBERT M. ETTINGER

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


                                        3
<PAGE>

                               QUESTIONS & ANSWERS

WHY WAS THERE AN EXTRA YEAR-END DIVIDEND?

     In 2002, the income generated by the preferred  securities in the portfolio
held up well despite the increased  allocation to DRD-eligible  securities.  The
very low cost of leverage provided a significant  benefit to the Fund. The rates
paid by the Fund on its  outstanding  Money  Market  Cumulative  Preferred(TRADE
MARK) stock,  which are reset every 49 days through an auction process,  hovered
between 1.5% and 2% throughout the year. The  persistently  low cost of leverage
helped the Fund to accumulate  income in excess of the regular monthly  dividend
rate,  and despite the dividend  increase in June, the Fund still ended the year
with some leftover income.

COULD YOU REMIND ME AGAIN ABOUT HOW THE HEDGE IS SUPPOSED TO WORK?

     The Fund attempts to protect against the risk of a significant  rise in the
overall level of interest  rates.  It has done so historically by purchasing put
options on Treasury Bond futures contracts. The Fund is also authorized, subject
to limitations,  to purchase  over-the-counter options so as to be a "fixed rate
payer" in an interest  rate swap  (a/k/a  "pay-fixed  swaption").  Both types of
hedging instruments would expire worthless if rates either fall or do not change
much.  In many ways,  this is  analogous to paying a cost of  insurance.  In the
event of a significant  increase in interest rates,  however, put options and/or
pay-fixed swaptions would be expected to appreciate in value.

     Such hedge  value  appreciation  would  cushion the drop in the Fund's NAV.
Further, any gains on hedging could be reinvested in additional shares of income
producing securities.  This underlies the Fund's strategy of being able to raise
the dividend in the event of a significant  increase in interest rates.  (Please
see Note 7 to the accompanying  Financial  Statements for an explanation of some
of the risks of these hedging strategies.)

DOES THE FUND HOLD MANY "CUSHIONED" PREFERRED SECURITIES?

     As a general rule, we don't like to hold so called "cushioned"  preferreds.
These are issues which have a relatively  high dividend  rate, but not much time
before  the issuer may call it away,  usually at a much lower  price.  Cushioned
preferreds offer a high current yield but the actual return usually turns out to
be much,  much  lower.  In effect,  this type of  investment  simply  converts a
portion of principal into income. In a fund, the difference  between the current
and "effective"  yield  ultimately  appears as a decline in the net asset value.
Cushioned  issues may boost a fund's yield for a short while, but it cannot last
long, and there are a number of undesirable  results.  We try to own issues that
are not as likely to get called, so that income from our investments is somewhat
more predictable.

WERE THERE ANY SIGNIFICANT CHANGES TO THE PORTFOLIO'S COMPOSITION DURING
THE YEAR?

     As the charts below indicate, a small portion of the hybrid preferreds, and
a  larger  portion  of the ARP  holdings  were  sold in  favor  of  traditional,
DRD-eligible fixed rate preferreds.  We sacrificed a little yield by selling the
hybrids,  and picked up some  yield by selling  the ARPs,  and on  balance,  the
portfolio's  income was pretty stable.  These moves were made because we felt we
were acquiring  undervalued  securities.  If we are right,  and the relationship
corrects itself,  we'll be able to revert back to our beginning  positions,  but
with more money in the Fund's pocket,  which ultimately will mean more income to
the shareholders.


                                        4
<PAGE>

     We also  allocated  a small  portion  of the  portfolio  to  common  stocks
recently.  The  Fund  may  invest  up to 15% of its  assets  in  common  stocks,
although,  under present  conditions,  we do not anticipate closely  approaching
that number.

                       PREFERRED INCOME OPPORTUNITY FUND

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

11/30/2001

ADJUSTABLE RATES                       14.5%
TRADITIONAL FIXED RATES                50.9%
HYBRID PREFERREDS                      29.8%
OTHER DEBT & EQUITY INVESTMENTS         1.6%
CASH, HEDGE & OTHER                     3.2%

11/30/2002

ADJUSTABLE RATES                        8.6%
TRADITIONAL FIXED RATES                59.5%
HYBRID PREFERREDS                      22.5%
OTHER DEBT & EQUITY INVESTMENTS         2.9%
CASH, HEDGE & OTHER                     6.5%

HOW WOULD CERTAIN PROPOSED TAX CHANGES IMPACT THE FUND?

     One idea  getting a great deal of airplay  recently is the  elimination  of
double  taxation of  corporate  dividends.  The Bush  Administration's  recently
announced proposal recommends  eliminating the taxation of dividends received by
individual taxpayers. This is similar to how dividends were treated prior to the
mid-1980s, although such dividends were subject to a dollar limit for individual
taxpayers  back then.  The  dividends on  DRD-eligible  preferreds in the Fund's
portfolio  appear to  qualify  for the tax break  under  the  President's  plan.
However, the fully taxable, i.e., "hybrid" preferreds held by the Fund would NOT
appear to benefit.

     We will  continue to monitor  developments  as various tax  proposals  move
through the legislative process.

DID THE MONEY MARKET  CUMULATIVE  PREFERRED(TRADE  MARK) STOCK GET UPGRADED THIS
YEAR?

     Yes!  FitchRatings,  one of the two  rating  services  that rate the Fund's
MMP(TRADE  MARK),  conducted  a review of the Fund and  raised its rating on the
MMP(TRADE  MARK) from AA+ to AAA. We appreciate  the vote of confidence and hope
the market rewards the Fund with lower MMP(TRADE MARK) cost as we go forward.

WHAT HAS HAPPENED TO THE CREDIT QUALITY OF THE FUND'S  INVESTMENTS  WITH SO MANY
COMPANIES BEING DOWNGRADED RECENTLY?

     Despite a "banner year" for Moody's and S&P downgrades,  the average rating
on the Fund's portfolio  declined only slightly over the year. At year-end,  the
securities  held by the Fund had an average  rating of low BBB.  This is because
the  Fund  was  over-weighted  in  the  issuers  that  escaped   downgrades  and
under-weighted in the names that were downgraded.


                                        5
<PAGE>



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

     The following  chart shows the  relationship  of the Fund's market price to
its Net Asset Value. Throughout almost the entire recent year, the Fund's shares
traded  at a  premium  to NAV.  We  think  this  mainly  represents  shareholder
preference  for  anything  that (a) pays a high level of income and (b) is not a
typical common stock.

