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

                                   FORM N-CSR

              CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
                              INVESTMENT COMPANIES

                  Investment Company Act file number 811-06495
                                                    --------------------------
                 PREFERRED INCOME OPPORTUNITY FUND INCORPORATED
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               (Exact name of registrant as specified in charter)

                      301 E. Colorado Boulevard, Suite 720
                               PASADENA, CA 91101
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               (Address of principal executive offices) (Zip code)

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

        Registrant's telephone number, including area code: 626-795-7300
                                                         ---------------------
                   Date of fiscal year end: NOVEMBER 30, 2003
                                         ---------------------
                     Date of reporting period: MAY 31, 2003
                                             -----------------

Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the  transmission to stockholders of
any report that is required to be transmitted to  stockholders  under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1).  The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.

A registrant  is required to disclose the  information  specified by Form N-CSR,
and the  Commission  will make this  information  public.  A  registrant  is not
required to respond to the  collection  of  information  contained in Form N-CSR
unless the Form  displays a  currently  valid  Office of  Management  and Budget
("OMB")  control number.  Please direct comments  concerning the accuracy of the
information  collection  burden  estimate and any  suggestions  for reducing the
burden to Secretary,  Securities and Exchange Commission,  450 Fifth Street, NW,
Washington,  DC 20549-0609.  The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.





ITEM 1. REPORTS TO STOCKHOLDERS.

PREFERRED INCOME OPPORTUNITY FUND INCORPORATED

Dear Shareholder:

     Spurred by declining  interest  rates and  increased  demand for  preferred
securities,  the Preferred  Income  Opportunity  Fund  continued to perform well
during the second  quarter of fiscal 2003. For the three months ending May 31st,
the Fund produced a 9.6% total return on net asset value ("NAV").  For the first
six months of the Fund's fiscal year, the return was 19.8%.

     The return on the market value of the Fund's  shares was somewhat  lower as
the premium of the market  price over the NAV declined  during the quarter.  For
the period,  the total return  based upon the market value of the Fund's  shares
equaled 4.8%,  while the return for the first six months was 15.5%.  Please keep
in mind, however, that past performance does not guarantee future results.

     Despite a quick  and  successful  outcome  to the Iraq  war,  the  domestic
economy has not yet demonstrated that it is on the road to recovery. The Federal
Reserve has kept  short-term  interest  rates at historic lows, and many believe
that  further   reductions  will  be  necessary.   With  inflation  subdued  and
substantial  slack  in  output  capacity  and  labor  markets  (suggesting  that
short-term  rates are likely to remain low for an  extended  period),  long-term
interest  rates have also  declined.  Since the start of the Fund's fiscal year,
yields on two-year  and  ten-year  US  Treasuries  have fallen by  approximately
0.75%. Lower short-term  interest rates provide a direct benefit by reducing the
variable cost of the Fund's leverage in the form of its Money Market  Cumulative
PreferredTM  Stock  ("MMP(TM)").  Recently,  the rates have been  running  below
1 1/4%.

     When  long-term  interest  rates  decline,  we expect to lose  money on the
Fund's  hedges and make money on the  securities in the  portfolio.  The hedging
strategy,  however,  is intended to tilt the playing  field in the Fund's favor,
and it has been  working!  Since  the hedge is  constructed  by  purchasing  put
options on US Treasury bond futures,  the Fund's loss on the hedge is limited to
the cost of the puts. On the other hand, with the right issues in the portfolio,
the gains on our  preferred  securities  have more than  offset  the cost of the
hedge, and the NAV has increased.

     As we have written often in the past, our fundamental investment philosophy
is to own the issues that offer the best value within the  preferred  securities
universe.  While this may seem  obvious,  it often  means that we pass up issues
offering higher yields.  If we make sound investments with attractive yields and
avoid  serious  credit  losses,  then the Fund will have more money to invest to
generate  income over time.  This  strategy  should  enable the Fund to meet its
objective of high current income for shareholders.

     In recent quarters,  we have increased the portfolio's  allocation to lower
coupon, traditional preferred stocks. Falling interest rates and new legislation
lowering the tax rate on Qualified Dividend Income ("QDI") to 15% have benefited
these securities more than taxable (or "hybrid") preferreds.





     Investors  are  still  evaluating  the new tax law and  determining  how to
incorporate it into investment decisions (more on this in the Q&A section),  but
one thing is clear - certain dividend paying securities will be more valuable to
individual  investors.  Issuers of preferred  securities  are also assessing the
impact of the new law and we expect to see several new issues of preferred stock
in the months to come. While the market tries to sort it all out, we'll stick to
the basic game plan and keep  looking for the best  bargains  within the various
sectors of the preferred market.

     We  certainly  haven't been  perfect,  and some of our holdings are on life
support. We have previously mentioned Conseco, Inc. and Farmland Industries, and
there is unfortunately not much new to report on these two. However,  we need to
add one  additional  issue to the short list of problem  credits - Touch America
Holdings.  Formerly  Montana  Power  Company,  management  sold off its electric
utility assets to focus on its fiber optic business (i.e., they zigged when they
should have  zagged!).  The issue we own remained with the fiber optic  business
and has not paid a dividend for the past two quarters.  (These three issuers now
account for 0.2% of the Fund.)

     It is important to remember that the investment objective of the Fund is to
produce high current income  consistent with  preservation of capital.  While no
one will apologize for the returns of the past six months, it would be imprudent
to expect them to be repeated very often. Of course,  that doesn't mean we won't
try,  but when yields on  long-term  US  Treasuries  are well below 5% and money
market funds are earning less than 1%, investors need to keep their expectations
realistic.  The Fund is well  positioned to participate in a continuation of the
rally in the bond market,  but its hedging strategy is there to help protect the
Fund should interest rates rise significantly.

     We encourage you to read the Questions and Answers section beginning on the
next page,  which contains  additional  information  on the Fund's  strategy and
operation, including a description of the new information that we intend to post
to the Fund's web site in the near future,  and discussion of a possible  change
in the Fund's name.

     Sincerely,

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


     June 30, 2003

                                       2


                               QUESTIONS & ANSWERS

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

     The following chart shows the relationship  between the market price of the
Fund's  shares and its net asset value  ("NAV").  Recently,  the share price has
been flat while the NAV has been  rising.  You might  expect the share  price to
track the NAV, although obviously this is not always the case.


