PREFERRED INCOME OPPORTUNITY FUND INC, N-30D, 1998-07-28

PREFERRED INCOME OPPORTUNITY FUND INC
N-30D, 1998-07-28

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<PAGE>

PREFERRED INCOME OPPORTUNITY FUND
INCORPORATED

Dear Shareholder:

The Preferred Income Opportunity Fund's portfolio continues to produce good
results. The returns on net asset value were 6.5% in the first half of fiscal
1998 and 16.1% for the most recent 12 months. However, the numbers make it look
easier than it really was.

The success we have enjoyed in fiscal 1998 so far has been primarily due to
our active management of the Fund's preferred portfolio. Overall market
conditions were of little help at best, and in some ways they were downright
unfavorable. At times we felt a little like a salmon swimming up stream. Being
in the right place at the right time was critical.

All sectors of the Fund's portfolio of hedged preferreds produced good
returns and overcame what we spent for our hedges. The strongest contributor was
traditional preferreds eligible for the Dividends Received Deduction ("DRD")
available to corporate investors. However, adjustable rate preferreds ("ARPs")
and hybrid preferred securities also turned in good results. The best returns of
all were on our holdings of income oriented common stocks, which represent a
very small part of the Fund's portfolio.

The market for traditional preferreds eligible for the DRD has become an
interesting study in contrasts. As a result of the "creeping scarcity" of such
issues (which we have discussed many times before in these letters), many
traditional preferreds have reached prices that offer only "ho hum" investment
value. At the same time, the small number of new issues of traditional
preferreds coming to market has included several extraordinarily attractive
special situations. Are we buyers or sellers of traditional preferreds? The
answer is "Both!", but probably more of the latter.

In the first half of this year, we continued the steady reduction in the
Fund's position in ARPs that began over a year ago. These holdings are also
eligible for the DRD and have benefited from the creeping scarcity phenomenon.
Many of the ARPs that we disposed of were either retired by their issuers at
attractive prices or sold by us at prices that anticipated such retirements.
This has been a very successful reversal of the substantial increase in the
Fund's holdings of ARPs accomplished in 1995 and 1996 when they seemed
particularly cheap.

Our experience with hybrid preferreds is proof of the old adage that "All's
well that ends well." The hybrid market performed rather poorly in the first
half of this year, causing problems for investors who were slow to react. In
contrast, the Fund traded very actively in this sector of the preferred market
and earned a good return on hybrids while the market adjustment was taking
place. The end result: We now own significantly more hybrid preferreds, which
seem quite attractively valued at their current prices. The Question and Answer
Section that follows goes into this in greater detail.

As you can see from the pie charts, there has been a significant shift in
the Fund's portfolio over the last year from traditional fixed rate and
adjustable rate preferreds into hybrid preferreds. It would be nice

<PAGE>

to say that this was the product of a "grand plan." More realistically, it is
just the cumulative result of our efforts each day to buy whatever is cheap and
sell whatever is not. This is how we think money should be managed, and it seems
to work.

[PIE CHARTS]

5/31/97 5/31/98
------- -------

Preferred Income Opportunity Fund

1.2%
30.7% 19.7% 4.6%
2.0%
3.1%
41.3%
16.8%

47.4% 33.2%

--------------------------------------
---- Adjustable Rates
---- Traditional Fixed Rates
---- Non-DRD Preferreds & Securities
(Hybrids)
Common Stock
---- Cash & Other
--------------------------------------

While all of the foregoing activity was going on in the trenches of our
preferred portfolio, interest rates were wandering almost aimlessly. A small
decline in interest rates in May represented the only net change for the fiscal
first-half. In this kind of environment, our hedging is analogous to buying
insurance and never making a claim. Nonetheless, we will continue to hedge until
we discover a crystal ball that will tell us in advance when interest rate
trends are going to be this boring.

We are also pleased to report that the shareholders approved at the Fund's
Annual Meeting the "supermajority" requirement proposed by management. This
provision will make it more difficult to change certain key aspects of the Fund
without widespread support from the directors and the shareholders. These
features include the income objective of the Fund, its diversified status, and
the prohibition against the Fund attempting to "take over" other companies.

I urge you to read the following Question and Answer Section, which
contains additional information about your Fund.

Sincerely yours,

/s/ Robert T. Flaherty
Robert T. Flaherty
Chairman of the Board

June 8, 1998

<PAGE>

QUESTIONS AND ANSWERS

WHAT IS THE DIFFERENCE BETWEEN TRADITIONAL PREFERREDS AND HYBRID PREFERREDS?

It is all basically a matter of taxes. In other respects, the two are
really very similar.

Traditional preferreds are treated for tax purposes just like any other
equity security such as common stock. The issuer receives no deduction for tax
purposes for the dividend payments made to the holders of the preferred. On the
other hand, those dividends are 70% tax free to corporate investors due to the
Dividends Received Deduction ("DRD"). The purpose of the DRD is to eliminate in
part the double taxation of these dollars at the corporate level that would
otherwise occur.

Hybrid preferreds were created about 5 years ago for the purpose of
allowing issuers to get a deduction for the dividend payments on preferreds,
just like they deduct interest payments on debt securities. Since no tax is paid
by the issuer, there is no double tax to avoid and no DRD available to a
corporate holder of hybrids. Initially, hybrids were primarily purchased by
individual investors, but the market has now broadened to include institutions
as well.

WHY HAS THE EMERGENCE OF HYBRIDS CREATED A "CREEPING SCARCITY" OF TRADITIONAL
PREFERREDS?

Since the issuer gets a tax deduction, it can afford to pay investors
higher rates on hybrid preferreds and still be better off after taxes than if it
issued traditional preferreds. At the beginning, the market did not "charge"
enough more for hybrids to offset this tax advantage, so issuers concentrated
new financing in hybrids, both for raising new capital and for refinancing
outstanding issues of traditional preferreds. The following graph highlights
rather dramatically the rapid growth in hybrid securities outstanding compared
to the sluggish growth and, ultimately, the shrinkage of traditional preferreds.

<PAGE>

---------------------------------------------
NET PREFERRED STOCK ISSUANCE/(REDEMPTIONS)
---------------------------------------------

<TABLE>
<CAPTION>
Measurement Period HYBRID NET
(Fiscal Year Covered) DRD NET ISSUANCE ISSUANCE
<S> <C> <C>
1991 3.55 0
1992 7.17 0
1993 3.67 0.55
1994 0.84 3.39
1995 -6.70 10.71
1996 0.04 30.79
1997 -7.07 22.84
1998 -1.74 13.81
</TABLE>

WILL THE CREEPING SCARCITY GO ON INDEFINITELY?

