FLAHERTY & CRUMRINE TOTAL RETURN FUND INC — Net Asset Value 2004

Oct 22, 2004

FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN FUND Dear Shareholder: The Flaherty & Crumrine/Claymore Total Return Fund ("FLC") produced a total return on Net Asset Value ("NAV") of 3.2%(1) during the three month period ending August 31, 2004. Since the beginning of the fiscal year on December 1, 2003, the total return on NAV has been 3.7%. The NAV returns are consistent with our expectations for how the Fund should perform during periods of volatile long-term interest rates. As can be seen from the chart below, the yield on the 30 year U.S. Treasury bond has changed direction in each of the first three fiscal quarters of 2004 (changes in the value of the Fund's assets and hedge positions are closely correlated to the performance of this bond). The decline in rates during the first fiscal quarter contributed to strong returns for the period. The subsequent jump in rates during the second fiscal quarter resulted in negative returns for the period, as the Fund's hedges only partially offset the drop in value of the Fund's investment portfolio. [GRAPHIC OMITTED] EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS: - -------------------------------------------------------------------------------- YIELD ON LONG-TERM U.S. TREASURY BOND Date Yield 12/01/03 5.155% 12/05/03 5.047% 12/12/03 5.090% 12/19/03 4.959% 12/26/03 4.969% 01/02/04 5.170% 01/09/04 4.964% 01/16/04 4.892% 01/23/04 4.938% 01/30/04 4.965% 02/06/04 4.928% 02/13/04 4.916% 02/20/04 4.954% 02/27/04 4.855% 03/05/04 4.743% 03/12/04 4.707% 03/19/04 4.718% 03/26/04 4.771% 04/02/04 4.972% 04/09/04 5.028% 04/16/04 5.174% 04/23/04 5.246% 04/30/04 5.281% 05/07/04 5.462% 05/14/04 5.500% 05/21/04 5.460% 05/28/04 5.345% 06/04/04 5.461% 06/11/04 5.474% 06/18/04 5.374% 06/25/04 5.336% 07/02/04 5.205% 07/09/04 5.213% 07/16/04 5.121% 07/23/04 5.171% 07/30/04 5.203% 08/06/04 5.034% 08/13/04 5.008% 08/20/04 5.027% 08/27/04 5.016% 08/31/04 4.935% As we began the most recent fiscal quarter, the Fund's hedge positions had appreciated significantly and were offsetting changes in value of the investment portfolio almost dollar-for-dollar. Following the weakness in March and April we were unwilling to risk further declines in NAV, so we maintained the existing hedge position. If interest rates had continued to rise, the NAV of the Fund should have remained reasonably stable. That is exactly how the Fund's safety net hedging strategy is intended to work! Shortly after the start of the third quarter, long-term interest rates reversed course and began a steady DECLINE, despite the fact that the Federal Reserve began INCREASING short-term rates in June (for a more detailed discussion of the economic conditions driving interest rates, see the "3rd Quarter Economic Update" on the Fund's website: WWW.FCCLAYMORE.COM). As expected, the Fund's preferred securities and corporate bonds appreciated throughout the period, while the hedge fell in value, dragging down overall performance. Initially this drag was substantial, but it lessened as rates continued to fall. The Fund also benefited from a modest, favorable move in the relationship between the Fund's preferred securities and U.S. Treasuries. Simply stated, the price of our preferreds rose by more than the price of corresponding Treasury bonds during the quarter. This was the opposite of conditions in the previous quarter. - -------------------------- (1) Based on monthly data provide by Lipper Inc. Distributions are assumed to be reinvested at NAV in accordance with Lipper's practice. NAV investment performance is comprised of principal change and income. The discussion to this point has focused on factors that impact the principal change. Let's turn to the other component of performance -- income. The Fund's investment portfolio continues to produce sufficient amounts of dividend and interest income to support the current monthly dividend. There are, however, some potential warning flags on the horizon. The Federal Reserve's present policy of raising short-term interest rates directly affects the Fund by increasing the cost of its leverage. The Fed's policy has been in place for some time now, and we have factored it into our management strategy. However, changes in long-term interest rates and the resulting impact on income are more difficult to plan for. If long-term interest rates rise, the Fund's hedges should appreciate and enable the Fund to purchase additional income-producing securities; this additional income should tend to offset the higher leverage expense. Things get more challenging if long-term rates decline. This so-called "bull flattening" scenario (short-term rates rise while long-term rates decline), initially puts a strain on distributable income. Once again, the cost of LEVERAGE goes up along with higher short-term rates, but now the income generated by the investment portfolio may at some point actually fall if issuers retire older securities with relatively high coupons and replace them with new issues that pay a lower rate (the issuer is analogous to a homeowner refinancing a mortgage when interest rates drop). Fortunately, there is a bright side to this scenario -- as the yield curve flattens, the cost of the Fund's HEDGING strategy falls. The mathematics behind this are fairly complicated, but the concept is quite simple. Hedging a long-term security creates a package that closely resembles a short-term security. The market imposes a "charge" for this transformation, the amount of which is closely tied to the difference between long-term and short-term interest rates. The larger the difference, the more expensive it is to hedge. Therefore, the cost of hedging declines when the yield curve flattens and the interest rate differential shrinks. The benefits to the Fund don't materialize immediately, but they can be significant over time. Changes in investment income, leverage expense and the cost of hedging (as well as other factors like realized gains or losses) mean that setting the dividend rate entails both science and art. We carefully monitor all of these moving parts, and do our best to set a rate that is sustainable under current market conditions. Readers will notice some changes to the appearance of the information that follows. These changes are in accordance with recent changes to the SEC rules on shareholder reporting. The biggest change is the inclusion of a complete listing of the investment portfolio (previous reports for the Fund's first and third fiscal quarters did not include a portfolio listing). In addition, we've included a page entitled "Portfolio Overview" that contains a number of schedules summarizing important measures of the Fund's investments. We hope you will also continue to visit the Fund's web site at www.fcclaymore.com where a broad range of information about the Fund is updated regularly. We also encourage you to visit www.preferredstockguide.com. It contains useful information about most of the issues that make up the preferred securities universe. Sincerely, /S/DONALD F. CRUMRINE /S/ROBERT M. ETTINGER Donald F. Crumrine Robert M. Ettinger Chairman of the Board President October 11, 2004 - -------------------------------------------------------------------------------- Flaherty & Crumrine/Claymore Total Return Fund Incorporated PORTFOLIO OVERVIEW AUGUST 31, 2004 ----------------------------------------------------------- FUND STATISTICS ON 8/31/04 - --------------------------------------------- Net Asset Value $ 23.71 Market Price $ 23.46 Premium/Discount -1.05% Yield on Market Price 8.31% Common Shares Outstanding 9,744,666 MOODY'S RATINGS % OF PORTFOLIO - --------------------------------------------- AAA 1.1% AA 2.1% A 37.0% BBB 46.6% BB 8.8% Not Rated 3.5% - --------------------------------------------- Below by Investment Grade* 7.9% * BELOW INVESTMENT GRADE BY BOTH MOODY'S AND S&P INDUSTRY CATEGORIES % OF PORTFOLIO - --------------------------------------------- [GRAPHIC OMITTED] EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS: Banks 34% Utilities 27% Insurance 18% REITs 7% Financial Services 6% Other 5% Oil and Gas 3% TOP 10 HOLDINGS BY ISSUER % OF PORTFOLIO - --------------------------------------------- J.P. Morgan Chase 5.4% Wachovia Corp 4.8% Duke Energy 3.9% HSBC Holdings PLC 3.8% Prudential Holdings 3.6% Lehman Brothers 3.5% Florida Power & Light 2.6% Nexen, Inc. 2.6% OneAmerica Financial 2.5% HBOS PLC 2.3%