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

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

Date     Prem/Disc

12/27/91
1/3/92
1/10/92
1/17/92
1/24/92
1/31/92
2/7/92
2/14/92
2/21/92   0.0726
2/28/92   0.0805
3/6/92    0.0874
3/13/92   0.0980
3/20/92   0.0819
3/27/92   0.0556
4/3/92    0.0538
4/10/92   0.0705
4/17/92   0.0547
4/24/92   0.0590
5/1/92    0.0546
5/8/92    0.0536
5/15/92   0.0306
5/22/92   0.0248
5/29/92   0.0307
6/5/92    0.0181
6/12/92   0.0400
6/19/92   0.0357
6/26/92   0.0442
7/3/92    0.0475
7/10/92   0.0626
7/17/92   0.0800
7/24/92   0.0592
7/31/92   0.0647
8/7/92    0.0613
8/14/92   0.0628
8/21/92   0.0514
8/28/92   0.0539
9/4/92    0.0409
9/11/92   0.0684
9/18/92   0.0572
9/25/92   0.0539
10/2/92   0.0620
10/9/92   0.0675
10/16/92  0.0490
10/23/92  0.0188
10/30/92  0.0474
11/6/92   0.0180
11/13/92  0.0188
11/20/92  0.0408
11/27/92  0.0844
12/4/92   0.0630
12/11/92  0.0515
12/18/92  0.0691
12/25/92  0.0638
1/1/93    0.0621
1/8/93    0.0679
1/15/93   0.0595
1/22/93   0.0434
1/29/93   0.0475
2/5/93    0.0483
2/12/93   0.0284
2/19/93   0.0202
2/26/93   0.0310
3/5/93    0.0473
3/12/93   0.0651
3/19/93   0.0303
3/26/93   0.0360
4/2/93    0.0514
4/9/93    0.0675
4/16/93   0.0570
4/23/93   0.0853
4/30/93   0.0651
5/7/93    0.0513
5/14/93   0.0610
5/21/93   0.0570
5/28/93   0.0441
6/4/93    0.0497
6/11/93   0.0561
6/18/93   0.0497
6/25/93   0.0417
7/2/93    0.0472
7/9/93    0.0425
7/16/93   0.0362
7/23/93   0.0068
7/30/93   0.0306
8/6/93    0.0212
8/13/93   0.0181
8/20/93   0.0008
8/27/93   0.0370
9/3/93    0.0331
9/10/93   0.0401
9/17/93   0.0338
9/24/93   0.0244
10/1/93   0.0214
10/8/93   0.0261
10/15/93  0.0263
10/22/93  0.0246
10/29/93  0.0090
11/5/93   0
11/12/93 -0.0107
11/19/93 -0.0282
11/26/93 -0.0179
12/3/93  -0.0076
12/10/93 -0.0334
12/17/93 -0.0338
12/24/93 -0.0431
12/31/93  0.0249
1/7/94   -0.0036
1/14/94   0.0157
1/21/94  -0.0230
1/28/94  -0.0377
2/4/94   -0.0323
2/11/94  -0.0361
2/18/94  -0.0863
2/25/94  -0.0500
3/4/94   -0.0392
3/11/94  -0.0315
3/18/94  -0.0585
3/25/94  -0.0562
4/1/94   -0.0556
4/8/94   -0.0612
4/15/94  -0.0771
4/22/94  -0.1012
4/29/94  -0.1145
5/6/94   -0.0775
5/13/94  -0.0633
5/20/94  -0.0636
5/27/94  -0.0312
6/3/94   -0.0683
6/10/94  -0.0288
6/17/94  -0.0457
6/24/94  -0.0393
7/1/94   -0.0409
7/8/94   -0.0450
7/15/94  -0.0490
7/22/94  -0.0294
7/29/94  -0.0327
8/5/94   -0.0221
8/12/94  -0.0303
8/19/94  -0.0269
8/26/94  -0.0348
9/2/94   -0.0204
9/9/94   -0.0318
9/16/94  -0.0409
9/23/94  -0.0628
9/30/94  -0.0620
10/7/94  -0.1322
10/14/94 -0.1149
10/21/94 -0.1410
10/28/94 -0.1040
11/4/94  -0.0786
11/11/94 -0.0976
11/18/94 -0.0990
11/25/94 -0.0770
12/2/94  -0.0402
12/9/94  -0.0868
12/16/94 -0.0732
12/23/94 -0.0604
12/30/94 -0.0851
1/6/95   -0.0010
1/13/95  -0.0141
1/20/95  -0.0303
1/27/95  -0.0619
2/3/95   -0.0119
2/10/95  -0.0314
2/17/95  -0.0702
2/24/95  -0.0376
3/3/95   -0.0297
3/10/95  -0.0585
3/17/95  -0.0523
3/24/95  -0.0534
3/31/95  -0.0393
4/7/95   -0.0341
4/14/95  -0.0393
4/21/95  -0.0690
4/28/95  -0.0341
5/5/95   -0.0576
5/12/95  -0.0501
5/19/95  -0.0933
5/26/95  -0.0753
6/2/95   -0.0481
6/9/95   -0.0729
6/16/95  -0.0702
6/23/95  -0.0749
6/30/95  -0.0686
7/7/95   -0.0690
7/14/95  -0.0869
7/21/95  -0.1087
7/28/95  -0.0911
8/4/95   -0.0973
8/11/95  -0.1018
8/18/95  -0.1011
8/25/95  -0.0780
9/1/95   -0.0706
9/8/95   -0.0833
9/15/95  -0.0710
9/22/95  -0.0749
9/29/95  -0.0641
10/6/95  -0.0718
10/13/95 -0.1006
10/20/95 -0.0909
10/27/95 -0.1012
11/3/95  -0.1232
11/10/95 -0.0962
11/17/95 -0.1071
11/24/95 -0.1093
12/1/95  -0.1014
12/8/95  -0.1277
12/15/95 -0.1233
12/22/95 -0.1265
12/29/95 -0.1454
1/5/96   -0.1197
1/12/96  -0.1279
1/19/96  -0.1312
1/26/96  -0.1146
2/2/96   -0.1233
2/9/96   -0.1233
2/16/96  -0.1279
2/23/96  -0.1303
3/1/96   -0.1124
3/8/96   -0.1465
3/15/96  -0.1508
3/22/96  -0.1487
3/29/96  -0.1515
4/5/96   -0.1315
4/12/96  -0.1286
4/19/96  -0.1279
4/26/96  -0.1383
5/3/96   -0.1257
5/10/96  -0.1130
5/17/96  -0.1408
5/24/96  -0.1386
5/31/96  -0.1386
6/7/96   -0.1255
6/14/96  -0.1337
6/21/96  -0.1301
6/28/96  -0.0918
7/5/96   -0.1079
7/12/96  -0.0911
7/19/96  -0.1122
7/26/96  -0.0939
8/2/96   -0.0876
8/9/96   -0.0688
8/16/96  -0.0673
8/23/96  -0.0881
8/30/96  -0.0836
9/6/96   -0.0836
9/13/96  -0.0661
9/20/96  -0.0889
9/27/96  -0.0991
10/4/96  -0.0876
10/11/96 -0.0876
10/18/96 -0.0935
10/25/96 -0.0834
11/1/96  -0.0796
11/8/96  -0.0932
11/15/96 -0.0726
11/22/96 -0.0586
11/29/96 -0.0608
12/6/96  -0.0792
12/13/96 -0.0813
12/20/96 -0.1009
12/27/96 -0.0837
1/3/97   -0.0693
1/10/97  -0.0562
1/17/97  -0.0693
1/24/97  -0.0834
1/31/97  -0.0678
2/7/97   -0.0623
2/14/97  -0.0551
2/21/97  -0.0645
2/28/97  -0.0605
3/7/97   -0.0581
3/14/97  -0.0654
3/21/97  -0.0715
3/28/97  -0.0715
4/4/97   -0.0573
4/11/97  -0.0973
4/18/97  -0.0806
4/25/97  -0.0748
5/2/97   -0.0672
5/9/97   -0.0520
5/16/97  -0.0647
5/23/97  -0.0573
5/30/97  -0.0362
6/6/97   -0.0615
6/13/97  -0.0385
6/20/97  -0.0473
6/27/97  -0.0418
7/4/97   -0.0498
7/11/97  -0.0585
7/18/97  -0.0486
7/25/97  -0.0630
8/1/97   -0.0273
8/8/97   -0.0701
8/15/97  -0.0715
8/22/97  -0.0767
8/29/97  -0.0472
9/5/97   -0.0580
9/12/97  -0.0656
9/19/97  -0.0557
9/26/97  -0.0492
10/3/97  -0.0292
10/10/97 -0.0492
10/17/97 -0.0506
10/24/97 -0.0574
10/31/97 -0.0477
11/7/97  -0.0442
11/14/97 -0.0377
11/21/97 -0.0688
11/28/97 -0.0484
12/5/97  -0.0406
12/12/97 -0.0652
12/19/97 -0.0648
12/26/97 -0.0456
1/2/98   -0.0171
1/9/98   -0.0197
1/16/98  -0.0185
1/23/98  -0.0620
1/30/98  -0.0477
2/6/98   -0.0530
2/13/98  -0.0604
2/20/98  -0.0456
2/27/98  -0.0477
3/6/98   -0.0473
3/13/98  -0.0568
3/20/98  -0.0487
3/27/98  -0.0579
4/3/98   -0.0682
4/10/98  -0.0508
4/17/98  -0.0620
4/24/98  -0.0768
5/1/98   -0.0618
5/8/98   -0.0540
5/15/98  -0.0717
5/22/98  -0.0664
5/29/98  -0.0648
6/5/98   -0.0643
6/12/98  -0.0627
6/19/98  -0.0573
6/26/98  -0.0600
7/3/98   -0.0575
7/10/98  -0.0562
7/17/98  -0.0563
7/24/98  -0.0465
7/31/98  -0.0526
8/7/98   -0.0472
8/14/98  -0.0864
8/21/98  -0.0954
8/28/98  -0.0540
9/4/98   -0.0618
9/11/98  -0.0487
9/18/98  -0.0392
9/25/98  -0.0402
10/2/98  -0.0554
10/9/98  -0.0744
10/16/98 -0.0485
10/23/98 -0.0406
10/30/98 -0.0616
11/6/98  -0.0396
11/13/98 -0.0481
11/20/98 -0.0641
11/27/98 -0.0478
12/4/98  -0.0413
12/11/98 -0.0363
12/18/98 -0.0537
12/25/98 -0.0132
1/1/99   -0.0196
1/8/99   -0.0297
1/15/99  -0.0392
1/22/99  -0.0627
1/29/99  -0.0677
2/5/99   -0.0610
2/12/99  -0.0887
2/19/99  -0.0937
2/26/99  -0.1078
3/5/99   -0.0846
3/12/99  -0.0650
3/19/99  -0.1022
3/26/99  -0.0888
4/2/99   -0.0724
4/9/99   -0.1029
4/16/99  -0.0781
4/23/99  -0.0930
4/30/99  -0.1156
5/7/99   -0.1015
5/14/99  -0.1277
5/21/99  -0.1256
5/28/99  -0.1093
6/4/99   -0.1007
6/11/99  -0.0558
6/18/99  -0.0835
6/25/99  -0.0602
7/2/99   -0.0532
7/9/99   -0.0532
7/16/99  -0.0761
7/23/99  -0.0558
7/30/99  -0.0829
8/6/99   -0.0464
8/13/99  -0.0780
8/20/99  -0.0864
8/27/99  -0.0345
9/3/99   -0.1057
9/10/99  -0.0938
9/17/99  -0.0683
9/24/99  -0.0401
10/1/99  -0.0770
10/8/99  -0.0860
10/15/99 -0.1231
10/22/99 -0.1254
10/29/99 -0.1223
11/5/99  -0.1192
11/12/99 -0.1252
11/19/99 -0.0826
11/26/99 -0.0979
12/3/99  -0.0970
12/10/99 -0.0807
12/17/99 -0.1118
12/24/99 -0.1212
12/31/99 -0.0354
1/7/00   -0.0028
1/14/00  -0.0385
1/21/00  -0.0996
1/28/00  -0.1047
2/4/00   -0.0923
2/11/00  -0.0845
2/18/00  -0.1038
2/25/00  -0.0962
3/3/00   -0.1021
3/10/00  -0.0858
3/17/00  -0.1055
3/24/00  -0.1272
3/31/00  -0.1361
4/7/00   -0.1047
4/14/00  -0.0894
4/21/00  -0.0781
4/28/00  -0.0640
5/5/00   -0.0385
5/12/00  -0.0566
5/19/00  -0.0734
5/26/00  -0.0759
6/2/00   -0.0905
6/9/00   -0.1037
6/16/00  -0.0943
6/23/00  -0.0775
6/30/00  -0.0841
7/7/00   -0.0909
7/14/00  -0.0893
7/21/00  -0.0970
7/28/00  -0.0927
8/4/00   -0.0912
8/11/00  -0.0879
8/18/00  -0.1046
8/25/00  -0.1046
9/1/00   -0.1105
9/8/00   -0.1113
9/15/00  -0.0836
9/22/00  -0.1189
9/29/00  -0.1155
10/6/00  -0.0896
10/13/00 -0.0921
10/20/00 -0.0895
10/27/00 -0.0725
11/3/00  -0.0739
11/10/00 -0.0747
11/17/00 -0.0962
11/24/00 -0.0937
12/1/00  -0.0928
12/8/00  -0.0903
12/15/00 -0.0913
12/22/00 -0.0672
12/29/00 -0.0276
1/5/01   -0.0411
1/12/01  -0.0200
1/19/01  -0.0077
1/26/01   0.0192
2/2/01   -0.0528
2/9/01   -0.0346
2/16/01  -0.0184
2/23/01  -0.0257
3/2/01   -0.0109
3/9/01   -0.0360
3/16/01  -0.0393
3/23/01  -0.0360
3/30/01  -0.0109
4/6/01    0.0200
4/13/01   0.0046
4/20/01   0.0243
4/27/01  -0.0278
5/4/01   -0.0218
5/11/01   0.0037
5/18/01  -0.0228
5/25/01  -0.0111
6/1/01   -0.0345
6/8/01   -0.0325
6/15/01  -0.0654
6/22/01  -0.0623
6/29/01  -0.0379
7/6/01   -0.0307
7/13/01  -0.0098
7/20/01  -0.0264
7/27/01   0.0237
8/3/01    0.0035
8/10/01  -0.0567
8/17/01  -0.0439
8/24/01  -0.0365
8/31/01  -0.0603
9/7/01   -0.0353
9/14/01  -0.0353
9/21/01   0
9/28/01  -0.0414
10/5/01  -0.0433
10/12/01 -0.0114
10/19/01 -0.0191
10/26/01 -0.0138
11/2/01   0.0017
11/9/01  -0.0068
11/16/01  0.0260
11/23/01  0.0304
11/30/01 -0.0284
12/7/01  -0.0009
12/14/01 -0.0201
12/21/01  0.0210
12/28/01  0.0289
1/4/02    0.0297
1/11/02   0.0276
1/18/02   0.0268
1/25/02   0.0677
2/1/02    0.0444
2/8/02    0.0607
2/15/02   0.0457
2/22/02   0.0582
3/1/02    0.0595
3/8/02    0.0124
3/15/02   0.0302
3/22/02   0.0383
3/29/02   0.0400
4/5/02    0.0248
4/12/02   0.0409
4/19/02   0.0394
4/26/02   0.0526
5/3/02    0.0839
5/10/02   0.0595
5/17/02   0.0858
5/24/02   0.0757
5/31/02   0.0766
6/7/02    0.0832
6/14/02   0.0670
6/21/02   0.0743
6/28/02   0.0933
7/5/02    0.1238
7/12/02   0.0692
7/19/02   0.0972
7/26/02   0.1421
8/2/02    0.1372
8/9/02    0.1002
8/16/02   0.1195
8/23/02   0.1206
8/30/02   0.1077
9/6/02    0.1002
9/13/02   0.0965
9/20/02   0.0993
9/27/02   0.1042
10/4/02   0.1141
10/11/02  0.1429
10/18/02  0.0519
10/25/02  0.0741
11/1/02   0.0733
11/8/02   0.0721
11/15/02  0.0664
11/22/02  0.0610
11/29/02  0.0872
12/6/02   0.0972
12/13/02  0.1086
12/20/02  0.1278
12/27/02  0.1558
01/03/03  0.1518
01/10/03  0.0930
01/17/03  0.1092
01/24/03  0.0865
01/31/03  0.1038
02/07/03  0.0983
02/14/03  0.0960
02/21/03  0.1148
02/28/03  0.0969
3/7/03    0.1258
3/14/03   0.1585
3/21/03   0.0897
3/28/03   0.1033
4/4/03    0.1225
4/11/03   0.1477
4/18/03   0.1463
4/25/03   0.1211
5/2/03    0.0989
5/9/03    0.0553
5/16/03   0.0330
5/23/03   0.0145
5/30/03   0.0486