The market has gotten smarter with the passage of time. Corporate investors
interested in the DRD have forced down the yields on the remaining supply of
traditional preferreds (by pushing their prices up). Simultaneously, as more
companies have issued hybrid preferreds, the market has demanded higher yields
for investors to soak up the supply. As a result, the markets have now come into
a balance that reasonably reflects the differences in tax treatment. We believe
we are close to the point where the two types of preferreds can co-exist
"peacefully".

The IRS has recently thrown a wild card into this game. It has audited one
of the original issuers of hybrids and has challenged in court the favorable tax
treatment received by the issuer. The IRS says it cannot see any real difference
between hybrid preferreds and equity financing such as traditional preferreds
and that the two should be treated the same. There is, of course, no way of
knowing now how this dispute might be resolved. A better bet is that Wall Street
will find a way around whatever comes out of this case and that hybrid
preferreds or similar securities are here to stay.

<PAGE>

HOW DID THE FUND DO SO WELL IN SUCH A TOUGH MARKET FOR HYBRIDS?

The hybrid preferred market suffered from a "one-two punch" in the fiscal
first half. First, the financial problems in Asia impacted hybrids along with
the corporate bond market generally. Second, a steady stream of 44 new issues of
hybrids put additional supply pressure on the market. Relative to the Treasury
bond market (which is the basis of our hedges), all 44 new hybrid issues were
cheaper on May 31st than when they were initially offered to the public.

Selectivity is key in a market like this. We participated, at one time or
another, in only 13 of the 44 new hybrid issues and purchased only two in their
initial public offerings. Most of our purchases were designed to take advantage
of temporary market mispricings that we identified. It was essential to move
elsewhere after those opportunities were captured, and we did. Individually,
none of these moves was a "big deal"; but collectively, they added up to
something very worthwhile.

HOW WILL THE GROWTH OF HYBRIDS AFFECT THE PORTION OF THE FUND'S DIVIDENDS
QUALIFYING FOR THE DRD?

The percentage of the Fund's dividends eligible for the DRD will probably
decline as time goes by. This seems like an inevitable result as hybrids account
for an ever larger proportion of the overall preferred market. As of May 31,
1998, however, traditional preferreds that qualify for the DRD still accounted
for almost two-thirds of the Fund's portfolio.

The good news is that increasing the Fund's holdings of hybrids typically
has a positive effect on our income. We expect that, over a period of time, this
will provide a meaningful offset to the reduced availability of the DRD to our
shareholders that are subject to corporate income taxes.

<PAGE>

IS THERE ANYTHING NEW ON THE DISCOUNT OF THE MARKET PRICE OF THE FUND SHARES
FROM NET ASSET VALUE?

The following graph tells the story. The discount from net asset value
continues to fluctuate in a rather narrow range. This allows the market price of
the Fund's shares to reflect the positive performance of their underlying NAV.

<TABLE>
<CAPTION>
Measurement Period
(Fiscal Year Covered) PREMIUM/DISCOUNT
<S> <C>
7.26
Feb-92 8.05
8.74
9.80
8.19
5.56
5.38
7.05
5.47
5.90
5.46
5.36
3.06
2.48
3.07
2.82
4.00
3.57
4.42
4.75
6.26
8.00
5.92
6.47
6.13
6.28
5.14
5.39
5.06
6.84
4.74
4.41
6.20
6.75
4.90
1.88
2.78
1.80
1.88
4.08
8.44
6.30
6.13
6.91
5.36
6.21
6.79
5.95
4.34
5.76
4.83
2.84
2.02
Feb-93 3.10
4.73
6.51
3.03
4.57
5.14
5.78
5.70
6.59
6.51
5.13
6.10
5.70
4.41
4.97
5.61
4.97
4.17
4.72
4.25
3.62
1.63
3.06
2.12
1.81
0.08
3.70
3.31
4.01
3.38
2.44
2.14
2.61
2.63
2.46
0.90
0.00
-1.07
-2.82
-1.79
-0.76
-3.34
-3.38
-4.31
-1.53
-0.36
1.57
-1.29
-3.77
-3.19
-4.62
-8.63
Feb-94 -5.00
-3.92
-3.15
-5.85
-5.62
-5.52
-5.10
-9.76
-10.12
-10.42
-7.75
-7.37
-6.36
-3.12
-6.83
-2.88
-4.57
-3.93
-4.09
-3.44
-4.90
-2.94
-3.27
-2.21
-2.98
-3.76
-2.94
-2.04
-3.18
-4.09
-6.28
-5.10
-13.22
-13.68
-14.10
-10.40
-7.86
-10.87
-9.90
-7.70
-4.02
-8.68
-7.32
-6.04
-8.51
-0.10
-1.41
-4.21
-6.19
-2.34
-3.14
-5.88
Feb-95 -3.76
-2.97
-5.85
-5.23
-5.34
-3.93
-3.41
-3.93
-6.90
-3.41
-5.76
-3.93
-9.33
-7.53
-4.81
-7.29
-8.07
-7.49
-6.86
-6.90
-7.64
-10.87
-9.11
-9.73
-10.18
-10.11
-7.80
-7.06
-8.33
-8.13
-7.49
-6.41
-7.18
-10.06
-9.09
-10.12
-12.32
-11.15
-10.71
-9.91
-10.14
-11.74
-12.33
-12.65
-14.54
-11.97
-12.79
-13.12
-11.46
-12.33
-12.33
-12.79
Feb-96 -13.03
-11.24
-14.65
-15.08
-14.87
-15.15
-13.15
-12.86
-12.79
-13.83
-11.53
-11.30
-14.08
-13.86
-13.86
-12.55
-13.37
-13.01
-9.18
-10.79
-10.13
-11.22
-9.39
-8.76
-6.88
-6.73
-7.79
-8.36
-8.36
-6.61
-9.91
-9.91
-8.76
-8.76
-9.35
-8.34
-7.96
-9.32
-6.30
-5.86
-6.08
-7.92
-8.13
-10.09
-8.37
-6.93
-5.62
-6.93
-8.34
-6.78
-6.23
-5.51
-6.45
Feb-97 -6.05
-5.81
-6.54
-7.15
-7.15
-5.73
-7.77
-9.04
-7.48
-6.72
-6.18
-6.47
-5.73
-3.62
-6.15
-4.81
-4.73
-4.18
-4.98
-5.85
-4.86
-6.30
-2.73
-7.01
-8.09
-7.67
-4.72
-5.80
-6.56
-5.10
-4.92
-2.92
-4.92
-5.06
-5.27
-4.77
-4.42
-3.77
-6.41
-5.76
-4.98
-4.69
-6.48
-5.02
-1.71
-1.97
-1.85
-6.20
-4.77
-5.30
-6.04
-3.63
Feb-98 -4.77
-4.27
-5.68
-4.87
-5.79
-6.82
-5.08
-6.20
-7.68
-5.18
-5.40
-7.17
-7.10
-6.48
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
-
</TABLE>