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

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

DATE        PREMIUM/DISCOUNT

02/21/92         7.26%
03/06/92         8.74%
04/03/92         5.38%
05/01/92         5.46%
06/05/92         1.81%
07/03/92         4.75%
08/07/92         6.13%
09/04/92         4.09%
10/02/92         6.20%
11/06/92         1.80%
12/04/92         6.30%
01/01/93         6.21%
02/05/93         4.83%
03/05/93         4.73%
04/02/93         5.14%
05/07/93         5.13%
06/04/93         4.97%
07/02/93         4.72%
08/06/93         2.12%
09/03/93         3.31%
10/01/93         2.14%
11/05/93         0.00%
12/03/93        -0.76%
01/07/94        -0.36%
02/04/94        -3.23%
03/04/94        -3.92%
04/01/94        -5.56%
05/06/94        -7.75%
06/03/94        -6.83%
07/01/94        -4.09%
08/05/94        -2.21%
09/02/94        -2.04%
10/07/94       -13.22%
11/04/94        -7.86%
12/02/94        -4.02%
01/06/95        -0.10%
02/03/95        -1.19%
03/03/95        -2.97%
04/07/95        -3.41%
05/05/95        -5.76%
06/02/95        -4.81%
07/07/95        -6.90%
08/04/95        -9.73%
09/01/95        -7.06%
10/06/95        -7.18%
11/03/95       -12.32%
12/01/95       -10.14%
01/05/96       -11.97%
02/02/96       -12.33%
03/01/96       -11.24%
04/05/96       -13.15%
05/03/96       -12.57%
06/07/96       -12.55%
07/05/96       -10.79%
08/02/96        -8.76%
09/06/96        -8.36%
10/04/96        -8.76%
11/01/96        -7.96%
12/06/96        -7.92%
01/03/97        -6.93%
02/07/97        -6.23%
03/07/97        -5.81%
04/04/97        -5.73%
05/02/97        -6.72%
06/06/97        -6.15%
07/04/97        -4.98%
08/01/97        -2.73%
09/05/97        -5.80%
10/03/97        -2.92%
11/07/97        -4.42%
12/05/97        -4.06%
01/02/98        -1.71%
02/06/98        -5.30%
03/06/98        -4.73%
04/03/98        -6.82%
05/01/98        -6.18%
06/05/98        -6.43%
07/03/98        -5.75%
08/07/98        -4.72%
09/04/98        -6.18%
10/02/98        -5.54%
11/06/98        -3.96%
12/04/98        -4.13%
01/01/99        -1.96%
02/05/99        -6.10%
03/05/99        -8.46%
04/02/99        -7.24%
05/07/99       -10.15%
06/04/99       -10.07%
07/02/99        -5.32%
08/06/99        -4.64%
09/03/99       -10.57%
10/01/99        -7.70%
11/05/99       -11.92%
12/03/99        -9.70%
01/07/00        -0.28%
02/04/00        -9.23%
03/03/00       -10.21%
04/07/00       -10.47%
05/05/00        -3.85%
06/02/00        -9.05%
07/07/00        -9.09%
08/04/00        -9.12%
09/01/00       -11.05%
10/06/00        -8.96%
11/03/00        -7.39%
12/01/00        -9.28%
01/05/01        -4.11%
02/02/01        -5.28%
03/02/01        -1.09%
04/06/01         2.00%
05/04/01        -2.18%
06/01/01        -3.45%
07/06/01        -3.07%
08/03/01         0.35%
09/07/01        -3.53%
10/05/01        -4.33%
11/02/01         0.17%
12/07/01        -0.09%
01/04/02         2.97%
02/01/02         4.44%
03/01/02         5.95%
04/05/02         2.48%
05/03/02         8.39%
06/07/02         8.32%
07/05/02        12.38%
08/02/02        13.72%
09/06/02        10.02%
10/04/02        11.41%
11/01/02         7.33%
12/06/02         9.72%
12/27/02        15.58%

     Once again, we want to put in a plug for  WWW.PREFERREDINCOME.COM,  the web
site for the Preferred  Income Group of closed-end  funds.  You can find current
information  there on  market  prices,  net  asset  values,  discounts,  yields,
dividends, performance and portfolio holdings, as well as news items and general
information about the Fund. We expect to improve the site from time to time, but
we need to know what would be helpful to you. Please let us hear from you.

     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  cannot 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
                                  ----------------------------------------------

                                 TOTAL                                DIVIDEND
                               DIVIDENDS  NET ASSET      NYSE       REINVESTMENT
                                 PAID       VALUE    CLOSING PRICE    PRICE (1)
                               ---------  ---------  -------------  ------------
December 31, 2001 .........     $0.136     $11.49       $11.85         $11.49
January 31, 2002 ..........      0.068      11.43        12.05          11.49
February 28, 2002 .........      0.068      11.33        12.00          11.40
March 31, 2002 ............      0.068      11.24        11.69          11.24
April 30, 2002 ............      0.068      11.21        11.95          11.26
May 31, 2002 ..............      0.068      11.10        11.95          11.16
June 30, 2002 .............      0.073      11.15        12.19          11.78
July 31, 2002 .............      0.073      11.05        12.48          11.86
August 31, 2002 ...........      0.073      11.33        12.55          11.92
September 30, 2002 ........      0.073      11.30        12.40          11.78
October 31, 2002 ..........      0.073      10.71        11.58          10.85
November 30, 2002 .........      0.073      10.78        11.72          11.13
December 31, 2002 .........      0.180      10.72        12.21          11.60

- ---------------------------
(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
NOVEMBER 30, 2002
- ----------------------------------------------

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

PREFERRED SECURITIES -- 91.5%
   ADJUSTABLE RATE PREFERRED SECURITIES -- 8.6%
          BANKING -- 8.1%
    35,000   Citigroup, Inc.,
               Series Q, Adj. Rate Pfd. ...  $    857,500*
    75,000   Cobank,
               Adj. Rate Pfd., Pvt. 144A***     4,064,625*
             J.P. Morgan Chase & Co.:
    79,825     Series A, Adj. Rate Pfd. ...     6,066,700*
    16,000     Series L, Adj. Rate Pfd. ...     1,336,000*
   134,200     Series N, Adj. Rate Pfd. ...     3,187,250*
                                             ------------
             TOTAL BANKING ADJUSTABLE RATE
              PREFERRED SECURITIES ........    15,512,075
                                             ------------
          FINANCIAL SERVICES -- 0.2%
    10,500   Bear Stearns Companies, Inc.,
               Series A, Adj. Rate Pfd. ...       464,625*
                                             ------------
          UTILITIES -- 0.3%
    12,265   Northern Indiana Public
               Service Company,
               Series A, Adj. Rate Pfd. ...       545,792*
                                             ------------
             TOTAL ADJUSTABLE RATE
              PREFERRED SECURITIES ........    16,522,492
                                             ------------
   FIXED RATE PREFERRED SECURITIES -- 82.0%
          BANKING -- 14.0%
       165   ABN AMRO North America, Inc.,
               6.46% Pfd., Pvt., 144A*** ..       159,428*
             BancWest Corporation:
$4,350,000     First Hawaiian Capital I,
               8.343% 7/1/27 Capital Security,
               Series B ...................     4,683,493
             Citigroup, Inc.:
   130,314     5.864% Pfd., Series M ......     5,933,848*
    10,500     6.213% Pfd., Series G ......       503,632*
     8,650     6.231% Pfd., Series H ......       418,574*
$  500,000   Comerica (Imperial) Capital Trust I,
               Series B,
               9.98% 12/31/26
               Capital Security ...........       561,505
             Deutsche Bank:
$  660,000     BT Preferred Capital Trust II,
               7.875% 2/25/27
               Capital Security ...........       680,153

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

     1,000   Firstar Realty LLC,
               8.875% Pfd., REIT,
               Pvt., 144A*** ..............  $  1,159,900
             GreenPoint Financial Corporation:
$3,349,000     GreenPoint Capital Trust I,
               9.10% 6/1/27 Capital Security    3,433,646
    24,900   HSBC USA, Inc.,
               $2.8575 Pfd. ...............     1,155,360*
$2,750,000   Keycorp Institutional Capital B,
               8.25% 12/15/26
               Capital Security ...........     2,947,244
             Wachovia Corporation:
$  500,000     First Union Capital II,
               7.95% 11/15/29
               Capital Security ...........       560,778
$2,575,000     First Union Institutional
               Capital I,
               8.04% 12/1/26
               Capital Security ...........     2,775,219
$1,885,000     First Union Institutional
               Capital II,
               7.85% 1/1/27 Capital Security    2,002,520
                                             ------------
             TOTAL BANKING FIXED RATE
              PREFERRED SECURITIES ........    26,975,300
                                             ------------
          FINANCIAL SERVICES -- 16.1%
             Bear Stearns Companies, Inc.:
   164,620     5.49% Pfd., Series G .......     6,776,582*
    51,573     5.72% Pfd., Series F .......     2,195,978*
             Household International, Inc.:
    15,000     $4.30 Pfd. .................     1,348,350*
    55,000     7.50% Pfd., Series 2001-A ..     1,303,500*
    86,000     7.60% Pfd. .................     2,060,130*
             Lehman Brothers Holdings, Inc.:
    83,150     5.67% Pfd., Series D .......     3,479,412*
   177,505     5.94% Pfd., Series C .......     7,724,130*
   113,400   SLM Corporation,
               6.97% Pfd. Series A ........     5,968,809*
                                             ------------
             TOTAL FINANCIAL SERVICES FIXED
              RATE PREFERRED  SECURITIES ..    30,856,891
                                             ------------
          INSURANCE -- 8.6%
             AON Corporation:
$1,550,000     AON Capital Trust A,
               8.205% 1/1/27
               Capital Security ...........     1,339,184


                        See Notes to Financial Statements.