     The  calculation  of total return  based upon the NAV is a  straightforward
measurement  of the job management is doing.  The linkage to  performance  based
upon share price is less direct. While we continually promote the Fund's shares,
the strongest endorsement comes from an evaluation of the NAV performance.

WHAT IS THE OUTLOOK FOR THE DIVIDEND PAID BY THE FUND?

     The recent decline in interest rates has had two offsetting impacts. First,
the rate that the Fund is paying on its MMP(TM)  shares has  declined,  saving a
substantial  sum.  Second,  the  income  earned by the Fund is a bit lower  than
projected,  as we have purchased  securities at lower yields. For now, these two
have roughly offset,  and, at this point, we remain  comfortable with the Fund's
current dividend rate.

HOW WILL THE NEW TAX LAW TREAT PREFERRED SECURITIES?

     On May 28,  2003,  President  Bush  signed  the Jobs and  Growth Tax Relief
Reconciliation  Act of 2003. The  cornerstone of the Act is a provision to lower
the maximum rate paid by  individuals  on certain  types of  qualified  dividend
income ("QDI") to 15%. Prior to this legislation,  dividend income was typically
taxed at the same rate as ordinary income.


                                        3




     Back in January,  the Bush Administration  proposed  eliminating the double
taxation  of   dividends.   When  a  company   distributes  a  dividend  to  its
shareholders,  it does so with income left over after it has already paid taxes.
Prior to the new legislation,  shareholders  were required to pay taxes at their
maximum tax rate on that same dividend. So a dollar earned by a company could be
taxed  twice  if it was  distributed  to the  shareholders  of the  company.  By
lowering the tax rate, the new law reduces,  but doesn't eliminate,  this double
taxation.

     To be eligible  for the lower tax rate as QDI,  the  dividend  must be paid
from the  company's  after-tax  income.  For this  reason,  it is  important  to
understand the difference between taxable (or "hybrid") preferred securities and
traditional  preferred stock.  Hybrid preferreds pay interest,  which the issuer
can  deduct  from  revenue  in  determining  its  taxable  income.   Traditional
preferreds pay  dividends,  which are  distributed  from income after taxes have
been paid. Because of the different tax treatment,  hybrid preferred  securities
normally have a higher yield than traditional preferred stocks.

     For the investor,  interest from hybrids is taxed as ordinary income, while
dividends from traditional  preferreds may be taxed at the new, lower rate. As a
result,  an investor  in a low tax bracket or an IRA  investor is more likely to
purchase taxable preferreds for the higher pre-tax income,  while an investor in
a high tax bracket may prefer the QDI issue for the higher after-tax income. But
this isn't  always the case.  The market  tends to offset the tax impact  pretty
effectively,  and securities that pay QDI will usually yield less (before taxes)
than those that pay interest.

HOW WILL THE NEW TAX LAW IMPACT THE FUND?

     We take all of this into  consideration  when  making  investments  for the
Fund. The Fund's investment  objective is high current income,  but that doesn't
mean we will always own the securities with the highest yields. In recent years,
the portion of the portfolio in  traditional  preferred  stock has been steadily
increasing.  Traditional preferreds typically yield less than hybrid preferreds,
but if that  differential  is small (as it was during this period),  traditional
preferreds can be more attractive.

     The Fund's  cost for its  leverage  may also be lower if more of the income
from the portfolio comes from traditional  preferreds.  This is because the Fund
must make  additional  payments  to the  holders  of its  MMP(TM) if some of the
income distributed to them is from hybrid preferreds.

     The  allocation  between  traditional  and hybrid  preferreds  is likely to
change over time.  Investors  should NOT assume that there is a target level for
traditional preferreds or other securities that pay QDI. The Fund will own these
securities when we think they are more attractive than hybrid preferreds, taking
all factors,  including taxes, into account (even if the yield is lower). But if
we are right,  and  relationships  move back in line,  we are likely to sell the
traditional preferreds and buy hybrid preferreds.

HOW WILL THE FUND REPORT THE BREAKDOWN BETWEEN DIVIDENDS AND INTEREST?

     At the end of the year, the Fund will calculate the breakdown  according to
the new rules and  expects to report it to  shareholders  on Form 1099.  We will
also publish the  breakdown  on the Fund's web site and in the Annual  Report to
Shareholders.


                                        4



CAN I REINVEST DIVIDENDS DIRECTLY INTO THE FUND?

     Yes, 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 at or above NAV,  DRIP  participants'  dividends  are
reinvested  into 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/her 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.

DOES THE FUND HAVE A WEB SITE?