<PAGE>

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

<TABLE>
<CAPTION>
DIVIDEND
DIVIDEND NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE(1)
-------- --------- ------------- -------------
<S> <C> <C> <C> <C>
December 31, 1996................................... $0.280 $12.56 $11.6250 $11.65
January 31, 1997.................................... 0.073 12.47 11.6250 11.69
February 28, 1997................................... 0.073 12.64 11.8750 12.01
March 31, 1997...................................... 0.073 12.81 12.0000 12.03
April 30, 1997...................................... 0.073 12.72 11.8750 12.03
May 31, 1997........................................ 0.073 12.84 12.3750 12.44
June 30, 1997....................................... 0.073 12.96 12.5000 12.52
July 31, 1997....................................... 0.073 13.35 12.9375 12.98
August 31, 1997..................................... 0.073 13.25 12.6250 12.84
September 30, 1997.................................. 0.073 13.42 13.0000 12.94
October 31, 1997.................................... 0.073 13.52 12.8750 12.94
November 30, 1997................................... 0.073 13.53 12.8750 12.88
December 31, 1997................................... 0.325 13.46 13.0000 13.40
January 31, 1998.................................... 0.068 13.52 12.8750 12.95
February 28, 1998................................... 0.068 13.52 12.8750 12.96
March 31, 1998...................................... 0.068 13.62 12.8125 12.92
April 30, 1998...................................... 0.068 13.59 12.6250 12.75
May 31, 1998........................................ 0.068 13.70 12.8125 12.92
</TABLE>

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

(1) See ADDITIONAL INFORMATION; Dividend Reinvestment and Cash Purchase Plan on
pages 25 and 26 of this report.

<PAGE>

- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS
MAY 31, 1998 (UNAUDITED)
- --------------------------------------------

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES -- 94.3 %
ADJUSTABLE RATE PREFERRED STOCKS -- 19.8 %
UTILITIES -- 7.6 %
22,470 Arizona Public Service Company,
Series Q, Adj. Rate Pfd. ...... $ 2,238,557
264,504 New York State Electric & Gas
Corporation,
Series B, Adj. Rate Pfd. ...... 6,381,159
Niagara Mohawk Power Corporation:
95,275 Series A, Adj. Rate Pfd. ........ 2,352,102
195,918 Series B, Adj. Rate Pfd. ........ 4,977,542
25,000 Series C, Adj. Rate Pfd. ........ 633,594
6,800 Northern Indiana Public Service
Company,
Series A, Adj. Rate Pfd. ...... 340,850
------------
TOTAL UTILITY ADJUSTABLE RATE
PREFERRED STOCKS............... 16,923,804
------------
BANKING -- 12.2 %
BankAmerica Corporation:
9,050 Series A, Adj. Rate Pfd. ........ 453,066
9,700 Series B, Adj. Rate Pfd. ........ 971,213
BankBoston Corporation:
9,800 Series A, Adj. Rate Pfd. ........ 490,000
65,600 Series B, Adj. Rate Pfd. ........ 3,280,000
38,300 Series C, Adj. Rate Pfd. ........ 3,820,425
Bankers Trust New York
Corporation:
188,500 Series Q, Adj. Rate Pfd. ........ 4,677,156
45,000 Series R, Adj. Rate Pfd. ........ 1,116,563
Chase Manhattan Corporation:
24,650 Series L, Adj. Rate Pfd. ........ 2,463,459
10,000 Series N, Adj. Rate Pfd. ........ 250,000
25,000 19th Series, Adj. Rate Pfd. ..... 621,875
First Chicago NBD:
9,011 Series B, Adj. Rate Pfd. ........ 903,353
20,000 Series C, Adj. Rate Pfd. ........ 2,011,250
49,650 Morgan (J.P.) & Company Inc.,
Series A, Adj. Rate Pfd........ 4,741,575
7,600 Republic New York Corporation,
Series D, Adj. Rate Pfd. ...... 190,475
</TABLE>

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
22,700 Wells Fargo & Company,
Series B, Adj. Rate Pfd. ...... $ 1,115,138
------------
TOTAL BANKING ADJUSTABLE RATE
PREFERRED STOCKS............... 27,105,548
------------
TOTAL ADJUSTABLE RATE
PREFERRED STOCKS............... 44,029,352
------------
FIXED RATE PREFERRED STOCKS AND SECURITIES -- 74.5 %
UTILITIES -- 36.8 %
Alabama Power Company:
116,406 Class A, 6.40% Pfd. ............. 2,975,628
12,000 Series A, 7.125% Sr. Notes ...... 295,950
287 4.60% Pfd. ...................... 24,646
172 4.72% Pfd. ...................... 15,158
100 4.92% Pfd. ...................... 9,188
58,100 7.375% TOPRS..................... 1,470,656
80,000 7.60% TOPRS...................... 2,055,000
Appalachian Power Company:
59,550 Series A, 8.25% TOPRS............ 1,552,022
40,400 Series B, 8.00% TOPRS............ 1,032,725
22,646 Arizona Public Service Company,
Series W, 7.25% Pfd. .......... 576,058
Baltimore Gas & Electric Company:
10,650 Series 1993, 6.70% Pfd. ......... 1,208,775
48,800 Series 1995, 6.99% Pfd. ......... 5,740,100
10,000 Boston Edison Company,
4.78% Pfd. .................... 872,500
267 Central Hudson Gas & Electric
Corporation,
Series D, 4.35% Pfd. .......... 21,126
18,000 Columbus Southern Power Company,
Series B, 7.92% Jr. Sub.
Debt........................... 455,625
7,500 Commonwealth Edison Company,
$8.40 Pfd. .................... 772,500
29,000 Consolidated Edison Company of
New York,
Series A, 7.75% QUICS.......... 744,938
75,000 CPL Capital,
Series A, 8.00% QUIPS.......... 1,926,563
</TABLE>

See Notes to Financial Statements.