                                         8
 <PAGE>


- --------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated
                                            PORTFOLIO OF INVESTMENTS (CONTINUED)
                                                               NOVEMBER 30, 2002
                                  ----------------------------------------------

                                                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 ................  $      6,187+
    25,000     Conseco Financing Trust VI,
               9.00% TOPrS ................         7,750+
    17,600     Conseco Financing Trust I,
               9.16% TOPrS ................         5,280+
     1,250   Fortis Funding Trust,
               7.68% Pfd., Pvt. 144A*** ...     1,376,369*
    11,000   Hartford Cap I,
               7.70% Pfd., Series A .......       278,905
             SAFECO Corporation:
 $ 500,000     SAFECO Capital Trust I,
               8.072% 7/15/37
               Capital Security ...........       481,765
             The St. Paul Companies, Inc.:
$4,895,000     MMI Capital Trust I,
               7.625% 12/15/27
               Capital Security,
               Series B ...................     4,599,538
             UnumProvident Corporation:
$5,889,000     Provident Financing Trust I,
               7.405% 3/15/38
               Capital Security ...........     4,522,546
     4,000   Zurich Financial Reg. Capital I,
               6.01% Pfd., Pvt. 144A*** ...     3,954,040*
                                             ------------
             TOTAL INSURANCE FIXED RATE
              PREFERRED SECURITIES ........    16,571,564
                                             ------------
          OIL AND GAS -- 4.6%
    17,200   Anadarko Petroleum Corporation,
               5.46% Pfd. .................     1,488,488*
    45,100   Apache Corporation,
               5.68% Pfd., Series B .......     4,039,382*
     3,200   EOG Resources, Inc.,
               7.195% Pfd., Series B ......     3,399,424*
                                             ------------
             TOTAL OIL AND GAS FIXED RATE
              PREFERRED SECURITIES ........     8,927,294
                                             ------------

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

          MISCELLANEOUS INDUSTRIES-- 2.8%
    13,600   E.I. Du Pont de Nemours
               and Company,
               $4.50 Pfd., Series B .......  $  1,147,976*
    36,200   Farmland Industries, Inc.,
               8.00% Pfd., Pvt., 144A*** ..       301,727*+
    20,500   Ocean Spray Cranberries, Inc.,
               6.25% Pfd., Pvt., 144A*** ..     1,670,443*
    26,000   Touch America Holdings,
               $6.875 Pfd. ................     1,635,010*
     9,520   Viad Corporation,
               $4.75 Sinking Fund Pfd. ....       614,992*
                                             ------------
             TOTAL MISCELLANEOUS
              INDUSTRIES FIXED RATE
              PREFERRED SECURITIES ........     5,370,148
                                             ------------
          UTILITIES -- 35.9%
$  750,000   Alabama Power Capital Trust V,
               5.50% 10/1/42 Capital Security     748,841
             Alabama Power Company:
     4,980     4.60% Pfd. .................       363,017*
     6,485     4.72% Pfd. .................       485,046*
       250     4.92% Pfd. .................        19,492*
   243,400     5.20% Pfd. .................     5,258,657*
     4,000   Appalachian Power Company,
               5.92% Sinking Fund Pfd. ....       369,620*
    23,750   Avista Corporation,
               $6.95 Sinking Fund Pfd.,
               Series K ...................     2,086,437*
    22,675   Baltimore Gas & Electric Company,
               6.99% Pfd., Series 1995 ....     2,377,814*
    10,000   Boston Edison Company,
               4.78% Pfd. .................       751,200*
    13,395   Carolina Power and Light Company,
               $5.44 Pfd. .................     1,086,870*
             CenterPoint Energy, Inc.:
    45,000     Houston Light & Power,
               Capital Trust I,
               8.125% QUIPS ...............       802,125
$3,750,000     Houston Light & Power,
               Capital Trust II,
               8.257%, 2/1/37 Capital Security,
               Series B ...................     2,973,375
    55,982     REI Trust I,
               7.20% TOPrS, Series C ......       853,725


                        See Notes to Financial Statements.

                                         9
 <PAGE>


- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2002
- ----------------------------------------------

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

PREFERRED SECURITIES (CONTINUED)
   FIXED RATE PREFERRED SECURITIES (CONTINUED)
          UTILITIES (CONTINUED)
     1,628   Central Hudson Gas &
               Electric Corporation,
               4.35% Pfd., Series D, Pvt. .  $    110,631*
             Central Illinois Light Company:
    10,000     4.64% Pfd. .................       709,050*
    10,000     5.85% Sinking Fund Pfd. ....       927,150*
    11,250   Central Vermont Public Service
               Corporation,
               8.3% Pfd., Pvt. Sinking
               Fund Pfd. ..................     1,114,706*
             Commonwealth Edison Company:
     5,000     COMED Financing I, 8.48% Pfd.      127,225
     5,300   Connecticut Light and
               Power Company,
               $3.24 Pfd. .................       256,599*
             Duke Energy Corporation:
     4,719     4.50% Pfd., Series C .......       322,850*
    13,400     6.75% Pfd., Series X,
               Sinking Fund Pfd. ..........     1,340,469*
    18,700     7.85% Pfd., Series S .......     1,940,966*
     5,000   Energy East Capital Trust I,
               8.25% TOPrS ................       129,600
             Entergy Arkansas, Inc.:
     1,050     $6.08 Pfd. .................        83,769*
     2,840     4.56% Pfd. .................       175,498*
     3,050     4.56% Pfd., Series 1965 ....       188,475*
    13,500     7.40% Pfd. .................     1,310,850*
       150     7.80% Pfd. .................        15,065*
     2,441   Entergy Gulf States, Inc.,
               7.56% Pfd. .................       224,511*
             Entergy Louisiana, Inc.:
       299     5.16% Pfd. .................        20,760*
     3,771     7.36% Pfd. .................       361,488*
   175,000     8.00% Pfd., Series 92 ......     4,258,625*
     8,500   Entergy Mississippi, Inc.,
               7.44% Pfd. .................       839,758*

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

             Florida Power & Light Company:
     4,654     4.35% Pfd., Series E, Pvt. .   $   301,347*
     4,000     4.50% Pfd. .................       267,940*
     7,500     6.75% Pfd., Series U .......       770,663*
             Hawaiian Electric Company, Inc.:
    23,600     HECO Capital Trust I,
               8.05% QUIPS ................       598,378
     5,291   Idaho Power Co.,
               7.68% Pfd., Series 1 .......       547,010*
    30,500   Indianapolis Power &
               Light Company,
               5.65% Pfd. .................     2,123,258*
     4,500   Kentucky Utilities Company,
               6.53% Pfd. .................       461,565*
             Mississippi Power Company:
    15,000     6.32% Pfd. .................       374,475*
     5,087     7.00% Pfd. .................       516,610*
    41,500   Monongahela Power Company,
               $7.73 Pfd., Series L .......     3,721,305*
             Northern States Power Company:
    20,000     NSP Financing I, 7.875% Pfd.       453,500
     2,500   Ohio Power Company,
               5.90% Sinking Fund Pfd. ....       226,238*
             PECO Energy Company:
     1,100     $4.30 Pfd., Series B .......        71,456*
     5,000     $4.40 Pfd., Series C .......       332,350*
     7,500     $7.48 Pfd. .................       800,625*
       570   PSI Energy, Inc.,
               4.32% Pfd. .................         9,972*
             PacifiCorp:
     6,458     $4.72 Pfd. .................       455,354*
   116,035     8.25% QUIPS ................     2,941,487
             Pacific Enterprises:
    11,910     $4.50 Pfd. .................       799,101*
    13,510     $4.75 Pfd. .................       956,846*


                        See Notes to Financial Statements.