     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. In the near future,  we intend to post on a monthly
basis the industry  concentrations,  the percent of the portfolio holdings rated
investment  grade by at least one of the rating agencies  (Moody's and S&P), and
the month-end  NAV. We will also post monthly the Fund's 1940 Act asset coverage
ratio,  which calculates the ratio of the liquidation  value of the Fund's Money
Market  Cumulative  PreferredTM  Stock (MMPTM)  relative to the Fund's total net
assets.  We continue to improve the site, but we need to know what  additionally
would be helpful. Please let us hear from you.

IS THE FUND CONSIDERING CHANGING ITS NAME?

     Yes.  Fund  management  thinks  it is  important  to have a name  that more
effectively  distinguishes  it from the  myriad  of other  preferred  funds.  To
minimize the chances of confusion,  we are considering  changing the name to one
that is more clearly associated with the adviser.

                                        5



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




                                           TOTAL                               DIVIDEND
                                         DIVIDENDS  NET ASSET      NYSE      REINVESTMENT
                                           PAID       VALUE    CLOSING PRICE   PRICE (1)
                                         ---------  ---------  ------------- ------------
                                                                   
December 31, 2002 EXTRA ................   0.107      10.72        12.21        11.60
December 31, 2002 ......................   0.073      10.72        12.21        11.60
January 31, 2003 .......................   0.073      11.46        12.65        12.02
February 28, 2003 ......................   0.073      11.46        12.57        11.94
March 31, 2003 .........................   0.073      11.58        13.00        12.35
April 30, 2003 .........................   0.073      11.76        12.59        11.96
May 31, 2003 ...........................   0.073      12.34        12.94        12.34

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



    The accompanying notes are an integral part of the financial statements.

                                       6




--------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated
                                                        PORTFOLIO OF INVESTMENTS
                                                        MAY 31, 2003 (UNAUDITED)
                                 -----------------------------------------------
                                                           VALUE
SHARES/$PAR                                               (NOTE 2)
-----------                                             -----------

PREFERRED SECURITIES -- 95.0%
  ADJUSTABLE RATE PREFERRED SECURITIES -- 8.8%
         BANKING -- 8.2%
   75,000   Cobank,
              Adj. Rate Pfd.,  Pvt.,  144A*** ......... $ 4,125,000*
            J.P.  Morgan Chase & Co.:
   79,825     Series A, Adj. Rate Pfd. ................   7,862,763*
   22,000     Series L, Adj. Rate Pfd. ................   2,172,500*
  129,200     Series N, Adj. Rate Pfd. ................   3,238,075*
                                                        -----------

            TOTAL BANKING ADJUSTABLE RATE
             PREFERRED SECURITIES .....................  17,398,338

                                                        -----------
         FINANCIAL SERVICES -- 0.3%
   10,500   Bear Stearns Companies, Inc.,
              Series A, Adj. Rate Pfd. ................     530,906*
                                                        -----------
         UTILITIES -- 0.3%
   12,265   Northern Indiana Public Service Company,
              Series A, Adj. Rate Pfd. ................     608,651*
                                                        -----------
            TOTAL ADJUSTABLE RATE
             PREFERRED SECURITIES .....................  18,537,895
                                                        -----------

  FIXED RATE PREFERRED SECURITIES -- 85.6%
         BANKING -- 15.1%
            ABN AMRO North America, Inc.:
     1,165    6.46% Pfd., Pvt., 144A*** ...............   1,291,735*
     1,000    6.59% Pfd., Pvt., 144A*** ...............   1,101,305*
            BancWest Corporation:
$2,250,000    First Hawaiian Capital I,
              8.343% 7/1/27 Capital Security,
              Series B ................................   2,773,935
            Citigroup, Inc.:
    98,435    5.864% Pfd., Series M ...................   5,199,337*
    10,500    6.213% Pfd., Series G ...................     569,467*
     8,650    6.231% Pfd., Series H ...................     470,473*
            Comerica, Inc.:
$  500,000    Comerica (Imperial) Capital Trust I,
              Series B,
              9.98% 12/31/26 Capital Security .........     647,710

                                                           VALUE
SHARES/$PAR                                               (NOTE 2)
-----------                                             -----------

            Deutsche Bank:
$ 660,000     BT Preferred Capital Trust II,
              7.875% 2/25/27 Capital Security ......... $   761,993
$ 150,000     BT Capital Trust B,
              7.90% 1/15/27
              Capital Security, Series B1 .............     173,588
    1,000   Firstar Realty LLC,
              8.875% Pfd., REIT, Pvt., 144A*** ........   1,336,370
            GreenPoint Financial Corporation:
$6,849,000    GreenPoint Capital Trust I,
              9.10% 6/1/27 Capital Security ...........   8,286,126
   24,900   HSBC USA, Inc.,
              $2.8575 Pfd. ............................   1,310,736*
$1,350,000  Keycorp Institutional Capital B,
              8.25% 12/15/26 Capital Security .........   1,636,814
            Wachovia Corporation:
$ 500,000     First Union Capital II,
              7.95% 11/15/29 Capital Security .........     646,248
$2,719,000    First Union Institutional Capital I,
              8.04% 12/1/26 Capital Security ..........   3,303,408
$1,885,000    First Union Institutional Capital II,
              7.85% 1/1/27 Capital Security ...........   2,260,096
                                                        -----------

            TOTAL BANKING FIXED RATE
             PREFERRED SECURITIES .....................  31,769,341
                                                        -----------

         FINANCIAL SERVICES -- 12.2%
            Bear Stearns Companies, Inc.:
    78,000    5.49% Pfd., Series G ....................   4,007,250*
    50,323    5.72% Pfd., Series F ....................   2,669,132*
            Lehman Brothers Holdings, Inc.:
    83,150    5.67% Pfd., Series D ....................   4,342,093*
   159,505    5.94% Pfd., Series C ....................   8,491,249*
   113,400  SLM Corporation,
              6.97% Pfd., Series A ....................   6,328,854*
                                                        -----------
            TOTAL FINANCIAL SERVICES FIXED
             RATE PREFERRED SECURITIES ................  25,838,578
                                                        -----------


    The accompanying notes are an integral part of the financial statements.

                                       7



--------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2003 (UNAUDITED)
----------------------------------
                                                           VALUE
SHARES/$PAR                                               (NOTE 2)
-----------                                             -----------

PREFERRED SECURITIES (CONTINUED)
  FIXED RATE PREFERRED SECURITIES (CONTINUED)
         INSURANCE -- 10.0%
   47,000   ACE, Ltd.,
              7.80% Pfd., Series C .................... $ 1,226,465
            AON Corporation:
$1,550,000    AON Capital Trust A,
              8.205% 1/1/27 Capital Security ..........   1,808,370
            Conseco, Inc.:
    24,750    Conseco Financing Trust V,
              8.70% TOPrS .............................       3,836+
    25,000    Conseco Financing Trust VI,
              9.00% TOPrS .............................       3,875+
    17,600    Conseco Financing Trust I,
              9.16% TOPrS .............................       2,904+
     1,250  Fortis Funding Trust,
              7.68% Pfd., Pvt., 144A*** ...............   1,467,775*
    11,000  Hartford Cap I,
              7.70% Pfd., Series A 280,445
            SAFECO Corporation:
$  500,000    SAFECO Capital Trust I,
              8.072% 7/15/37 Capital Security .........     592,040
            The St. Paul Companies, Inc.:
$4,895,000    MMI Capital Trust I,
              7.625% 12/15/27 Capital Security,
              Series B ................................   5,264,205
            UnumProvident Corporation:
$5,889,000    Provident Financing Trust I,
              7.405% 3/15/38 Capital Security .........   5,420,795
            Zurich RegCaPS Fund Trust I:
     4,000    6.01% Pfd., Pvt., 144A*** ...............   3,837,640*
     1,200    6.58%, Pfd., Pvt., 144A*** ..............   1,165,320*
                                                        -----------

            TOTAL INSURANCE FIXED RATE
             PREFERRED SECURITIES .....................  21,073,670
                                                        -----------

         UTILITIES -- 41.5%
            Alabama Power Company:
     4,980    4.60% Pfd. ..............................    461,422*
     6,485    4.72% Pfd. ..............................    616,561*
       250    4.92% Pfd. ..............................     24,776*
         5    4.95% Pfd. ..............................    554,999*
    93,400    5.20% Pfd. ..............................  2,414,857*

                                                           VALUE
SHARES/$PAR                                               (NOTE 2)
-----------                                             -----------


     4,000  Appalachian Power Company,
              5.92% Sinking Fund Pfd. ................. $   410,120*
    23,750  Avista Corporation,
              $6.95 Sinking Fund Pfd., Series K .......   2,174,669*
    10,000  Boston Edison Company,
              4.78% Pfd. ..............................     909,150*
    13,395  Carolina Power & Light Company,
              $5.44 Pfd. ..............................   1,347,403*
            CenterPoint Energy, Inc.:
    45,000    Houston Light & Power, Capital Trust I,
              8.125% QUIPS ............................   1,120,500
$3,750,000    Houston Light & Power, Capital Trust II,
              8.257%, 2/1/37 Capital Security,
              Series B ................................   3,702,619
    55,982    REI Trust I,
              7.20% TOPrS, Series C ...................   1,339,369
     1,628  Central Hudson Gas & Electric Corporation,
              4.35% Pfd., Series D, Pvt. ..............     129,760*
            Central Illinois Light Company:
    10,000    4.64% Pfd. ..............................     883,600*
    10,000    5.85% Sinking Fund Pfd. .................   1,049,950*
     3,798  Central Maine Power Company,
              4.75% Pfd. ..............................     314,057*
     9,375  Central Vermont Public Service Corporation,
              8.30% Pvt. Sinking Fund Pfd. ............   1,004,625*
     5,300  Connecticut Light & Power Company,
              $3.24 Pfd. ..............................     273,692*
     2,000  Consolidated Edison Company of New York,
              4.65% Pfd., Series C ....................     177,910*
            Dayton Power & Light Company:
     2,000    3.75% Pfd. ..............................     120,970*
     4,500    3.90% Pfd., Series C ....................     283,072*
            Duke Energy Corporation:
     8,004    4.50% Pfd., Series C, Pvt. ..............     567,203*
    13,400    6.75% Pfd., Series X,
              Sinking Fund Pfd. .......................   1,390,652*
    30,700    7.85% Pfd., Series S ....................   3,185,892*
    15,030  Duquesne Light Company,
              3.75% Pfd. ..............................     416,932*
     5,000  Energy East Capital Trust I,
              8.25% TOPrS .............................     136,400

    The accompanying notes are an integral part of the financial statements.