<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 1998 (UNAUDITED)
---------------------------------------------------------------

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
UTILITIES (CONTINUED)
Duke Power Company:
7,019 Series C, 4.50% Pfd. ............ $ 604,511
10,003 Series S, 7.85% Pfd. ............ 1,164,099
1,009 Series W, 7.00% Pfd. ............ 113,891
53,750 Duquesne Capital,
Series A, 8.375% MIPS.......... 1,387,422
26,000 Duquesne Light,
7.375% QUIBS................... 649,025
5,050 El Paso, Tennessee Pipeline
Company,
Series A, 8.25% Pfd. .......... 286,588
Florida Power & Light Company:
4,000 4.50% Pfd. ...................... 341,000
4,105 Series E, 4.35% Pfd. ............ 329,426
32,850 Series S, 6.98% Pfd. ............ 3,695,625
18,100 Series T, 7.05% Pfd. ............ 2,054,350
Georgia Power Company:
1,246 $6.48 Pfd. ...................... 130,519
3,481 $6.60 Pfd. ...................... 364,635
13,500 7.75% TOPRS...................... 348,469
10,000 Gulf Power Company,
Series A, 7.625% QUIPS......... 255,625
Hawaiian Electric Industries:
20,000 8.05% QUIPS...................... 511,250
23,500 8.36% TOPRS...................... 612,469
14,250 Indianapolis P&L,
5.65% Pfd. .................... 1,494,469
10,000 Jersey Central Power & Light
Company,
Series K, 7.52% Sinking Fund
Pfd. .......................... 1,045,625
18,500 Long Island Lighting,
7.95% Sinking Fund Pfd. ....... 486,781
15,000 Mississippi Power Company,
6.32% Pfd. .................... 385,313
Monongahela Power Company:
24,000 Series A, 8.00% QUIDS............ 625,500
20,000 Series L, $7.73 Pfd. ............ 2,345,000
3,900 Montana Power Company,
$6.875 Pfd. ................... 442,650
10,000 MP&L Capital,
8.05% QUIPS.................... 256,875
</TABLE>

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
New York State Electric & Gas
Corporation:
5,000 6.30% Sinking Fund Pfd. ......... $ 522,188
7,481 6.48% Pfd. ...................... 775,219
Niagara Mohawk Power Corporation:
6,250 4.10% Pfd. ...................... 406,250
35,720 7.85% Sinking Fund Pfd. ......... 913,093
62,000 9.50% Pfd. ...................... 1,646,875
Northern States Power Company:
2,480 $4.10 Pfd. ...................... 193,130
2,660 $4.16 Pfd. ...................... 210,140
75,000 NSP Financing,
7.875% TOPRS................... 1,935,938
28,360 NVP Capital I,
Series A, 8.20% QUIPS.......... 728,498
Ohio Power Company:
75,800 7.375% Sr. Notes................. 1,892,158
47,500 Series B, 7.92% QUIDS............ 1,202,344
2,150 Pacific Enterprises,
$4.50 Pfd. .................... 177,375
2,493 Potomac Electric Power Company,
Series 1957, $2.44 Pfd. ....... 113,743
PP&L Capital Trust:
86,900 8.10% TOPRS...................... 2,253,969
30,400 8.20% TOPRS...................... 788,500
49,000 PSCO Capital Trust,
7.60% TOPRS.................... 1,228,063
12,350 PSI Energy, Inc.,
6.875% Pfd. ................... 1,392,463
5,776 Public Service Company of
Colorado,
4.64% Pfd. .................... 491,682
1,050,000 Puget Sound Energy Capital Trust,
Series B, 8.231% 6/1/27 Capital
Security....................... 1,143,188
Puget Sound Power & Light
Company:
27,555 7.75% Sinking Fund Pfd. ......... 2,927,719
125,300 Series II, 7.45% Pfd. ........... 3,602,375
4,030 Rochester Gas & Electric
Corporation,
Series I, 4.75% Pfd. .......... 342,550
68,800 San Diego Gas & Electric Company,
6.80% Pfd. .................... 1,965,100
26,000 Sierra Pacific Capital,
8.60% TOPRS.................... 684,125
</TABLE>

See Notes to Financial Statements.

<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 1998 (UNAUDITED)
- ---------------------------------------------------------------

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
UTILITIES (CONTINUED)
South Carolina Electric & Gas:
10,188 5.125% Sinking Fund Pfd. ........ $ 480,110
44,000 7.55% TOPRS...................... 1,119,250
4,000 Southern Indiana Gas & Electric,
4.75% Pfd. .................... 352,000
35,000 Southwestern Public Service
Company,
7.85% TOPRS.................... 894,688
57,300 TransCanada Pipeline Ltd.,
8.75% COPRS.................... 1,514,869
Union Electric Power Company:
3,000 $7.64 Pfd. ...................... 348,000
4,000,000 $7.69 12/15/36 Capital
Security....................... 4,185,000
Virginia Electric & Power
Company:
1,136 $4.04 Pfd. ...................... 88,040
1,420 $4.20 Pfd. ...................... 114,310
27,300 $6.98 Pfd. ...................... 3,074,663
5,500 Wisconsin Power & Light Company,
6.20% Pfd. .................... 603,625
------------
TOTAL UTILITY FIXED RATE
PREFERRED STOCKS AND
SECURITIES..................... 81,991,515
------------
BANKING -- 10.2 %
500 ABN Amro North America,
6.59% Pfd. 144A**.............. 553,750
1,275,000 BankBoston Capital Trust,
Series B, 7.75% 12/15/26
Capital Security............... 1,337,156
21,000 Bankers Trust New York
Corporation,
Series O, 7.625% Pfd. ......... 525,000
540,000 Bank of New York,
7.78% 12/1/26 Capital Security
144A**......................... 571,050
1,750,000 BNY Capital,
Series B, 7.97% 12/31/26
Capital Security............... 1,890,000
1,500,000 BT Preferred Capital Trust,
7.875% 2/25/27 Capital
Security....................... 1,554,375
2,600,000 Chase Capital,
7.67% 12/1/26 Capital
Security....................... 2,726,750
</TABLE>

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
101,050 Chase Manhattan Corporation,
Series C, 10.84% Pfd. ......... $ 3,126,234
1,000,000 Citicorp Capital,
8.015% 2/15/27 Capital
Security....................... 1,086,250
2,500,000 First Hawaiian Capital,
Series B, 8.343% 7/1/27 Capital
Security....................... 2,721,875
300,000 First Union Institutional,
8.04% 12/1/26 Capital Security
144A**......................... 324,750
Fleet Financial Group, Inc.:
12,300 Series VI, 6.75% Pfd. ........... 699,563
35,000 Series E, 9.35% Pfd. ............ 967,969
700,000 Great Western Financial
Corporation,
8.206% 2/1/27 Capital
Security....................... 757,750
750 La Salle National Corporation,
6.46% Pfd. .................... 826,875
35,500 NB Capital Trust,
7.84% TOPRS.................... 916,344
1,985,000 Republic New York Capital,
7.53% 12/4/26 Capital
Security....................... 2,066,881
3,200 Republic New York Corporation,
5.715% Pfd. ................... 167,600
------------
TOTAL BANKING FIXED RATE
PREFERRED STOCKS AND
SECURITIES..................... 22,820,172
------------
FINANCIAL SERVICES -- 14.4 %
38,300 Bear Stearns Co.,
Series E, 6.15% Pfd. .......... 2,072,988
27,000 DLJ Capital Trust,
8.42% MIPS..................... 707,063
15,000 Heller Financial,
6.687% Pfd. 144A**............. 1,661,250
174,950 Household International, Inc.,
8.70% TOPRS.................... 4,647,109
Lehman Brothers Holdings Inc.:
94,225 5.00% Conv. Pfd. ................ 3,450,991
65,000 Series A, 8.30% QUICS............ 1,685,938
52,000 Series C, 5.94% Pfd. ............ 2,743,000
Merrill Lynch & Company, Inc.:
30,000 8.00% TOPRS...................... 800,625
104,200 Series A, 9.00% Pfd. ............ 3,340,913
</TABLE>

See Notes to Financial Statements.