                                        10
 <PAGE>


- --------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated
                                            PORTFOLIO OF INVESTMENTS (CONTINUED)
                                                               NOVEMBER 30, 2002
                                  ----------------------------------------------

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

PREFERRED SECURITIES (CONTINUED)
   FIXED RATE PREFERRED SECURITIES (CONTINUED)
          UTILITIES (CONTINUED)
    14,250   Portland General Electric,
               7.75%, Sinking Fund Pfd. ...  $  1,357,384*
     2,493   Potomac Electric Power Company,
               $2.44 Pfd., Series 1957 ....        94,111*
    43,400   Public Service Company
               of Colorado,
               Capital Trust I,
               7.60% TOPrS ................       955,885
             Public Service Enterprise
               Group, Inc.:
    10,900     Enterprise Capital Trust I,
               7.44% TOPrS, Series A ......       255,987
    14,020     Public Service Electric &
               Gas Company,
               5.28% Pfd., Series E .......     1,156,720*
             Puget Sound Energy, Inc.:
    56,485     7.45% Pfd., Series II ......     1,408,453*
    34,698     7.75% Sinking Fund Pfd. ....     3,463,034*
             Rochester Gas & Electric
               Corporation:
     5,060     4.10% Pfd., Series J .......       279,084*
    10,000     4.55% Pfd. Series M, Pvt. ..       612,050*
     4,030     4.75% Pfd., Series I .......       257,517*
    40,000   San Diego Gas & Electric,
               $1.7625 Sinking Fund Pfd. ..     1,073,800*
             South Carolina Electric &
               Gas Company:
    14,502     5.125% Purchase Fund Pfd., Pvt.    585,953*
     6,318     6.00% Purchase Fund Pfd., Pvt.     296,251*
             Southern Union Company:
    60,800     Southern Union Financing I,
               9.48% TOPrS ................     1,552,528
             TXU US Holdings Company:
$  750,000     TXU Electric Capital V,
               8.175% 1/30/37
               Capital Security ...........       684,953
     6,050   TransCanada PipeLines Ltd.,
               8.25% Pfd. .................       157,058

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

             Virginia Electric & Power Company:
     1,665     $4.04 Pfd. .................  $     99,742*
     2,270     $4.20 Pfd. .................       141,364*
     1,573     $4.80 Pfd. .................       111,950*
     2,878     $6.98 Pfd. .................       295,916*
             Xcel  Energy, Inc.:
    15,000     $4.08 Pfd., Series B .......       710,550*
    20,040     $4.10 Pfd., Series C .......       953,804*
    35,510     $4.11 Pfd., Series D .......     1,694,360*
    17,750     $4.16 Pfd., Series E .......       857,236*
    10,000     $4.56 Pfd., Series G .......       529,350*
                                             ------------
             TOTAL UTILITIES FIXED RATE
              PREFERRED SECURITIES ........    68,948,784
                                             ------------
             TOTAL FIXED RATE
              PREFERRED SECURITIES ........   157,649,981
                                             ------------
   INVERSE FLOATING RATE PREFERRED -- 0.9%
        18   Premium Assets, Series A,
               Zurich Financial Reg. Capital    1,742,004*
                                             ------------
             TOTAL PREFERRED SECURITIES
              (Cost $175,138,173) .........   175,914,477
                                             ------------
DEBT SECURITIES -- 0.2%
    15,000   Northern States Power Company,
               8.00% Pfd., PINES ..........       372,750
     3,000   Telephone & Data Systems, Inc.,
               7.60% Sr. Unsecured Notes.,
               Series A ...................        74,190
                                             ------------
             TOTAL DEBT SECURITIES
              (Cost $442,925) .............       446,940
                                             ------------
COMMON STOCKS -- 1.8%
    96,700   Allegheny Energy, Inc. .......       655,142*+
   102,500   CenterPoint Energy, Inc. .....       771,313*
    97,500   Duke Energy Corporation ......     1,918,313*
    80,831   Reliant Resources, Inc. ......       196,015*+
                                             ------------
             TOTAL COMMON STOCKS
              (Cost $4,821,693) ...........     3,540,783
                                             ------------


                        See Notes to Financial Statements.

                                        11
 <PAGE>


- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2002
- ----------------------------------------------

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

OPTION CONTRACTS-- 2.8% (Cost $3,717,719)
     1,100   Put Option on U.S. Treasury:
               Bond March Futures,
               Expiring 02/22/2003 ........   $ 5,475,250
                                             ------------
MONEY MARKET FUNDS -- 1.2% (Cost $2,267,360)
 2,267,360   BlackRock Provident
               Institutional TempFund, 1.42%    2,267,360
                                             ------------
TOTAL INVESTMENTS
   (Cost $186,387,870**) .........   97.5%    187,644,810
OTHER ASSETS AND LIABILITIES (Net)    2.5%      4,716,275
                                    -----    ------------
TOTAL NET ASSETS AVAILABLE TO
   COMMON AND PREFERRED STOCK ....  100.0%++ $192,361,085
                                    -----    ------------

MONEY MARKET CUMULATIVE PREFERRED(TRADE MARK)
   STOCK (MMP(TRADE MARK)) REDEMPTION VALUE   (70,000,000)
ACCUMULATED UNDECLARED
   DISTRIBUTIONS TO MMP(TRADE MARK) .......      (102,739)
                                             ------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK   $122,258,346
                                             ============

- --------------
*    Securities  eligible for the Dividends Received  Deduction.
**   Aggregate cost for federal tax purposes is $188,507,027.
***  Securities exempt from  registration  under Rule 144A of the Securities Act
     of 1933.  These  securities  may be  resold  in  transactions  exempt  from
     registration to qualified institutional buyers.
+    Non-income producing.
++   The  percentage  shown for each  investment  category is the total value of
     that  category  as a  percentage  of net  assets  available  to Common  and
     Preferred Stock.

ABBREVIATIONS (Note 6):
PINES -- Public Income Notes
QUIPS -- Quarterly Income Preferred Securities
REIT  -- Real Estate Investment Trust
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
                                                               NOVEMBER 30, 2002
                                  ----------------------------------------------

<TABLE>
<CAPTION>
<S>                                                                 <C>       <C>
ASSETS:
   Investments, at value (Cost $186,387,870) ( Note 1)
     (See accompanying schedule) ...............................              $187,644,810
   Cash and receivable for investments sold ....................                 3,324,651
   Dividends and interest receivable ...........................                 1,647,718
   Prepaid expenses ............................................                    88,577
                                                                              ------------
           Total Assets ........................................               192,705,756
LIABILITIES:
   Dividends payable to Common shareholders ....................    $143,526
   Investment advisory fee payable (Note 2) ....................      88,919
   Professional fees payable ...................................      59,612
   Accrued expenses and other payables .........................      52,614
   Accumulated undeclared distributions to Money Market
     Cumulative Preferred(TRADE MARK) Stock (Note 5) ...........     102,739
                                                                    --------
           Total Liabilities ...................................                   447,410
                                                                              ------------
   MONEY MARKET CUMULATIVE PREFERRED(TRADE MARK) STOCK (700 SHARES
     OUTSTANDING) REDEMPTION VALUE (Note 5) ....................                70,000,000
                                                                              ------------
NET ASSETS AVAILABLE TO COMMON STOCK ...........................              $122,258,346
                                                                              ============
NET ASSETS AVAILABLE TO COMMON STOCK consist of:
   Undistributed net investment income (Note 1) ................                $  756,099
   Accumulated net realized loss on investments sold (Note 1) ..               (10,775,920)
   Unrealized appreciation of investments (Note 3) .............                 1,256,940
   Par value of Common Stock ...................................                   113,414
   Paid-in capital in excess of par value of Common Stock ......               130,907,813
                                                                              ------------
           Total Net Assets Available to Common Stock ..........              $122,258,346
                                                                              ============

NET ASSET VALUE PER SHARE OF COMMON STOCK:
   Common Stock (11,341,434 shares outstanding) ................              $      10.78
                                                                              ============
</TABLE>


                       See Notes to Financial Statements.