                                       8



--------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated
                                            PORTFOLIO OF INVESTMENTS (CONTINUED)
                                                        MAY 31, 2003 (UNAUDITED)
                                 -----------------------------------------------
                                                           VALUE
SHARES/$PAR                                               (NOTE 2)
-----------                                             -----------

PREFERRED SECURITIES (CONTINUED)
  FIXED RATE PREFERRED SECURITIES (CONTINUED)
         UTILITIES (CONTINUED)
            Entergy Arkansas, Inc.:
    2,840     4.56% Pfd. .............................. $   192,978*
    3,050     4.56% Pfd., Series 1965 .................     207,247*
   13,500     7.40% Pfd. ..............................   1,408,252*
      150     7.80% Pfd. ..............................      15,709*
   23,814     $1.96 Pfd. ..............................     604,876*
    1,050     $6.08 Pfd. ..............................      95,125*
    2,441   Entergy Gulf States, Inc.,
              7.56% Pfd. ..............................     244,710*
            Entergy Louisiana, Inc.:
      299     5.16% Pfd. ..............................      23,180*
    3,771     7.36% Pfd. ..............................     392,882*
  175,000     8.00% Pfd., Series 92 ...................   4,483,500*
            Entergy Mississippi, Inc.:
    3,791     4.36% Pfd. ..............................     253,940*
    8,500     7.44% Pfd. ..............................     881,832*
            Florida Power & Light Company:
    6,000     4.32% Pfd., Series D ....................     493,620*
    4,654     4.35% Pfd., Series E, Pvt. ..............     381,954*
    4,000     4.50% Pfd., Series A, Pvt. ..............     342,800*
            Hawaiian Electric Company, Inc.:
   23,600     HECO Capital Trust I,
              8.05% QUIPS .............................     602,154
    5,291   Idaho Power Co.,
              7.68% Pfd., Series 1 ....................     547,751*
    8,000   Indiana Michigan Power Company,
              6.875% Sinking Fund Pfd. ................     810,720*
   30,500   Indianapolis Power & Light Company,
              5.65% Pfd. ..............................   2,454,945*
  340,000   Interstate Power & Light Company,
              8.375% Pfd., Series B ...................  10,040,200*
    4,500   Kentucky Utilities Company,
              6.53% Pfd. ..............................     471,128*
            Mississippi Power Company:
   15,000     6.32% Pfd. ..............................     386,925*
    5,087     7.00% Pfd. ..............................     531,388*
   41,500   Monongahela Power Company,
              $7.73 Pfd., Series L ....................   3,542,855*


                                                           VALUE
SHARES/$PAR                                               (NOTE 2)
-----------                                             -----------


    2,588   New York State Electric & Gas,
              $4.50 Pfd., Series 1949 ................. $   201,023*
   20,000   Northern States Power Company,
              NSP Financing I,
              7.875% Pfd. TOPrS .......................     510,400
    2,500   Ohio Power Company,
              5.90% Sinking Fund Pfd. .................     250,500*
            PECO Energy Company:
    1,100     $4.30 Pfd., Series B ....................      84,282*
    5,000     $4.40 Pfd., Series C ....................     385,275*
    7,500     $7.48 Pfd. ..............................     784,388*
      570   PSI Energy, Inc.,
              4.32% Pfd. ..............................      11,095*
            PacifiCorp:
    6,458     $4.72 Pfd. ..............................     518,803*
  116,035     8.25% QUIPS .............................   2,976,878
            Pacific Enterprises:
    8,630     $4.36 Pfd. ..............................     659,893*
   11,910     $4.50 Pfd. ..............................     939,878*
   13,510     $4.75 Pfd., Series 53 ...................   1,125,451*
   14,250   Portland General Electric,
              7.75%, Sinking Fund Pfd. ................   1,452,218*
    2,493   Potomac Electric Power Company,
              $2.44 Pfd., Series 1957 .................     111,724*
   43,400   Public Service Company of Colorado,
              Capital Trust I, 7.60% TOPrS ............   1,109,738
            Public Service Enterprise Group, Inc.:
   10,900     Enterprise Capital Trust I,
              7.44% TOPrS, Series A ...................     272,664
   14,020     Public Service Electric & Gas Company,
              5.28% Pfd., Series E ....................   1,257,664*
   34,079   Puget Sound Energy, Inc.,
              7.75% Sinking Fund Pfd. .................   3,616,804*
            Rochester Gas & Electric Corporation:
    5,060     4.10% Pfd., Series J ....................     344,384*
   10,000     4.55% Pfd., Series M, Pvt. ..............     755,300*
    4,030     4.75% Pfd., Series I ....................     317,745*
    3,404     4.95% Pfd., Series K ....................     279,707*
            San Diego Gas & Electric Company:
   40,000     $1.70 Pfd ...............................   1,041,000*
   38,000     $1.7625 Sinking Fund Pfd. ...............   1,020,300*


    The accompanying notes are an integral part of the financial statements.

                                       9



--------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2003 (UNAUDITED)
-----------------------------------------------
                                                           VALUE
SHARES/$PAR                                               (NOTE 2)
-----------                                             -----------

PREFERRED SECURITIES (CONTINUED)
  FIXED RATE PREFERRED SECURITIES (CONTINUED)
         UTILITIES (CONTINUED)
            South Carolina Electric & Gas Company:
   14,226     5.125% Purchase Fund Pfd., Pvt. ......... $   665,350*
    7,774     6.00% Purchase Fund Pfd., Pvt. ..........     390,177*
            Southern Union Company
   60,800     Southern Union Financing I,
              9.48% TOPrS .............................   1,580,192
            TXU US Holdings Company:
   23,500     $6.98 7/01/08 Sinking Fund Pfd. .........   2,416,858*
$ 750,000     TXU Electric Capital V,
              8.175% 1/30/37 Capital Security .........     824,831
            Virginia Electric & Power Company:
    1,665     $4.04 Pfd. ..............................     127,730*
    2,270     $4.20 Pfd. ..............................     181,044*
    1,573     $4.80 Pfd. ..............................     143,371*
    2,878     $6.98 Pfd. ..............................     298,031*
    2,160   Washington Gas & Light Company,
              $4.25 Pfd. ..............................     166,201*
            Xcel  Energy, Inc.:
   15,000     $4.08 Pfd., Series B ....................     972,300*
   20,040     $4.10 Pfd., Series C ....................   1,295,285*
   35,510     $4.11 Pfd., Series D ....................   2,300,693*
   17,750     $4.16 Pfd., Series E ....................   1,163,956*
   10,000     $4.56 Pfd., Series G ....................     697,350*
                                                        -----------

            TOTAL UTILITIES FIXED RATE
             PREFERRED SECURITIES .....................  87,672,314
                                                        -----------

         OIL AND GAS -- 4.6%
   17,200   Anadarko Petroleum Corporation,
              5.46% Pfd. ..............................   1,794,562*
   40,100   Apache Corporation,
              5.68% Pfd., Series B ....................   4,227,141*
    3,200   EOG Resources, Inc.,
              7.195% Pfd., Series B ...................   3,684,096*
                                                        -----------
            TOTAL OIL AND GAS FIXED RATE
             PREFERRED SECURITIES .....................   9,705,799
                                                        -----------

                                                           VALUE
SHARES/$PAR                                               (NOTE 2)
-----------                                             -----------


         MISCELLANEOUS INDUSTRIES-- 2.2%
   13,600   E.I. Du Pont de Nemours and Company,
              $4.50 Pfd., Series B .................... $ 1,324,096*
   36,200   Farmland Industries, Inc.,
              8.00% Pfd., Pvt., 144A*** ...............     298,650*+
   20,500   Ocean Spray Cranberries, Inc.,
              6.25% Pfd., Pvt., 144A*** ...............   1,819,068*
   26,000   Touch America Holdings,
              $6.875 Pfd. .............................     627,250*+
    9,520   Viad Corporation,
              $4.75 Sinking Fund Pfd. .................     659,450*
                                                        -----------

            TOTAL MISCELLANEOUS
             INDUSTRIES FIXED RATE
             PREFERRED SECURITIES .....................   4,728,514
                                                        -----------
            TOTAL FIXED RATE
             PREFERRED SECURITIES ..................... 180,788,216
                                                        -----------
  INVERSE FLOATING RATE PREFERRED -- 0.6%
        14 Premium Assets, Series A,
             Zurich Financial Reg. Capital ............   1,259,546*
                                                        -----------
            TOTAL PREFERRED SECURITIES
             (Cost $178,950,689) ...................... 200,585,657
                                                        -----------

CORPORATE DEBT SECURITY -- 0.2%  (Cost $369,125)
         UTILITIES -- 0.2%
   15,000   Northern States Power Company,
              8.00% Pfd., PINES .......................     409,950
                                                        -----------

COMMON STOCKS AND CONVERTIBLE SECURITIES -- 3.5%
   96,700   Allegheny Energy, Inc. ....................     838,872+
    5,000   American Electric Power,
              9.25% Pfd. Convertible ..................     215,550
  102,500   CenterPoint Energy, Inc. ..................     976,312*
   97,500   Duke Energy Corporation ...................   1,884,188*
   27,500   FPL Group, Inc.,
              8.50% Pfd. Convertible ..................   1,628,413
   80,831   Reliant Resources, Inc. ...................     543,588+
   40,000   TXU Corporation,
              8.75% Pfd. Convertible ..................   1,208,000
                                                        -----------

            TOTAL COMMON STOCKS AND
             CONVERTIBLE SECURITIES
             (Cost $7,595,136) ........................   7,294,923
                                                        -----------

    The accompanying notes are an integral part of the financial statements.