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
FINANCIAL SERVICES (CONTINUED)
Travelers Group:
6,500 Series G, 6.213% Pfd. ........... $ 355,063
124,680 Series H, 6.231% Pfd. ........... 6,872,985
70,100 Series M, 5.864% Pfd. ........... 3,697,775
------------
TOTAL FINANCIAL SERVICES FIXED
RATE PREFERRED STOCKS AND
SECURITIES..................... 32,035,700
------------
INSURANCE -- 7.0 %
3,270,000 Allstate Financing,
7.83% 12/01/45 Capital
Security....................... 3,470,288
300,000 American General Capital,
7.57% Capital Security,
144A**......................... 317,625
71,481 Hartford Capital,
Series B, 8.35% QUIPS.......... 1,898,714
3,700,000 MMI Capital Trust,
Series B, 7.625% 12/15/27
Capital Security............... 3,806,375
2,950,000 Orion Capital Trust,
7.701% 4/15/28 144A** Capital
Security....................... 3,034,813
1,000,000 Provident Companies Inc.,
7.405% 3/15/38 Capital
Security....................... 1,022,500
21 Prudential Human Resources
Management Company,
6.30% Private, Sinking Fund
Pfd. .......................... 2,136,750
------------
TOTAL INSURANCE FIXED RATE
PREFERRED STOCKS AND
SECURITIES..................... 15,687,065
------------
MISCELLANEOUS INDUSTRIES -- 6.1 %
118,300 Coastal Finance,
8.375% 6/30/38 TOPRS........... 2,964,894
3,000 E.I. du Pont de Nemours and
Company,
Series B, $4.50 Pfd. .......... 255,750
</TABLE>

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
55,000 Farmland Industries,
8.00% Pfd. 144A**.............. $ 3,478,750
3,300 Time Warner Inc.,
Series M, 10.25% Pfd. ......... 3,818,100
19,600 Union Texas Petroleum Holdings,
Series A, 7.14% Pfd. .......... 2,418,150
9,520 Viad Corporation,
$4.75 Sinking Fund Pfd. ....... 754,460
------------
TOTAL MISCELLANEOUS FIXED RATE
PREFERRED STOCKS AND
SECURITIES..................... 13,690,104
------------
TOTAL FIXED RATE PREFERRED STOCKS
AND SECURITIES................. 166,224,556
------------
TOTAL PREFERRED STOCKS AND
SECURITIES
(Cost $191,948,284)............ 210,253,908
------------
COMMON STOCKS -- 4.6 %
UTILITIES -- 4.6 %
19,000 Energy East Corporation.......... 774,250
220,800 Nevada Power Company............. 5,292,300
20,000 New England Electric System...... 837,500
11,200 Northern States Power Company.... 635,950
33,000 Scana Corporation................ 952,875
40,700 Wisconsin Energy Corporation..... 1,203,194
15,700 WPS Resources Corporation........ 491,606
------------
TOTAL UTILITY COMMON STOCKS
(Cost $8,985,052)................ 10,187,675
------------
</TABLE>

See Notes to Financial Statements.

<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 1998 (UNAUDITED)
- ---------------------------------------------------------------

<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
MISCELLANEOUS SECURITIES -- 0.3 % (Cost $1,509,276)
September Put Options on U.S.
Treasury Bond Futures, expiring
8/22/98+....................... $ 637,813
------------
COMMERCIAL PAPER -- 0.3 % (Cost $764,000)
$764,000 General Electric Capital
Corporation,
5.66% due 06/01/98............. 764,000
------------
TOTAL INVESTMENTS (Cost $203,206,612*).. 99.5% 221,843,396
OTHER ASSETS AND LIABILITIES(Net)....... 0.5 1,200,851
------ ------------
NET ASSETS.............................. 100.0% $223,044,247
====== ============
</TABLE>

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

* Aggregate cost for Federal tax purposes.
** Security 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.

<TABLE>
<S> <C>
ABBREVIATIONS (Note 6):
TOPRS -- Trust Originated Preferred Securities
MIPS -- Monthly Income Preferred Securities
QUIPS -- Quarterly Income Preferred Securities
QUIDS -- Quarterly Income Debt Securities
COPRS -- Canadian Originated Preferred Securities
QUICS -- Quarterly Income Capital Securities
QUIBS -- Quarterly Interest Bonds

Capital Securities are debt instruments and the amounts
shown in the Shares/Par column are dollar amounts of par
value.
</TABLE>

See Notes to Financial Statements.

<PAGE>

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

Preferred Income Opportunity Fund Incorporated
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1998 (UNAUDITED)
- -------------------------------------------------------------

<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $203,206,612) (Note 1)
See accompanying schedule.............................. $221,843,396
Cash...................................................... 100
Receivable for securities sold............................ 1,073,626
Dividends and interest receivable......................... 1,613,523
Prepaid expenses.......................................... 53,019
------------
Total Assets...................................... 224,583,664

LIABILITIES:
Payable for securities purchased.......................... $ 1,064,531
Dividends payable to Common Shareholders.................. 192,827
Investment advisory fee payable (Note 2).................. 104,891
Accrued expenses and other payables....................... 177,168
-----------
Total Liabilities................................. 1,539,417
------------
NET ASSETS.................................................. $223,044,247
============
NET ASSETS consist of:
Accumulated distributions in excess of net investment
income (Note 1)........................................ $ (169,241)
Accumulated net realized gain on investments sold (Note
1)..................................................... 5,660,875
Unrealized appreciation of investments (Note 3)........... 18,636,784
Par value of Common Stock................................. 111,513
Paid-in capital in excess of par value of Common Stock.... 128,804,316
Money Market Cumulative Preferred(TM) Stock (Note 5)...... 70,000,000
------------
Total Net Assets.................................. $223,044,247
============
PER SHARE
---------
NET ASSETS AVAILABLE TO:
Money Market Cumulative Preferred(TM) Stock (700 shares
outstanding) redemption value.......................... $100,000.00 $ 70,000,000
Accumulated undeclared dividends on Money Market
Cumulative Preferred(TM) Stock......................... 365.24 255,671
----------- ------------
$100,365.24 70,255,671
===========
Common Stock (11,151,287 shares outstanding).............. $13.70 152,788,576
====== ------------
TOTAL NET ASSETS............................................ $223,044,247
============
</TABLE>

See Notes to Financial Statements.