                                       13
<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 2002
- --------------------------------------------------------------


<TABLE>
<CAPTION>

<S>                                                                   <C>         <C>
INVESTMENT INCOME:
     Dividends .................................................                  $10,953,649
     Interest ..................................................                    3,194,125
                                                                                  -----------
          Total Investment Income ..............................                   14,147,774

EXPENSES:
     Investment advisory fee (Note 2) ..........................      $1,106,597
     Administration fee (Note 2) ...............................         196,319
     Money Market Cumulative Preferred(TRADE MARK) broker commissions
        and auction agent fees .................................         189,445
     Insurance expense .........................................         159,614
     Legal and audit fees ......................................         104,860
     Directors' fees and expenses (Note 2) .....................          82,854
     Shareholder servicing agent fees and expenses (Note 2) ....          62,461
     Custodian fees and expenses (Note 2) ......................          22,257
     Other .....................................................          43,341
                                                                      ----------
          Total Expenses .......................................                    1,967,748
                                                                                  -----------

NET INVESTMENT INCOME ..........................................                   12,180,026
                                                                                  -----------

REALIZED AND UNREALIZED LOSS ON INVESTMENTS
   (Notes 1 and 3):
     Net realized loss on investments sold during the year .....                   (3,508,136)
     Change in unrealized depreciation of investments during the year              (6,414,650)
                                                                                  -----------

NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS ................                   (9,922,786)
                                                                                  -----------

DISTRIBUTIONS TO MONEY MARKET CUMULATIVE PREFERRED(TRADE MARK) STOCK
   SHAREHOLDERS (Note 5):
     From net investment income (including changes in
        accumulated undeclared distributions) ..................                   (1,243,631)
                                                                                  -----------

NET INCREASE IN NET ASSETS TO COMMON STOCK RESULTING
   FROM OPERATIONS .............................................                  $ 1,013,609
                                                                                  ===========
</TABLE>


                       See Notes to Financial Statements.

                                       14
<PAGE>


- --------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated
                   STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK
                   -------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                     YEAR ENDED            YEAR ENDED
                                                                                  NOVEMBER 30, 2002     NOVEMBER 30, 2001
                                                                                  -----------------     -----------------
<S>                                                                                  <C>                  <C>
OPERATIONS:
     Net investment income ....................................................      $ 12,180,026         $ 12,287,081
     Net realized loss on investments sold during the year ....................        (3,508,136)          (1,599,316)
     Change in net unrealized (depreciation) appreciation
        of investments during the year ........................................        (6,414,650)          11,525,093
     Distributions to Money Market Cumulative Preferred(TRADE MARK) Stock
        Shareholders from net investment income, including changes in
        accumulated undeclared distributions (Note 5) .........................        (1,243,631)          (2,799,793)
                                                                                     ------------         ------------
     Net increase in net assets from operations ...............................         1,013,609           19,413,065

DISTRIBUTIONS:
     Dividends paid from net investment income to Common Stock
        shareholders ..........................................................       (10,296,991)          (9,113,985)
     Distributions paid from net realized capital gains to Common Stock
        shareholders ..........................................................                --                   --
                                                                                     ------------         ------------

FUND SHARE TRANSACTIONS:
     Increase from Common Stock transactions (Note 4) .........................         1,749,231              424,175
                                                                                     ------------         ------------

NET (DECREASE) INCREASE IN NET ASSETS AVAILABLE TO
     COMMON STOCK FOR THE YEAR ................................................        (7,534,151)          10,723,255

NET ASSETS AVAILABLE TO COMMON STOCK:
     Beginning of year ........................................................       129,792,497          119,069,242
                                                                                     ------------         ------------
     End of year (including undistributed net investment income of
        $756,099 and $410,456, respectively) ..................................      $122,258,346         $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 YEAR.
- ----------------------------------------------------
     Contained below is per share operating  performance  data, total investment
returns,  ratios to  average  net  assets  and  other  supplemental  data.  This
information  has  been  derived  from  information  provided  in  the  financial
statements and market price data for the Fund's shares.


<TABLE>
<CAPTION>
                                                                                  YEAR ENDED NOVEMBER 30,
                                                                     ---------------------------------------------------
                                                                       2002       2001      2000       1999       1998
                                                                     --------   --------  --------   --------   --------
<S>                                                                  <C>        <C>       <C>        <C>        <C>
OPERATING PERFORMANCE:
Net asset value, beginning of year .............................     $  11.60   $  10.68  $  11.50   $  13.50   $  13.53
                                                                     --------   --------  --------   --------   --------
INVESTMENT OPERATIONS:
Net investment income ..........................................         1.07       1.10      1.18       1.14       1.14
Net realized and unrealized (loss)/gain on investments .........        (0.87)      0.89     (0.33)     (1.24)      0.17
DISTRIBUTIONS TO MMP* SHAREHOLDERS:
From net investment income .....................................        (0.11)+    (0.25)+   (0.32)+    (0.25)+    (0.16)
From net realized capital gains ................................        --         --        (0.02)     (0.09)     (0.11)
                                                                     --------   --------  --------   --------   --------
Total from investment operations. ..............................         0.09       1.74      0.51      (0.44)      1.04
                                                                     --------   --------  --------   --------   --------
DISTRIBUTIONS TO COMMON SHAREHOLDERS:
From net investment income .....................................        (0.91)     (0.82)    (0.91)     (0.96)     (0.89)
From net realized capital gains ................................        --         --        (0.42)     (0.60)     (0.18)
                                                                     --------   --------  --------   --------   --------
Total distributions ............................................        (0.91)     (0.82)    (1.33)     (1.56)     (1.07)
                                                                     --------   --------  --------   --------   --------
Net asset value, end of year ...................................     $  10.78   $  11.60 +$  10.68 + $  11.50 + $  13.50
                                                                     ========   ========  ========   ========   ========
Market value, end of year ......................................     $ 11.720   $ 11.270  $  9.563   $ 10.500   $ 12.875
                                                                     ========   ========  ========   ========   ========
Total investment return based on net asset value** .............        0.63%     16.97%     5.88%    (2.99)%      8.29%
                                                                     ========   ========  ========   ========   ========
Total investment return based on market value** ................       12.61%     26.95%     3.80%    (7.12)%      8.53%
                                                                     ========   ========  ========   ========   ========
RATIOS TO AVERAGE NET ASSETS AVAILABLE
  TO COMMON STOCK SHAREHOLDERS:
     Total net assets, end of year (in 000's) . ................     $122,258   $129,792  $119,069   $128,200   $150,532
     Operating expenses. .......................................         1.56%      1.61%     1.59%      1.53%      1.45%
     Net investment income*** ..................................         8.67%      7.63%     7.93%      6.81%      6.37%

- ----------------------------------------------------------------
SUPPLEMENTAL DATA:++
     Portfolio turnover rate. ..................................           29%        41%       67%        64%        87%
     Total net assets available to Common and Preferred Stock,
      end of year (in 000's) ...................................     $192,361   $200,228  $189,666   $199,060   $220,690
     Ratio of operating expenses to total average net assets
      available to Common and Preferred Stock ..................         1.00%      1.03%     1.00%      1.01%      0.99%

<FN>
  *  Money Market Cumulative Preferred(TRADE MARK) Stock.
 **  Assumes reinvestment of distributions at the price obtained by the Fund's Dividend Reinvestment Plan.
***  The net investment income ratios reflect income net of operating expenses and payments to MMP* Shareholders.
  +  Includes effect of additional distribution available to MMP* Shareholders ($0.01 per Common Share at November 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*.
</FN>
</TABLE>


                       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(TRADE MARK) Stock currently outstanding.