                                       10



--------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated
                                            PORTFOLIO OF INVESTMENTS (CONTINUED)
                                                        MAY 31, 2003 (UNAUDITED)
                                 -----------------------------------------------
                                                           VALUE
SHARES/$PAR                                               (NOTE 2)
-----------                                             -----------

OPTION CONTRACTS -- 0.3%  (Cost $920,421)
    1,040   Put Options on US Treasury
              Bond September Futures,
              Expiring 08/23/2003 ...................  $    675,750+
                                                       ------------
MONEY MARKET FUND -- 0.4%  (Cost $917,661)
  917,661   BlackRock Provident
              Institutional TempFund, 1.19% .........       917,661
                                                       ------------

TOTAL INVESTMENTS (Cost $188,753,032**) ...  99.4%      209,883,941
OTHER ASSETS AND LIABILITIES (Net) ........   0.6%        1,272,927
                                             ----      ------------
TOTAL NET ASSETS AVAILABLE TO
COMMON AND PREFERRED STOCK ................ 100.0%++   $211,156,868
                                            -----      ------------
MONEY MARKET CUMULATIVE PREFERRED
STOCK (MMP) REDEMPTION VALUE ........................   (70,000,000)
ACCUMULATED UNDECLARED DISTRIBUTIONS TO MMP .........     ( 129,526)
                                                       ------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ..........  $141,027,342
                                                       ============
--------------
*    Securities eligible for the Dividends Received Deduction.
**   Aggregate cost of securities held.
***  Securities exempt from  registration  under Rule 144A of the Securities Act
     of 1933.  These  securities  may be  resold  in  transactions  exempt  from
     registration to qualified institutional buyers.
+    Non-income producing.
++   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 7):
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.


    The accompanying notes are an integral part of the financial statements.

                                       11




--------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2003 (UNAUDITED)
----------------------------------------------



                                                                                
ASSETS:
   Investments, at value (Cost $188,753,032)
     (See accompanying schedule) ..................................                  $209,883,941
   Dividends and interest receivable ..............................                     1,876,397
   Prepaid expenses ...............................................                       241,383
                                                                                     ------------
           Total Assets ...........................................                   212,001,721

LIABILITIES:
   Payable for securities purchased ............................... $495,180
   Dividends payable to Common Shareholders .......................  133,675
   Investment advisory fee payable ................................   99,167
   Professional fees payable ......................................   34,677
   Accrued expenses and other payables ............................   82,154
   Accumulated undeclared distributions to Money Market
     Cumulative Preferred(TM)Stock ................................  129,526
                                                                    --------
           Total Liabilities ......................................                       974,379
                                                                                     ------------
   MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (700 SHARES
     OUTSTANDING) REDEMPTION VALUE ................................                    70,000,000
                                                                                     ------------
NET ASSETS AVAILABLE TO COMMON STOCK ..............................                  $141,027,342
                                                                                     ============
NET ASSETS AVAILABLE TO COMMON STOCK consist of:
   Distributions in excess of net investment income ...............                     $ (98,886)
   Accumulated net realized (loss) on investments sold ............                   (12,065,240)
   Unrealized appreciation of investments .........................                    21,130,909
   Par value of Common Stock ......................................                       114,297
   Paid-in capital in excess of par value of Common Stock .........                   131,946,262
                                                                                     ------------
           Total Net Assets Available to Common Stock .............                  $141,027,342
                                                                                     ============
NET ASSET VALUE PER SHARE OF COMMON STOCK:
   Common Stock (11,429,733 shares outstanding) ...................                  $      12.34
                                                                                     ============


    The accompanying notes are an integral part of the financial statements.

                                        12



--------------------------------------------------------------------------------
                                  Preferred Income Opportunity Fund Incorporated
                                                         STATEMENT OF OPERATIONS
                               FOR THE SIX MONTHS ENDED MAY 31, 2003 (UNAUDITED)
                               -------------------------------------------------



                                                                                         
INVESTMENT INCOME:
     Dividends++ ............................................................                  $ 5,492,144
     Interest ...............................................................                    1,387,406
                                                                                               -----------
          Total Investment Income ...........................................                    6,879,550

EXPENSES:
     Investment advisory fee ................................................  $562,084
     Administrator's fee ....................................................   100,300
     Money Market Cumulative Preferred(TM)broker commissions
        and auction agent fees ..............................................    94,480
     Professional fees ......................................................    55,361
     Insurance expense ......................................................    51,178
     Directors' fees and expenses ...........................................    38,233
     Shareholder servicing agent fees and expenses ..........................    37,446
     Custodian fees and expenses ............................................    13,669
     Other ..................................................................    59,963
                                                                               --------
          Total Expenses ....................................................                    1,012,714
                                                                                               -----------
NET INVESTMENT INCOME .......................................................                    5,866,836
                                                                                               -----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
     Net realized (loss) on investments sold during the period ..............                   (1,284,395)
     Change in unrealized appreciation of investments during the period .....                   19,869,044
                                                                                               -----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS .............................                   18,584,649
                                                                                               -----------
DISTRIBUTIONS TO MONEY MARKET CUMULATIVE PREFERRED(TM)
   STOCK SHAREHOLDERS:
     From net investment income (including changes in
        accumulated undeclared distributions) ...............................                     (514,407)
                                                                                               -----------
NET INCREASE IN NET ASSETS TOCOMMONSTOCK RESULTING
   FROM OPERATIONS ..........................................................                  $23,937,078
                                                                                               ===========

------------
++   For Federal income tax purposes,  a significant portion of this amount does
     NOT qualify for the inter-corporate dividends received deduction ("DRD") or
     as Qualified Dividend Income ("QDI") for individuals.



    The accompanying notes are an integral part of the financial statements.

                                      13




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



                                                                                    SIX MONTHS ENDED
                                                                                      MAY 31, 2003         YEAR ENDED
                                                                                       (UNAUDITED)      NOVEMBER 30, 2002
                                                                                    ----------------    -----------------
                                                                                                    
OPERATIONS:
     Net investment income .....................................................      $ 5,866,836         $ 12,180,026
     Net realized (loss) on investments sold during the period .................       (1,284,395)          (3,508,136)
     Change in net unrealized appreciation/(depreciation)
        of investments held during the period ..................................       19,869,044           (6,414,650)
     Distributions to Money Market Cumulative  Preferred(TM)  Stock Shareholders
        from net investment income, including changes in
        accumulated undeclared distributions ...................................         (514,407)          (1,243,631)
                                                                                     ------------         ------------
     Net increase in net assets resulting from operations ......................       23,937,078            1,013,609

DISTRIBUTIONS:
     Dividends paid from net investment income to Common Stock
        Shareholders ...........................................................       (6,207,414)         (10,296,991)
     Distributions paid from net realized capital gains to Common Stock
        Shareholders ...........................................................               --                   --
                                                                                     ------------         ------------
FUND SHARE TRANSACTIONS:
     Increase from Common Stock transactions ...................................        1,039,332            1,749,231
                                                                                     ------------         ------------
NET INCREASE/(DECREASE)IN NET ASSETS TO
     COMMON STOCK FOR THE PERIOD ...............................................       18,768,996           (7,534,151)

NET ASSETS AVAILABLE TO COMMON STOCK:
     Beginning of period .......................................................      122,258,346          129,792,497
                                                                                     ------------         ------------
     End of period (including (overdistributed)/undistributed net investment
        income of $(98,886) and $756,099, respectively) ........................     $141,027,342         $122,258,346
                                                                                     ============         ============



    The accompanying notes are an integral part of the financial statements.