<PAGE>

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

Preferred Income Opportunity Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 1998 (UNAUDITED)
---------------------------------------------------------------

<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends.............................................. $ 6,262,871
Interest............................................... 1,114,736
-----------
Total Investment Income........................... 7,377,607
EXPENSES:
Investment advisory fee (Note 2)....................... $ 614,993
Administration fee (Note 2)............................ 132,640
Money Market Cumulative Preferred(TM) broker
commissions and Auction Agent fees.................... 112,738
Insurance expense...................................... 38,961
Legal and audit fees................................... 33,373
Directors' fees and expenses (Note 2).................. 29,141
Shareholder servicing agent fees (Note 2).............. 24,698
Economic consulting fee (Note 2)....................... 22,667
Custodian fees (Note 2)................................ 16,593
Other.................................................. 90,086
----------
Total Expenses.................................... 1,115,890
-----------
NET INVESTMENT INCOME....................................... 6,261,717
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
(Notes 1 and 3):
Net realized gain on investments sold during the
period................................................ 4,650,805
Change in net unrealized appreciation of investments
during the period..................................... 32,244
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS............. 4,683,049
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $10,944,766
===========
</TABLE>

See Notes to Financial Statements.

<PAGE>

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

<TABLE>
<CAPTION>
SIX MONTHS ENDED
MAY 31, 1998 YEAR ENDED
(UNAUDITED) NOVEMBER 30, 1997
---------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income.................................. $ 6,261,717 $ 12,304,022
Net realized gain on investments sold during the
period................................................ 4,650,805 2,977,646
Change in net unrealized appreciation of investments
during the period..................................... 32,244 6,639,359
------------ ------------
Net increase in net assets resulting from operations... 10,944,766 21,921,027

DISTRIBUTIONS:
Dividends paid from net investment income to Money
Market Cumulative Preferred(TM) Stock Shareholders
(Note 5).............................................. (1,682,907) (2,350,442)
Distributions paid from net realized capital gains to
Money Market Cumulative Preferred(TM) Stock
Shareholders (Note 5)................................. (32,478) (457,916)
Dividends paid from net investment income to Common
Stock Shareholders.................................... (5,371,574) (10,345,646)
Distributions paid from net realized capital gains to
Common Stock Shareholders............................. (2,044,031) (1,731,258)
------------ ------------
NET INCREASE IN NET ASSETS FOR THE PERIOD................... 1,813,776 7,035,765

NET ASSETS:
Beginning of period.................................... 221,230,471 214,194,706
------------ ------------
End of period (including accumulated distributions in
excess of net investment income/undistributed net
investment income of $(169,241) and $623,523,
respectively)......................................... $223,044,247 $221,230,471
============ ============
</TABLE>

See Notes to Financial Statements.

<PAGE>

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

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

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
MAY 31, YEAR ENDED NOVEMBER 30,
1998 ---------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
----------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 13.53 $ 12.91 $ 12.35 $ 10.92 $ 13.17 $ 12.69
-------- -------- -------- -------- --------- --------
Net investment income.................................. 0.56 1.10 1.16 1.27 1.19 1.19
Net realized and unrealized gain/(loss) on
investments........................................... 0.41 0.87 0.53 1.73 (1.64) 0.92
-------- -------- -------- -------- --------- --------
Net increase/(decrease) in net asset value............. 0.97 1.97 1.69 3.00 (0.45) 2.11
-------- -------- -------- -------- --------- --------
DISTRIBUTIONS:
Dividends paid from net investment income to MMP*
Shareholders.......................................... (0.15) (0.21) (0.21) (0.31) (0.18) (0.15)
Distributions paid from net realized capital gains to
MMP* Shareholders..................................... (0.00)# (0.04) (0.03) (0.00)# (0.03) (0.05)
Dividends paid from net investment income to Common
Stock Shareholders.................................... (0.48) (0.92) (0.87) (1.11) (0.86) (1.18)
Distributions paid from net realized capital gains to
Common Stock Shareholders............................. (0.18) (0.16) -- (0.17) (0.72) (0.26)
Change in accumulated undeclared dividends on MMP*..... 0.01 (0.02) (0.02) 0.02 (0.01) 0.01
-------- -------- -------- -------- --------- --------
Total distributions.................................... (0.80) (1.35) (1.13) (1.57) (1.80) (1.63)
-------- -------- -------- -------- --------- --------
Net asset value, end of period......................... $ 13.70 $ 13.53 $ 12.91 $ 12.35 $ 10.92 $ 13.17
======== ======== ======== ======== ========= ========
Market value, end of period............................ $ 12.813 $ 12.875 $ 12.000 $ 11.250 $ 10.125 $ 13.250
======== ======== ======== ======== ========= ========
Total investment return based on net asset value***.... 6.47% 14.44% 13.11% 27.25% (5.44)% 16.04%
======== ======== ======== ======== ========= ========
Total investment return based on market value***....... 4.64% 17.16% 15.42% 25.02% (12.83)% 8.70%
======== ======== ======== ======== ========= ========
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK
SHAREHOLDERS:
Operating expenses.................................. 1.47%** 1.48% 1.71% 1.78% 1.69% 1.72%
Net investment income****........................... 6.16%** 6.44% 7.36% 8.47% 8.31% 7.65%
SUPPLEMENTAL DATA:
Portfolio turnover rate............................. 53% 74% 87% 94% 116% 129%
Net assets, end of period (in 000's)................ $223,044 $221,230 $214,195 $207,720 $ 191,797 $213,569
- -----------------------------------------------------
Ratio of operating expenses to Total Average Net Assets
including MMP*........................................ 1.01%** 1.00% 1.13% 1.13% 1.11% 1.14%
</TABLE>

* Money Market Cumulative Preferred(TM) Stock.
** Annualized.
*** 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.
# Amount represents less than $0.01 per share.

See Notes to Financial Statements.

<PAGE>

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

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

<TABLE>
<CAPTION>
INVOLUNTARY AVERAGE
ASSET LIQUIDATING MARKET
TOTAL SHARES COVERAGE PREFERENCE VALUE
OUTSTANDING PER SHARE PER SHARE(1) PER SHARE(1) & (2)
------------ --------- ------------ ------------------
<S> <C> <C> <C> <C>
05/31/98* 700 $318,608 $100,000 $100,000
11/30/97 700 316,044 100,000 100,000
11/30/96 700 305,992 100,000 100,000
11/30/95 700 296,743 100,000 100,000
11/30/94 700 273,996 100,000 100,000
11/30/93 700 305,099 100,000 100,000
11/30/92 700 286,384 100,000 100,000
</TABLE>

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

(1) Excludes accumulated undeclared dividends.