                                               INVOLUNTARY         AVERAGE
                                   ASSET       LIQUIDATING         MARKET
 YEAR ENDED    TOTAL SHARES      COVERAGE      PREFERENCE           VALUE
 NOVEMBER 30  OUTSTANDING (1)  PER SHARE (3)  PER SHARE (2)  PER SHARE (1) & (2)
 -----------  ---------------  -------------  -------------  -------------------
    2002            700           $274,802       $100,000          $100,000
    2001            700            286,040        100,000           100,000
    2000            700            270,952        100,000           100,000
    1999            700            284,371        100,000           100,000
    1998            700            315,271        100,000           100,000

- ---------------
(1) See Note 5.
(2) Excludes accumulated undeclared dividends.
(3) Calculated  by  subtracting  the  Fund's total  liabilities  (excluding  the
    MMP(TRADE  MARK))  from the Fund's total  assets and dividing that amount by
    the number of MMP(TRADE MARK) shares outstanding.

                       See Notes to Financial Statements.

                                       17
<PAGE>


- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
NOTES TO FINANCIAL STATEMENTS
- ----------------------------------------------

1.   SIGNIFICANT ACCOUNTING POLICIES

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

     PORTFOLIO  VALUATION:  The net asset  value of the Fund's  Common  Stock is
determined  by the  Fund's  Administrator  no less  frequently  than on the last
business day of each week and month.  It is  determined by dividing the value of
the Fund's net assets  attributable  to common shares by the number of shares of
Common Stock  outstanding.  The value of the Fund's net assets  attributable  to
common  shares is deemed to equal the value of the Fund's  total assets less (i)
the Fund's liabilities,  (ii) the aggregate liquidation value of the outstanding
Money Market  Cumulative  Preferred(TRADE  MARK) Stock and (iii) accumulated and
unpaid  dividends on the  outstanding  Money Market  Cumulative  Preferred(TRADE
MARK) Stock.

     Securities listed on a national securities exchange are valued on the basis
of the last sale on such exchange on the day of  valuation,  except as described
hereafter.  In the absence of sales of listed securities and with respect to (a)
securities  for which the most recent  sale  prices are not deemed to  represent
fair  market  value  and  (b)  unlisted  securities  (other  than  money  market
instruments),  securities  are valued at the mean  between  the  closing bid and
asked  prices  when  quoted  prices  for  investments  are  readily   available.
Investments in over-the-counter  derivative  instruments,  such as interest rate
swaps and options thereon  ("swaptions")  are valued at the prices obtained from
the  broker/dealer or bank that is the counterparty to such instrument,  subject
to comparison of such valuation with a valuation  obtained from a  broker/dealer
or bank that is not a  counterparty  to the  particular  derivative  instrument.
Investments for which market  quotations are not readily  available or for which
management  determines  that the prices  are not  reflective  of current  market
conditions  are valued at fair value as determined in good faith by or under the
direction  of the  Board  of  Directors  of the  Fund,  including  reference  to
valuations of other  securities  which are  comparable in quality,  maturity and
type. Investments in money market instruments,  which mature in 60 days or less,
are valued at amortized  cost.  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.  This Guide  requires that, for book  accounting  purposes,  the Fund
amortize premium and accrete discount on those fixed-income securities,  such as
capital  securities,  which trade and are quoted on an "accrued  income"  basis.
Prior to  December  1,  2001,  the Fund did not  amortize  premium  and  accrete
discounts for these  securities.  Adopting these  accounting  principles has not
affected the Fund's net asset value, but changes the classification of


                                       18
<PAGE>


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

certain amounts between interest income and realized and unrealized gain/loss in
the Statement of  Operations.  The adoption of this principle is not material to
the financial statements. The impact is quantified in the following table.

<TABLE>
<CAPTION>
     AT NOVEMBER 30, 2001                            FOR THE YEAR ENDED NOVEMBER 30, 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)                 $(16,100)                        $(19)                  $16,119
</TABLE>

     The Statement of Changes in Net Assets and Financial  Highlights  for prior
periods have not been restated to reflect these changes in presentation.

     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(TRADE  MARK) Stock are entitled to receive
cumulative  cash  dividends  as  declared  by the  Fund's  Board  of  Directors.
Distributions  to  shareholders  are recorded on the  ex-dividend  date. Any net
realized  short-term  capital gains will be distributed to shareholders at least
annually.  Any net  realized  long-term  capital  gains  may be  distributed  to
shareholders  at least  annually or may be retained by the Fund as determined by
the Fund's Board of Directors. Capital gains retained by the Fund are subject to
tax at the capital gains corporate tax rate. Subject to the Fund's 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 (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  proportionate  allocation  of  income  and  gains to all  classes  of
shareholders.

     Distributions  from net  realized  gains  for  book  purposes  may  include
short-term  capital  gains,  which  are  included  as  ordinary  income  for tax
purposes.  The  tax  character  of  distributions  paid,  including  changes  in
accumulated  undeclared  distributions to MMP(TRADE MARK)  shareholders,  during
2002 and 2001 was as follows:

<TABLE>
<CAPTION>
                    DISTRIBUTIONS PAID IN FISCAL YEAR 2002        DISTRIBUTIONS PAID IN FISCAL YEAR 2001
                    --------------------------------------        --------------------------------------

                   ORDINARY INCOME  LONG-TERM CAPITAL GAINS     ORDINARY INCOME    LONG-TERM CAPITAL GAINS
                   ---------------  -----------------------     ---------------    -----------------------
<S>                    <C>                     <C>                 <C>                        <C>
Common                 $10,296,991             --                  $9,113,985                 --
Preferred               $1,243,631             --                  $2,799,793                 --
</TABLE>

     As of November 30, 2002, the components of  distributable  earnings  (i.e.,
ordinary income and capital  gain/loss)  available to Common and Preferred Stock
shareholders, on a tax basis were as follows:

   CAPITAL LOSS   UNDISTRIBUTED    UNDISTRIBUTED          UNREALIZED
   CARRYFORWARD  ORDINARY INCOME  LONG-TERM GAIN  APPRECIATION/(DEPRECIATION)
   ------------  ---------------  --------------  ---------------------------

   $(8,656,764)     $1,157,762         --                 $(862,217)

     At November 30, 2002, the composition of the Fund's $8,656,764  accumulated
realized capital losses was $6,221,654,  $982,343,  and $1,452,767 in 2000, 2001
and 2002,  respectively.  These losses may be carried forward and offset against
any future capital gains through 2008, 2009 and 2010, respectively.

     EXCISE TAX: 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.  During the fiscal year ended November 30, 2002, the Fund paid $10,023 of
Federal excise taxes attributable to calendar year 2001.

     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


                                       20
<PAGE>

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

monthly  total net assets  available  to Common and  Preferred  Stock up to $100
million and 0.50% of the value of the Fund's  average  monthly  total net assets
available to Common and Preferred Stock in excess of $100 million.