                                       14



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

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




                                                         SIX MONTHS
                                                            ENDED                             YEAR ENDED NOVEMBER 30,
                                                        MAY 31, 2003   -------------------------------------------------------------
                                                         (UNAUDITED)     2002         2001         2000         1999        1998
                                                        ------------   --------     --------     --------      -------    --------
                                                                                                        
OPERATING PERFORMANCE:
Net asset value, beginning of period ..................   $  10.78     $  11.60     $  10.68     $  11.50      $ 13.50    $  13.53
                                                          --------     --------     --------     --------      -------    --------
INVESTMENT OPERATIONS:
Net investment income .................................       0.51         1.07         1.10         1.18         1.14        1.14
Net realized and unrealized gain/(loss) on investments        1.64        (0.87)        0.89        (0.33)       (1.24)       0.17

DISTRIBUTIONS TO MMP* SHAREHOLDERS:
From net investment income ............................      (0.05)       (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. .....................       2.10         0.09         1.74         0.51        (0.44)       1.04
                                                          --------     --------     --------     --------      -------    --------
DISTRIBUTIONS TO COMMON SHAREHOLDERS:
From net investment income ............................      (0.54)       (0.91)       (0.82)       (0.91)       (0.96)      (0.89)
From net realized capital gains .......................         --           --           --        (0.42)       (0.60)      (0.18)
                                                          --------     --------     --------     --------      -------    --------
Total distributions ...................................      (0.54)       (0.91)       (0.82)       (1.33)       (1.56)      (1.07)
                                                          --------     --------     --------     --------      -------    --------
Net asset value, end of period ........................   $  12.34     $  10.78 +   $  11.60+    $  10.68+     $ 11.50+   $  13.50
                                                          ========     ========     ========     ========      =======    ========
Market value, end of period ...........................   $  12.94     $  11.72     $  11.27     $  9.563      $ 10.50    $ 12.875
                                                          ========     ========     ========     ========      =======    ========
Total investment return based on net asset value** ....     19.79%        0.63%       16.97%        5.88%       (2.99)%      8.29%
                                                          ========     ========     ========     ========      =======    ========
Total investment return based on market value** .......     15.54%       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) .........   $141,027     $122,258     $129,792     $119,069     $128,200    $150,532
     Operating expenses. ..............................       1.56%(1)     1.56%        1.61%        1.59%        1.53%       1.45%
     Net investment income*** .........................       8.20%(1)     8.67%        7.63%        7.93%        6.81%       6.37%

---------------------------------------
SUPPLEMENTAL DATA:++
     Portfolio turnover rate. .........................         15%(2)       29%          41%          67%          64%         87%
     Total net assets available to Common and
       Preferred Stock, end of period (in 000's) ......   $211,157     $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)     1.00%        1.03%        1.00%        1.01%       0.99%

  *  Money Market Cumulative Preferred(TM) Stock.
 **  Assumes  reinvestment of  distributions at the price obtained by the Fund's
     Dividend  Reinvestment  Plan.
***  The net investment  income ratios reflect income net of operating expenses
     and payments to MMP* Shareholders.
 +   Includes effect of additional  distribution  available to MMP* Shareholders
     ($0.00 per Common  Share at May 2003,  $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 6 to
     the Financial Statements.)
++   Information presented under heading Supplemental Data includes MMP*.
(1)  Annualized.
(2)  Not annualized.



    The accompanying notes are an integral part of the financial statements.

                                       15




--------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
FINANCIAL HIGHLIGHTS (CONTINUED)
--------------------------------
      The  table  below  sets out  information  with  respect  to  Money  Market
Cumulative Preferred(TM) Stock currently outstanding.



                                                                             INVOLUNTARY                  AVERAGE
                                                         ASSET               LIQUIDATING                  MARKET
                             TOTAL SHARES              COVERAGE              PREFERENCE                    VALUE
      AT PERIOD END         OUTSTANDING (1)          PER SHARE (3)          PER SHARE (2)           PER SHARE (1) & (2)
      -------------         ---------------          -------------          -------------           -------------------
                                                                                         
         5/31/03*                700                   $301,653               $100,000                   $100,000
        11/30/02                 700                    274,802                100,000                    100,000
        11/30/01                 700                    286,040                100,000                    100,000
        11/30/00                 700                    270,952                100,000                    100,000
        11/30/99                 700                    284,371                100,000                    100,000
        11/30/98                 700                    315,271                100,000                    100,000

-------
(1)  See Note 6.
(2)  Excludes accumulated undeclared dividends.
(3)  Calculated  by  subtracting  the Fund's total  liabilities  (excluding  the
     MMP(TM))  from the Fund's  total  assets and  dividiNG  that  amount by the
     number of MMP(TM) shares outstanding.
*    Unaudited.



    The accompanying notes are an integral part of the financial statements.

                                       16



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

1.   ORGANIZATION

     Preferred   Income   Opportunity   Fund   Incorporated   (the  "Fund")  was
incorporated  as a Maryland  corporation  on December  10, 1991,  and  commenced
operations  on  February  13,  1992  as  a  diversified,  closed-end  management
investment  company under the  Investment  Company Act of 1940, as amended.  The
Fund's  investment  objective  is to provide its Common  Shareholders  with high
current income consistent with the preservation of capital.

2.   SIGNIFICANT ACCOUNTING POLICIES

     The following is a summary of significant  accounting policies consistently
followed  by the  Fund  in the  preparation  of its  financial  statements.  The
preparation of financial statements is in conformity with accounting  principles
generally  accepted in the United  States of America and requires  management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities in the financial  statements  and the reported  amounts of increases
and decreases in net assets from operations during the reporting period.  Actual
results could differ from those estimates.

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

     Securities listed on a national securities exchange are valued on the basis
of the last sale on such exchange on the day of  valuation,  except as described
hereafter.  In the absence of sales of listed securities and with respect to (a)
securities  for which the most recent  sale  prices are not deemed to  represent
fair  market  value  and  (b)  unlisted  securities  (other  than  money  market
instruments),  securities  are valued at the mean  between  the  closing bid and
asked  prices  when  quoted  prices  for  investments  are  readily   available.
Investments in over-the-counter  derivative  instruments,  such as interest rate
swaps and options thereon  ("swaptions")  are valued at the prices obtained from
the  broker/dealer or bank that is the counterparty to such instrument,  subject
to comparison of such valuation with one or more valuations obtained from one or
more  broker/dealers  or banks  that are not  counterparties  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.

                                       17




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

     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.

     The AICPA  Audit and  Accounting  Guide,  Audits of  Investment  Companies,
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 was not required to 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 certain  amounts
between  interest income and realized and unrealized  gain/loss in the Statement
of Operations.  The adoption of this principle was not material to the financial
statements.

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


                                        18




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

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

     Income and capital gain  distributions  are determined and characterized in
accordance with income tax regulations which may differ from generally  accepted
accounting  principles.  These  differences  are  primarily due to (1) differing
treatments  of income and gains on  various  investment  securities  held by the
Fund,  including  timing  differences,  (2) the attribution of expenses  against
certain components of taxable  investment  income,  and (3) federal  regulations
requiring  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
and may exclude  amortization of premium on "accrued income"  securities,  which
are not  reflected in ordinary  income for tax  purposes.  The tax  character of
distributions paid, including changes in accumulated undeclared distributions to
MMP(TM) Shareholders, during 2002 and year-to-date was as follows:



                    DISTRIBUTIONS PAID IN FISCAL YEAR 2003        DISTRIBUTIONS PAID IN FISCAL YEAR 2002
                    --------------------------------------        --------------------------------------
                    ORDINARY INCOME    LONG-TERM CAPITAL GAINS     ORDINARY INCOME    LONG-TERM CAPITAL GAINS
                    ---------------    -----------------------     ---------------    -----------------------
                                                                                    
Common                     N/A                   N/A                 $10,296,991                 --
Preferred                  N/A                   N/A                  $1,243,631                 --


     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:



                                    UNDISTRIBUTED               UNDISTRIBUTED                 UNREALIZED
  CAPITAL (LOSS) 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 ending November 30, 2003, the Fund paid $10,293 of
Federal excise taxes attributable to calendar year 2002.

                                        19


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


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

     Flaherty  &  Crumrine  Incorporated  (the  "Adviser")  serves as the Fund's
Investment Adviser. The Fund pays the Adviser a monthly fee at an annual rate of
0.625% of the value of the Fund's average monthly 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 pays 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.

4.   PURCHASES AND SALES OF SECURITIES

     Cost of purchases and proceeds from sales of securities  for the six-months
ended May 31, 2003, excluding short-term investments, aggregated $31,640,233 and
$28,604,600, respectively.

     At May 31, 2003, aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost was $29,008,608 and aggregate
gross unrealized  depreciation for all securities in which there is an excess of
tax cost over value was $7,877,699.


                                      20




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

5.   COMMON STOCK

     At May 31,  2003,  240,000,000  shares of $0.01 par value Common Stock were
authorized.

     Common Stock transactions were as follows:



                                                                    SIX MONTHS ENDED              YEAR ENDED
                                                                         5/31/03                   11/30/02
                                                                 -----------------------    -----------------------
                                                                   SHARES       AMOUNT        SHARES       AMOUNT
                                                                  --------     --------      --------     --------
                                                                                             
Issued as reinvestment of dividends under the
   Dividend Reinvestment and Cash Purchase Plan ...............     88,299      $1,039,332    152,365      $1,749,231
                                                                   -------      ----------    -------      ----------


6.   MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK

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

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

     Under  Emerging   Issues  Task  Force  (EITF)   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(TM) Stock, which was previously classified as A component of total 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 reclassifed to conform with this presentation. The impact of this
reclassification  creates  no  change  to the net  assets  available  to  Common
Shareholders.


                                        21



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


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

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

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

     At May 31, 2003, 700 shares of Money Market Cumulative  Preferred(TM) Stock
were  outstanding at the annual rate of 1.27%.  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.