(2) See Note 5.

* Unaudited.

See Notes to Financial Statements.

<PAGE>

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

1. SIGNIFICANT ACCOUNTING POLICIES

Preferred Income Opportunity Fund Incorporated (the "Fund") is a
diversified, closed-end management investment company organized as a Maryland
corporation on December 10, 1991 and is registered with the Securities and
Exchange Commission ("SEC") under the Investment Company Act of 1940, as
amended. The Fund commenced operations on February 13, 1992. The policies
described below are followed consistently by the Fund in the preparation of its
financial statements in conformity with generally accepted accounting
principles.

Portfolio valuation: The net asset value of the Fund's Common Stock is
determined by the Fund's administrator no less frequently than on the last
business day of each week and month. It is determined by dividing the value of
the Fund's net assets attributable to common shares by the number of shares of
Common Stock outstanding. The value of the Fund's net assets attributable to
common shares is deemed to equal the value of the Fund's total assets less (i)
the Fund's liabilities, (ii) the aggregate liquidation value of the outstanding
Money Market Cumulative Preferred(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. In the absence of sales
of listed securities and with respect to securities for which the most recent
sale prices are not deemed to represent fair market value and unlisted
securities (other than money market instruments), securities are valued at the
mean between the closing bid and asked prices when quoted prices for investments
are readily available. Investments for which market quotations are not readily
available 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 considered comparable in quality,
maturity and type. Investments in money market instruments, which mature in 60
days or less, are valued at amortized cost.

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

Option accounting principles: Upon the purchase of a put option by the
Fund, the total purchase price paid is recorded as an investment. The market
valuation is determined as set forth in the second preceding 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 Board of Directors reviews and approves periodically
the eligibility of the banks and dealers with which the Fund enters into
repurchase agreement transactions. The value of the collateral underlying such
transactions is at least equal at all times to the total amount of the
repurchase obligations, including

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

interest. The Fund maintains possession of the collateral 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 corporate tax rate. Subject to the Fund qualifying as a regulated
investment company, any taxes paid by the Fund on such net realized long-term
gains may be used by the Fund's Shareholders as a credit against their own tax
liabilities.

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

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

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

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

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

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

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

Primark Decision Economics Inc. ("Primark") serves as the Fund's Economic
Consultant. The Fund pays Primark an annual fee equal to $45,333 for services
provided.

First Data Investor Services Group, Inc. ("Investor Services Group"), a
wholly owned subsidiary of First Data Corporation, serves as the Fund's
Administrator and Transfer Agent. As Administrator, Investor Services Group
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 Investor
Services Group's services as Administrator, the Fund pays Investor Services
Group a monthly fee at an annual rate of 0.12% of the Fund's average monthly net
assets. Boston Safe Deposit and Trust Company ("Boston Safe"), a wholly owned
subsidiary of Mellon Bank Corporation, serves as the Fund's Custodian. As
compensation for Boston Safe's services as Custodian, the Fund pays Boston Safe
a monthly fee at an annual rate of 0.01% of the Fund's average monthly net
assets. Investor Services Group also serves as the Fund's Common Stock servicing
agent (transfer agent), dividend-paying agent and registrar, and as compensation
for Investor Services Group's services as transfer agent, the Fund pays Investor
Services Group a fee at an annual rate of 0.02% of the Fund's average monthly
net assets plus certain out-of-pocket expenses.

Chase Manhattan Bank ("Auction Agent") serves as the Fund's Money Market
Cumulative Preferred(TM) Stock transfer agent, registrar, dividend disbursing
agent and redemption agent.

3. PURCHASES AND SALES OF SECURITIES

Cost of purchases and proceeds from sales of securities for the six months
ended May 31, 1998, excluding short-term investments, aggregated $114,402,081
and $118,229,093, respectively.

At May 31, 1998, aggregate gross unrealized appreciation for all securities
in which there is an excess of value over cost was $19,542,879 and aggregate
gross unrealized depreciation for all securities in which there is an excess of
cost over value was $906,095.

4. COMMON STOCK

At May 31, 1998, 240,000,000 shares of $0.01 par value Common Stock were
authorized. There were no Common Stock transactions for the six months ended May
31, 1998 and the year ended November 30, 1997.

5. MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK

The Fund's Articles of Incorporation authorize the issuance of up to
10,000,000 shares of $0.01 par value preferred stock. On April 9, 1992, the Fund
received proceeds from the public offering of 700 shares of Money Market
Cumulative Preferred(TM) Stock of $70,000,000 before offering costs of $144,375
and underwriting discounts and commissions paid directly to Lehman Brothers Inc.
of $1,225,000. 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.

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.

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 Stock Shareholders may also trade shares in the secondary market
between auction dates.

At May 31, 1998, 700 shares of Money Market Cumulative Preferred(TM) Stock
were outstanding at the annual rate of 4.109%. 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 the portfolio

holdings and hedging transactions to lessen such risks to Common Stock
Shareholders, there can be no assurance that such results will be attained.

6. PORTFOLIO INVESTMENTS, CONCENTRATION AND INVESTMENT QUALITY

The Fund invests primarily in adjustable and fixed rate preferred stocks
and similar hybrid securities. Under normal market conditions, the Fund invests
at least 25% of its assets in securities issued by utilities and may invest a
significant portion of its assets, but less than 25% of its assets, in companies
in the banking industry. The Fund's portfolio may therefore be subject to
greater risk and market fluctuation than a portfolio of securities representing
a broader range of investment alternatives. Because of the Fund's concentration
of investments in the utility industry and significant holdings in the banking
industry, the ability of the Fund to maintain its dividend and the value of the
Fund's investments could be adversely affected by the possible inability of
companies in these industries to pay dividends and interest on their securities
and the ability of holders of securities of such companies to realize any value
from the assets of the issuer upon liquidation or bankruptcy. The Fund may
invest up to 15% of its assets at the time of purchase in securities rated below
investment grade, provided that no such investment may be rated below both "Ba"
by Moody's Investors Service, Inc. and "BB" by Standard & Poor's Rating Group or
judged to be comparable in quality at the time of purchase; however, any such
securities must be issued by an issuer having an outstanding class of senior
debt rated investment grade. The Fund may also invest up to 15% of its assets in
common stock. The Fund's investment policy regarding debt securities was amended
on July 21, 1995. The amended policy allows the Fund to invest up to 35% of its
assets collectively in the following: Trust Originated Preferred Securities
("TOPRS"), Monthly Income Preferred Shares ("MIPS"), Quarterly Income Debt
Securities ("QUIDS"), Quarterly Income Preferred Shares ("QUIPS"), Canadian
Originated Preferred Securities ("COPRS"), Quarterly Income Capital Securities
("QUICS"), and similarly-structured instruments commonly referred to as hybrid
or taxable preferreds, subject to the quality standards set forth above. The
Fund's investment policy was further amended on October 17, 1997, to clarify
that the foregoing 35% limitation only applies to such TOPRS, MIPS, QUIDS,
QUIPS, COPRS, QUICS and analogous securities that the Fund's Adviser deems to be
debt-like in key characteristics.