3 - -------------------------------------------------------------------------------- Flaherty & Crumrine/Claymore Total Return Fund Incorporated PORTFOLIO OF INVESTMENTS AUGUST 31, 2004 (UNAUDITED) - -----------------------------------------------------------

4 - -------------------------------------------------------------------------------- Flaherty & Crumrine/Claymore Total Return Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) AUGUST 31, 2004 (UNAUDITED) -----------------------------------------------------------

5 - -------------------------------------------------------------------------------- Flaherty & Crumrine/Claymore Total Return Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) AUGUST 31, 2004 (UNAUDITED) - -----------------------------------------------------------

6 - -------------------------------------------------------------------------------- Flaherty & Crumrine/Claymore Total Return Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) AUGUST 31, 2004 (UNAUDITED) -----------------------------------------------------------

7 - -------------------------------------------------------------------------------- Flaherty & Crumrine/Claymore Total Return Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) AUGUST 31, 2004 (UNAUDITED) - ------------------------------------------------------------

8 - -------------------------------------------------------------------------------- Flaherty & Crumrine/Claymore Total Return Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) AUGUST 31, 2004 (UNAUDITED) -----------------------------------------------------------

9 - -------------------------------------------------------------------------------- Flaherty & Crumrine/Claymore Total Return Fund Incorporated FINANCIAL DATA PER SHARE OF COMMON STOCK (UNAUDITED) - ----------------------------------------------

10 - -------------------------------------------------------------------------------- Flaherty & Crumrine/Claymore Total Return Fund Incorporated STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1) FOR THE PERIOD FROM DECEMBER 1, 2003 THROUGH AUGUST 31, 2004 (UNAUDITED) ------------------------------------------------------------------------

11 - -------------------------------------------------------------------------------- Flaherty & Crumrine/Claymore Total Return Fund Incorporated FINANCIAL HIGHLIGHTS(1) FOR THE PERIOD FROM DECEMBER 1, 2003 THROUGH AUGUST 31,2004 (UNAUDITED) FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD. - -----------------------------------------------------

12 [This page intentionally left blank] [This page intentionally left blank] [This page intentionally left blank] [BEGIN SIDEBAR] DIRECTORS Martin Brody Donald F. Crumrine, CFA Nicholas Dalmaso 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 R. Eric Chadwick, CFA Chief Financial Officer, Vice President, Treasurer and Secretary Peter C. Stimes, CFA Chief Compliance Officer and Vice President Nicholas Dalmaso Vice President Bradford S. Stone Vice President Laurie Lodolo Assistant Compliance Officer, Assistant Treasurer and Assistant Secretary INVESTMENT ADVISER Flaherty & Crumrine Incorporated e-mail: flaherty@pfdincome.com QUESTIONS CONCERNING YOUR SHARES OF FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN 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 FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN 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. [END SIDEBAR] [GRAPHIC OMITTED] LIGHTHOUSE Flaherty & Crumrine/Claymore ============================ Total Return Fund Quarterly Report August 31, 2004 web site: www.fcclaymore.com