7.   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's  investments  could be adversely  affected by the  possible  inability of
companies in these  industries to pay dividends and interest on their securities
and the ability of holders of securities of such  companies to realize any value
from the assets of the issuer upon liquidation or bankruptcy.

                                      22




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

     The Fund may  invest  up to 25% of its  assets at the time of  purchase  in
securities rated below investment grade. These securities must be rated at least
either "Ba3" by Moody's Investors Service, Inc. or "BB-" by Standard & Poor's or
judged to be  comparable  in quality,  in either  case at the time of  purchase;
however,  these  securities must be issued by an issuer having a class of senior
debt rated investment grade  outstanding.  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.

8.   SPECIAL INVESTMENT TECHNIQUES

     The Fund may employ certain  investment  techniques in accordance  with its
fundamental  investment  policies.  These may include the use of when-issued and
delayed delivery transactions.  Securities purchased or sold on a when-issued or
delayed  delivery  basis may be  settled  within  45 days  after the date of the
transaction.  Such  transactions  may  expose  the  Fund to  credit  and  market
valuation  risk  greater than that  associated  with  regular  trade  settlement
procedures.  The Fund may also enter into  transactions,  in accordance with its
fundamental investment policies,  involving any or all of the following: lending
of portfolio securities, short sales of securities,  futures contracts, interest
rate swaps,  options on futures contracts,  options on securities and swaptions.
As  in  the  case  of  when-issued  securities,   the  use  of  over-the-counter
derivatives,  such as interest rate swaps and swaptions,  may expose the Fund to
greater  credit,  operations,  and  market  value  risk  than is the  case  with
regulated, exchange traded futures and options. With the exception of purchasing
securities  on a  when-issued  or delayed  delivery  basis or lending  portfolio
securities,  these  transactions  are used  for  hedging  or  other  appropriate
risk-management  purposes or, under  certain  other  circumstances,  to increase
income.  As of May 31,  2003,  the Fund owned put  options on US  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.

9.   SIGNIFICANT SHAREHOLDERS

     At July 7,  2003,  the  Commerce  Group,  Inc.  and  its  affiliates  owned
approximately  22.3% of the Fund's  outstanding  Common  Stock,  according  to a
Schedule 13D filing dated July 18, 2003.

                                       23




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

DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN

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

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

     Plan  participants are not subject to any charge for reinvesting  dividends
or capital gains  distributions.  Each Plan participant  will,  however,  bear a
proportionate  share of  brokerage  commissions  incurred  with  respect to PFPC
Inc.'s open market purchases in connection with the reinvestment of dividends or
capital  gains  distributions.  For the period ended May 31, 2003,  no brokerage
commissions were incurred.

                                       24



--------------------------------------------------------------------------------
                                  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 by PFPC Inc. under the Plan.

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

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

                                       25



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

MEETING OF SHAREHOLDERS

     On April 25, 2003,  the Fund held its Annual Meeting of  Shareholders  (the
"Meeting") to elect three  Directors of the Fund  ("Proposal 1"). The results of
the proposal are as follows:

PROPOSAL 1: ELECTION OF DIRECTORS.

NAME                                                  FOR         WITHHELD
----                                                  ----        --------
COMMON STOCK
   Martin Brody ................................    10,832,759     132,644
   Robert M. Ettinger ..........................    10,865,913      99,491
   David Gale ..................................    10,866,413      98,991

     Donald F. Crumrine, Morgan Gust and Robert F. Wulf continue to serve in
their capacities as Directors of the Fund.


                                       26



--------------------------------------------------------------------------------
                                  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.



                                                                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:
----------
                                                                                           
MARTIN BRODY                Director       Class I Director     Retired                        3          Director, Jaclyn, Inc.
c/o HMK Associates                            since 1992                                                  (luggage and
30 Columbia Turnpike                                                                                      accessories). Director
Florham Park, NJ 07932                                                                                    Emeritus, Smith Barney
Age: 81                                                                                                   Mutual Funds (18 Funds).

DAVID GALE                  Director       Class I Director     President & CEO of             3          Director, Golden State
Delta Dividend Group, Inc.                    since 1997        Delta Dividend                            Vintners, Inc.
220 Montgomery Street                                           Group, Inc. (investments).
Suite 426
San Francisco, CA 94104
Age: 54

MORGAN GUST+                Director      Class III Director    Since March 2002,              3                   --
Giant Industries, Inc.                        since 1992        President and previously
23733 N. Scottsdale Road                                        held other officerships of
Scottsdale, AZ 85255                                            Giant Industries, Inc.
Age: 56                                                         (petroleum refining and
                                                                marketing)

ROBERT F. WULF              Director      Class II Director     Financial Consultant;          3                   --
3560 Deerfield Drive South                    since 1992        Trustee, University of
Salem, OR 97302                                                 Oregon Foundation;
Age: 66                                                         Trustee, San Francisco
                                                                Theological Seminary.

-----------------------------
*    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 2006 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.

+    As a  Director,  represents  holders of shares of the Fund's  Money  Market
     Cumulative Preferred(TM) Stock.



                                       27


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


                                                                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:
----------
                                                                                                   
DONALD F. CRUMRINE+, ++      Director,      Class II Director   Chairman of the Board,        3                    --
301 E. Colorado Boulevard     Chairman         since 1992       Director of Flaherty &
Suite 720                   of the Board                        Crumrine Incorporated.
Pasadena, CA 91101           and Chief
Age: 55                   Executive Officer

ROBERT M. ETTINGER++          Director,     Class III Director  President and Director of     2                    --
301 E. Colorado Boulevard     President        since 2002       Flaherty & Crumrine
Suite 720                                                       Incorporated.
Pasadena, CA 91101
Age: 44

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

R. ERIC CHADWICK            Vice President,        Since         Since August 2001,           --                   --
301 E. Colorado Boulevard   Secretary and      October 2002      Vice President of
Suite 720                     Assistant                          Flaherty & Crumrine
Pasadena, CA 91101            Treasurer                          Incorporated, from January
Age: 28                                                          1997 through November
                                                                 1998, portfolio manager of
                                                                 Koch Industries, Inc.

-----------------
*    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 2006 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.

+    As a  Director,  represents  holders of shares of the Fund's  Money  Market
     Cumulative Preferred(TM) 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  Incorporated
     which acts as the Fund's investment adviser.



                                     28



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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
   Peter C. Stimes, CFA
     Chief Financial Officer,
     Chief Accounting Officer,
     Vice President, Treasurer,
     and Assistant Secretary
   Robert E. Chadwick, CFA
     Vice President, Secretary and
     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.

                                [GRAPHIC OMITTED]
                         PREFERRED OPPORTUNITY LOGO ART

                                   SEMI-ANNUAL
                                     REPORT
                                  MAY 31, 2003

                        web site: www.preferredincome.com





ITEM 2. CODE OF ETHICS.

Not applicable.

ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.

Not applicable.

ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Not applicable.

ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.

Not applicable.

ITEM 6. [RESERVED]

ITEM 7.  DISCLOSURE  OF PROXY VOTING  POLICIES  AND  PROCEDURES  FOR  CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.

Not applicable.

ITEM 8. [RESERVED]





ITEM 9. CONTROLS AND PROCEDURES.

(a)      The registrant's  principal executive officer or officers and principal
         financial officer or officers, or persons performing similar functions,
         have concluded that the registrant's disclosure controls and procedures
         (as defined in Rule 30a-3(c) under the  Investment  Company Act of 1940
         (17 CFR  270.30a-3(c)))  are  effective,  based on their  evaluation of
         these controls and procedures as of a date within 90 days of the filing
         date of the  report  that  includes  the  disclosure  required  by this
         paragraph.

(b)      There were no significant changes in the registrant's internal controls
         or in other  factors that could  significantly  affect  these  controls
         subsequent to the date of their  evaluation,  including any  corrective
         actions   with  regard  to   significant   deficiencies   and  material
         weaknesses.

ITEM 10. EXHIBITS.

     (a)(1)  Not applicable.

     (a)(2)  Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
             2002 are attached hereto.

     (b)     Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
             2002 are attached hereto.




                                   SIGNATURES

Pursuant to the  requirements  of the  Securities  Exchange  Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

(registrant) PREFERRED INCOME OPPORTUNITY FUND INCORPORATED
            --------------------------------------------------------------------
By (Signature and Title)*  /S/ DONALD F. CRUMRINE
                         -------------------------------------------------------
                         Donald F. Crumrine, Director, Chairman of the Board
                         and Chief Executive Officer
                         (principal executive officer)

Date                                JULY 30, 2003
    ----------------------------------------------------------------------------

Pursuant to the  requirements  of the  Securities  Exchange  Act of 1934 and the
Investment  Company  Act of  1940,  this  report  has been  signed  below by the
following  persons on behalf of the  registrant and in the capacities and on the
dates indicated.

By (Signature and Title)*  /S/ DONALD F. CRUMRINE
                         -------------------------------------------------------
                         Donald F. Crumrine, Director, Chairman of the Board
                         and Chief Executive Officer
                        (principal executive officer)

Date                                JULY 30, 2003
    ----------------------------------------------------------------------------
By (Signature and Title)*  /S/ PETER C. STIMES
                         -------------------------------------------------------
                        Peter C. Stimes, Chief Financial and Accounting Officer,
                        Vice President, Treasurer & Assistant Secretary
                        (principal financial officer)

Date                                JULY 30, 2003
    ----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.