7. SPECIAL INVESTMENT TECHNIQUES

The Fund may employ certain investment techniques in accordance with its
fundamental investment policies. These may include the use of when-issued and
delayed delivery transactions. Securities purchased or sold on a when-issued or
delayed delivery basis may be settled within 45 days after the date of the
transaction. Such transactions may expose the Fund to credit and market
valuation risk greater than that associated with regular trade settlement
procedures. The Fund may also enter into transactions, in accordance with its
fundamental investment policies, involving any or all of the following: lending
of portfolio securities, short sales of securities, futures contracts, options
on futures contracts, and options on securities. 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, 1998, the Fund owned put
options on U.S. Treasury bond futures contracts. No assurance can be given that
such transactions will achieve their desired purposes or will result in an
overall reduction of risk to the Fund.

<PAGE>

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

Preferred Income Opportunity Fund Incorporated
QUARTERLY RESULTS OF INVESTMENT OPERATION (UNAUDITED)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
AVAILABLE TO COMMON STOCK SHAREHOLDERS
-----------------------------------------------------------------
NET REALIZED NET INCREASE/
AND UNREALIZED (DECREASE) IN
NET INVESTMENT GAIN/(LOSS) NET ASSETS FROM
INVESTMENT INCOME INCOME ON INVESTMENTS OPERATIONS
------------------- ------------------- -------------------- --------------------
QUARTER PER PER PER PER
ENDED TOTAL SHARE* TOTAL SHARE* TOTAL SHARE* TOTAL SHARE*
- ------- ----- ------ ----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
02/29/96 $3,672,584 $0.33 $2,333,543 $0.21 $(4,454,117) $(0.40) $(2,120,574) $(0.19)
05/31/96 3,868,154 0.35 2,573,570 0.23 2,444,402 0.22 5,017,972 0.45
08/31/96 3,961,160 0.35 2,661,602 0.24 (716,135) (0.06) 1,945,467 0.18
11/30/96 3,744,137 0.34 2,845,619 0.25 8,647,364 0.77 11,492,983 1.02
02/28/97 3,328,538 0.30 2,789,856 0.25 (233,256) (0.02) 2,556,600 0.23
05/31/97 3,714,170 0.33 3,218,380 0.29 2,151,212 0.19 5,369,592 0.48
08/31/97 3,747,750 0.34 3,195,496 0.29 4,544,355 0.41 7,739,851 0.70
11/30/97 3,653,782 0.33 3,100,290 0.27 3,154,694 0.29 6,254,984 0.56
02/28/98 3,784,203 0.33 3,233,347 0.29 2,711,296 0.24 5,944,643 0.53
05/31/98 3,593,404 0.32 3,028,370 0.27 1,971,753 0.17 5,000,123 0.44
</TABLE>

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

* Per share of common stock.

<PAGE>

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

DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN

Under the Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
a shareholder whose Common Stock is registered in his own name will have all
distributions reinvested automatically by Investor Services Group 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, Investor Services Group 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 Investor Services Group 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, Investor Services
Group 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 Investor
Services Group's open market purchases in connection with the reinvestment of
dividends or capital gains distributions. For the year ended May 31, 1998,
$4,578 in brokerage commissions were incurred.

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

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

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

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

A shareholder whose Common Stock is registered in his or her own name may
terminate participation in the Plan at any time by notifying Investor Services
Group in writing, by completing the form on the back of the Plan account
statement and forwarding it to Investor Services Group or by calling Investor
Services Group directly. A termination will be effective immediately if notice
is received by Investor Services Group 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, Investor Services Group 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 Investor Services Group at
1-800-331-1710.

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

MEETING OF SHAREHOLDERS

On April 17, 1998, the Fund held its Annual Meeting of Shareholders (the
"Meeting") to (1) elect two Directors of the Fund ("Proposal 1"), (2) ratify the
selection of Coopers & Lybrand L.L.P. as independent accountants for the Fund
for the fiscal year ending November 30, 1998 ("Proposal 2"), and (3) approve an
amendment to the Fund's Articles of Incorporation to require a "super-majority"
vote to change the Fund's investment objective, its diversified status or its
policy against investing for the purpose of gaining control of a company
("Proposal 3"). With respect to Proposal 3, the Meeting was adjourned and
reconvened on May 15, 1998. The results of each proposal are as follows:

PROPOSAL 1: ELECTION OF DIRECTORS.

<TABLE>
<CAPTION>
NAME FOR WITHHELD UNVOTED
- ---- --- -------- -------
<S> <C> <C> <C>
Common Stock
Robert F. Wulf............................................ 10,146,455 316,950 --
Preferred Stock
Donald F. Crumrine........................................ 559 -- --
</TABLE>

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

PROPOSAL 2: RATIFY THE SELECTION OF COOPERS & LYBRAND L.L.P. AS INDEPENDENT
ACCOUNTANTS.

PROPOSAL 3: APPROVE AN AMENDMENT TO THE FUND'S ARTICLES OF INCORPORATION.

<TABLE>
<CAPTION>
FOR AGAINST ABSTAINED
--- ------- ---------
<S> <C> <C> <C>
Common Stock and Preferred Stock
(voting together as a single class)
Voted....................................................... 5,888,356 345,306 234,079
Preferred Stock
(voting as a separate class)
Voted....................................................... 436 0 23
</TABLE>

<PAGE>

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

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

INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: [email protected]

QUESTIONS CONCERNING YOUR SHARES OF PREFERRED
INCOME OPPORTUNITY FUND?
- If your shares are held in a Brokerage
Account, contact your Broker.
- If you have physical possession of your shares in certificate
form, contact the Fund's Transfer Agent & Shareholder Servicing
Agent --
First Data Investor Services Group, Inc.
P.O. Box 1376
Boston, MA 02104
1-800-331-1710

THIS REPORT IS SENT TO SHAREHOLDERS OF PREFERRED INCOME OPPORTUNITY
FUND INCORPORATED FOR THEIR INFORMATION. IT IS NOT A PROSPECTUS,
CIRCULAR OR REPRESENTATION INTENDED FOR USE IN THE PURCHASE OR SALE OF
SHARES OF THE FUND OR OF ANY SECURITIES MENTIONED IN THIS REPORT.

3202 4/98

[Preferred Income Opportunity]

Semi-Annual
Report

May 31, 1998