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

     PFPC  Inc.,  a member  of the PNC  Financial  Services  Group,  Inc.  ("PNC
Financial Services"),  serves as the Fund's Administrator and Transfer Agent. As
Administrator, PFPC Inc. calculates the net asset value of the Fund's shares and
generally assists in all aspects of the Fund's administration and operation.  As
compensation for PFPC Inc.'s services as Administrator,  the Fund paid PFPC Inc.
a monthly fee at an annual rate of 0.10% of the Fund's average monthly total net
assets  available to Common and  Preferred  Stock.  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 total
net assets  available to Common and Preferred  Stock 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  total  net  assets
available to Common and Preferred Stock.

3.   PURCHASES AND SALES OF SECURITIES

     Costs of purchases  and proceeds  from sales of  securities  for the period
ended  November  30,  2002,   excluding   short-term   investments,   aggregated
$54,386,460 and $62,500,229, respectively.

     At November 30,  2002,  aggregate  gross  unrealized  appreciation  for all
securities in which there is an excess of value over tax cost was $8,453,405 and
aggregate gross unrealized  depreciation for all securities in which there is an
excess of tax cost over value was $9,235,505.

4.   COMMON STOCK

     At November  30, 2002,  240,000,000  shares of $0.01 par value Common Stock
were authorized.

     Common Stock transactions were as follows:

<TABLE>
<CAPTION>
                                                                       YEAR ENDED                 YEAR ENDED
                                                                        11/30/02                   11/30/01
                                                                   -------------------        -------------------
                                                                   SHARES       AMOUNT        SHARES       AMOUNT
                                                                   ------       ------        ------       ------
<S>                                                                <C>       <C>              <C>         <C>
Issued as reinvestment of dividends under the
   Dividend Reinvestment and Cash Purchase Plan ............       152,365   $1,749,231       37,782      $424,175
                                                                   =======   ==========       ======      ========
</TABLE>


                                       21
<PAGE>


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

5.   MONEY MARKET CUMULATIVE PREFERRED(TRADE MARK) STOCK

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

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

     Under  Emerging   Issues  Task  Force  (EITF)   promulgation   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(TRADE  MARK) Stock, which was previously  classified as a 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(TRADE
MARK)  Stock,  the Fund is required to make  additional  distributions  to Money
Market Cumulative  Preferred(TRADE  MARK) Stock  shareholders or to pay a higher
dividend rate in amounts  needed to provide a return,  net of tax,  equal to the
return had such  originally paid  distributions  been eligible for the Dividends
Received   Deduction.   Net  assets   available  to  Money   Market   Cumulative
Preferred(TRADE  MARK) Stock at November 30, 2002 included an accrued additional
distribution of $71,440. The amount subsequently calculated and then paid to the
Money Market Cumulative  Preferred(TRADE  MARK) shareholders for the fiscal year
ended November 30, 2002 was $79,828. (See Note 9 - "Subsequent Events.")

     Prior to November 30, 1999,  additional  distributions were not reported as
available to Money Market Cumulative  Preferred(TRADE MARK) Stock until declared
by the Board of Directors.  The amount of additional  distributions  payable for
any year may be highly uncertain and will not be known until after a fiscal year
has been completed.


                                       22
<PAGE>


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

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

     At November 30, 2002, 700 shares of Money Market Cumulative Preferred(TRADE
MARK) Stock were  outstanding at the annual rate of 1.60%. The dividend rate, as
set by the  auction  process,  is  generally  expected  to vary with  short-term
interest  rates.  These  rates  may vary in a  manner  unrelated  to the  income
received  on the  Fund's  assets,  which  could  have  either  a  beneficial  or
detrimental  impact on net investment income and gains available to Common Stock
Shareholders.  While the Fund expects to structure  its  portfolio  holdings and
hedging  transactions to lessen such risks to Common Stock  Shareholders,  there
can be no assurance that such results will be attained.

6.   PORTFOLIO INVESTMENTS, CONCENTRATION AND INVESTMENT QUALITY

     The Fund invests primarily in traditional DRD-eligible preferred securities
(i.e.,  adjustable and fixed rate  preferred and preference  stocks) and similar
hybrid,  i.e.,  fully  taxable,   preferred  securities.   Under  normal  market
conditions,  at least 80% of the value of the Fund's net assets will be invested
in preferred securities.  Also, under normal market conditions, the Fund invests
at least 25% of its assets in  securities  issued by utilities and a significant
percentage,  but no  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'  investments  could be  adversely  affected by the  possible  inability of
companies in these  industries to pay dividends and interest on their securities
and the ability of holders of securities of such  companies to realize any value
from the assets of the issuer upon liquidation or bankruptcy.

     The Fund may  invest  up to 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.  The 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, REIT, 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.


                                       23
<PAGE>


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

7.   SPECIAL INVESTMENT TECHNIQUES

     The Fund may employ certain  investment  techniques in accordance  with its
fundamental  investment  policies.  These may include the use of when-issued and
delayed delivery transactions.  Securities purchased or sold on a when-issued or
delayed  delivery  basis may be  settled  within  45 days  after the date of the
transaction.  Such  transactions  may  expose  the  Fund to  credit  and  market
valuation  risk  greater than that  associated  with  regular  trade  settlement
procedures.  The Fund may also enter into  transactions,  in accordance with its
fundamental investment policies,  involving any or all of the following: lending
of portfolio securities, short sales of securities,  futures contracts, interest
rate swaps,  options on futures contracts,  options on securities and swaptions.
As  in  the  case  of  when-issued  securities,   the  use  of  over-the-counter
derivatives,  such as interest rate swaps and swaptions,  may expose the Fund to
greater  credit,  operations,  and  market  value  risk  than is the  case  with
regulated, exchange traded futures and options. With the exception of purchasing
securities  on a  when-issued  or delayed  delivery  basis or lending  portfolio
securities,  these  transactions  are used  for  hedging  or  other  appropriate
risk-management  purposes or, under  certain  other  circumstances,  to increase
income.  As of November  30, 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 November 30, 2002, the Commerce  Group,  Inc. and its  affiliates  owned
approximately  33.1%  of the  Fund's  outstanding  Common  Stock,  according  to
Schedule 13D filings dated September 19, 2002.

9.   SUBSEQUENT EVENTS

     As a result of the income realized by the Fund that did not qualify for the
Corporate  Dividends  Received Deduction ("DRD"), a portion of the distributions
paid  to  the  Fund's  Money  Market  Cumulative   Preferred(TRADE  MARK)  Stock
shareholders  from January 1, 2002 through November 30, 2002 has been designated
as being non-DRD income,  as required by Internal Revenue Services Ruling 89-81,
with respect to the Internal  Revenue Code of 1986, as amended.  On December 23,
2002, the Fund declared an additional distribution of $79,828,  payable December
26, 2002, to Money Market Cumulative Preferred(TRADE MARK) Stock shareholders as
required by the Fund's Articles Supplementary (See Note 5.)


                                       24
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

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

     We have audited the  accompanying  statement of assets and  liabilities  of
Preferred  Income  Opportunity  Fund  Incorporated,  including  the portfolio of
investments,  as of November 30, 2002,  and the related  statement of operations
for the year then  ended,  statements  of  changes in net assets for each of the
years in the two-year period then ended and financial highlights for each of the
years  in the  two-year  period  then  ended.  These  financial  statements  and
financial  highlights  are the  responsibility  of the  Fund's  management.  Our
responsibility  is to  express  an opinion  on these  financial  statements  and
financial  highlights based on our audit.  The financial  highlights for each of
the years in the three-year period ended November 30, 2000 were audited by other
auditors whose report dated January 12, 2001,  expressed an unqualified  opinion
on that financial statement and those financial highlights.

     We conducted our audits in accordance  with  auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and perform our audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial statements. Our procedures included confirmation of
securities  owned as of November 30, 2002 by  correspondence  with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

     In our opinion,  the financial statements and financial highlights referred
to above present fairly,  in all material  respects,  the financial  position of
Preferred  Income  Opportunity  Fund  Incorporated  as of November 30, 2002, the
results of its operations for the year then ended, and changes in its net assets
and financial highlights for each of the years in the two-year period then ended
in conformity with accounting principles generally accepted in the United States
of America.

/S/ KPMG LLP

Boston, Massachusetts
January 6, 2003


                                       25
<PAGE>


- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
SUPPLEMENTARY TAX INFORMATION (UNAUDITED)
- ----------------------------------------------

     Of the total  distributions  attributable to the fiscal year ended November
30, 2002,  including  the  additional  Distribution  to Money Market  Cumulative
Preferred(TRADE  MARK) Stock  shareholders,  78.97%  qualified for the Dividends
Received Deduction for eligible corporate investors.

     For the calendar year ended December 31, 2002,  79.19% of all distributions
paid to Common Stock shareholders qualified for the Dividends Received Deduction
for eligible corporate investors.


                                       26
<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 year ended  November 30,  2002,  $258 in
brokerage commissions were incurred.


                                       27
<PAGE>


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

     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  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.


                                       28
<PAGE>


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


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

<TABLE>
<CAPTION>
                                                               PRINCIPAL              NUMBER OF FUNDS
                                         TERM OF OFFICE      OCCUPATION(S)            IN FUND COMPLEX
NAME, ADDRESS,            POSITION(S)     AND LENGTH OF        DURING PAST                OVERSEEN       OTHER DIRECTORSHIPS
AND AGE                  HELD WITH FUND   TIME SERVED*         FIVE YEARS               BY DIRECTOR       HELD BY DIRECTOR
- --------------           --------------  --------------      -------------            ---------------    -------------------
NON-INTERESTED
DIRECTORS:

<S>                         <C>         <C>                <C>                                <C>      <C>
MARTIN BRODY                Director    Class I Director   Retired                            2        Director, Jaclyn, Inc.
c/o HMK Associates                         since 1992                                                  (luggage and
30 Columbia Turnpike                                                                                   accessories).
Florham Park, NJ 07932
Age: 81

DAVID GALE                  Director    Class I Director   President & CEO                    2        Director, Stone Container
Delta Dividend Group, Inc.                 since 1997      of Delta Dividend                           Corporation (packaging),
301 Pine Street                                            Group, Inc.                                 until December 31,
San Francisco, CA 94104                                    (investments).                              2000; Director, Free
Age: 53                                                                                                Real Time.com, until
                                                                                                       February 1, 2001.

MORGAN GUST+                Director   Class III Director  From March 2002,                   2                  --
Giant Industries, Inc.                     since 1992      President, Giant Industries,
23733 N. Scottsdale Road                                   Inc. (petroleum refining and
Scottsdale, AZ 85255                                       marketing); and, for more
Age: 55                                                    than five years prior thereto,
                                                           Executive Vice President,
                                                           and various other Vice
                                                           President positions at
                                                           Giant Industries, Inc.

ROBERT F. WULF              Director    Class II Director  Since March 1984,                  2                  --
3560 Deerfield Drive South                 since 1992      Financial Consultant;
Salem, OR 97302                                            Trustee, University of
Age: 65                                                    Oregon Foundation;
                                                           Trustee, San Francisco
                                                           Theological Seminary

<FN>
- -------------------------------
* The Fund's Board of Directors is divided into three classes, each class having a term of three years. Each year the term of office
of one class expires and the successor or successors elected to such class serve for a three year term. The three year term for each
class expires as follows:
                                 CLASS I DIRECTORS - three year term  expires at the Fund's  2003  Annual  Meeting of  Shareholders;
                                 directors may continue in office until their successors are duly elected and qualified.
                                 CLASS II  DIRECTORS - three year term  expires at the Fund's 2004 Annual  Meeting of  Shareholders;
                                 directors may continue in office until their successors are duly elected and qualified.
                                 CLASS III  DIRECTORS - three year term expires at the Fund's 2005 Annual  Meeting of  Shareholders;
                                 directors may continue in office until their successors are duly elected and qualified.

+ Represents holders of shares of the Fund's Money Market Cumulative Preferred(TRADE MARK) Stock.
</FN>
</TABLE>


                                       29
<PAGE>


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

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

<S>                         <C>         <C>                <C>                           <C>                <C>
DONALD F. CRUMRINE+, ++    Director,   Class II Director   Chairman of the Board,        2                  --
301 E. Colorado Boulevard   Chairman       since 1992      since December 1996,
Suite 720                 of the Board                     and previously held
Pasadena, CA 91101          and Chief                      other officerships of
Age: 55                 Executive Officer                  Flaherty & Crumrine;
                                                           Director of Flaherty &
                                                           Crumrine.

ROBERT M. ETTINGER++        Director,   Class IIIDirector  President of Flaherty &       2                  --
301 E. Colorado Boulevard  President       since 2002      Crumrine since October
Suite 720                 and Secretary                    2002, and previously held
Pasadena, CA 91101                                         other officerships of
Age: 44                                                    Flaherty & Crumrine;
                                                           Director of Flaherty &
                                                           Crumrine.

OFFICERS:

PETER C. STIMES          Vice President,   Since 1992      Vice President of             --                 --
301 E. Colorado Boulevard  Treasurer,                      Flaherty & Crumrine.
Suite 720                Chief Financial
Pasadena, CA 91101       and Accounting
Age: 47                      Officer

ROBERT E. CHADWICK          Assistant  Since October 2002  Vice President of             --                 --
301 E. Colorado Boulevard   Treasurer                      Flaherty & Crumrine
Suite 720                                                  since August 2001, and
Pasadena, CA 91101                                         previously worked as
Age: 27                                                    portfolio manager for
                                                           Koch Industries, Inc.

<FN>
- -------------------------------
* The Fund's Board of Directors is divided into three classes, each class having a term of three years. Each year the term of office
of one class expires and the successor or successors elected to such class serve for a three year term. The three year term for each
class expires as follows:
                                 CLASS I DIRECTORS - three year term  expires at the Fund's  2003  Annual  Meeting of  Shareholders;
                                 directors may continue in office until their successors are duly elected and qualified.
                                 CLASS II  DIRECTORS - three year term  expires at the Fund's 2004 Annual  Meeting of  Shareholders;
                                 directors may continue in office until their successors are duly elected and qualified.
                                 CLASS III  DIRECTORS - three year term expires at the Fund's 2005 Annual  Meeting of  Shareholders;
                                 directors may continue in office until their successors are duly elected and qualified.

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

++ "Interested  person" of  the Fund  as defined  in the  Investment Company  Act of  1940. Messrs.  Crumrine and  Ettinger are each
considered an "interested person" because of their affiliation with Flaherty & Crumrine which acts as the Fund's investment adviser.
</FN>
</TABLE>


                                       30
<PAGE>


                      [This page intentionally left blank]


<PAGE>

DIRECTORS
   Martin Brody
   Donald F. Crumrine, CFA
   Robert M. Ettinger, CFA
   David Gale
   Morgan Gust
   Robert F. Wulf, CFA

OFFICERS
   Donald F. Crumrine, CFA
     Chairman of the Board
     and Chief Executive Officer
   Robert M. Ettinger, CFA
     President and Secretary
   Peter C. Stimes, CFA
     Vice President, Treasurer,
     Chief Financial and
     Accounting Officer
   Robert E. Chadwick, CFA
     Assistant 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]

                                     Annual
                                     Report

                                November 30, 2002

                        web site: www.preferredincome.com


</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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