FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND
To the Shareholders of the Flaherty & Crumrine Preferred Income Opportunity Fund
("PFO"):
During the Fund's 3rd fiscal quarter, the economy slowed from its rapid
growth earlier in the year and, for the first time in two years, the Federal
Reserve paused in its ratcheting up of short-term interest rates. In this
environment, the Fund performed very well, earning a total return of +3.0% on
its net asset value (NAV) in the three months ended August 31st and +5.2% over
its fiscal year-to-date.
In a reversal of the weak markets for Treasury securities earlier in the
year, when the Fund's hedging strategies contributed significantly to results,
long-term interest rates declined during the recent fiscal quarter and the
interest-rate hedge proved unnecessary. However, as always, we follow the Fund's
investment strategy of maintaining the hedge in place, while attempting to
control its cost. Doing so helps protect the value of the Fund's holdings
against significant increases in long-term interest rates and potentially
results in an increase in the Fund's distributable income. During the recent
fiscal quarter, the Fund's NAV performed very well, even after absorbing the
cost of the hedge.
Conditions in the market for preferred securities continue to be positive.
This market is somewhat amorphous, so we find it useful to break it down into
smaller groups of similarly-structured issues. The market for traditional
preferred STOCK (issues that pay dividends and may have tax advantages to
certain investors which the Fund can pass through to its shareholders) has been
delivering strong relative returns for some time. As of August 31st, this type
of security comprised 63% of the Fund's portfolio.
Since the beginning of 2006, fourteen new traditional preferred stock
issues totaling $5.7 billion have been brought to market (increasing the sector
total by roughly 10%); the additional supply has helped focus interest on
traditional preferred stock and appears to have attracted new investors. Several
of these recent issues have dividend rates that adjust every quarter to reflect
changes in short-term interest rates. This floating-rate feature fits the Fund
nicely because it tends to offset changes in the cost of the Fund's leverage and
requires only a minimal interest-rate hedge. However, unless the level of income
we can earn on this type of security goes up, we don't anticipate increasing the
Fund's holdings much beyond present levels.
The other major category of the preferred market is the fully taxable or
"hybrid" preferred. Income from these issues is taxed as ordinary income to
investors and is a deductible expense to the issuer. Taxable preferred
securities comprise the lion's share of the preferred market, and the segment
continues to grow rapidly. Over $24 billion of new taxable preferred securities
have come to market in 2006. As of August 31st, 31% of the Fund's portfolio was
invested in fully-taxable preferred securities.
Much of the recent growth in taxable preferred securities has come from
issuance of "enhanced" preferreds. These issues have certain terms and
conditions which may result in better credit ratings for the issuer (which in
turn helps keep their borrowing costs down). Since most of these features favor
the issuer, investors should require a higher return. In our view, too often
this is not the case. As a result, the portfolio's allocation to enhanced
preferreds has increased at a much slower pace than that of the overall market.
While changes in short-term interest rates affect the valuation of some of
the Fund's securities (and therefore its NAV), short-term rates more directly
affect the Fund's income and the amount of its dividend by influencing both the
cost of its Money Market PreferredTM Stock (MMP(R)) leverage and its hedging
strategy. The Fund's leverage generally produces additional distributable income
for its Common Stock shareholders. The amount of this additional income is
influenced by the "spread" between the income generated by the portfolio and the
cost of leverage.
As the Fed increased short-term interest rates through June 2006, these
spreads narrowed significantly and the Fund generated less additional
distributable income. If the Fed maintains its pause on short-term rates, and
long-term rates do not decrease materially, the Fund's leverage should continue
to produce the same additional distributable income as it does now. Of course,
if the Fed lowers short-term interest rates, the Fund should see a greater
benefit from its use of leverage and consequently have more additional
distributable income for its Common Stock shareholders.
The cost of the Fund's hedging strategy is also directly affected by the
slope of the yield curve (in other words, the difference between short- and
long-term interest rates). When the yield curve is steep - as it was for most of
the period from mid-2001 through 2004 - hedging tends to be expensive, because
the market charges the difference between long- and short-term yields to those
hedging. However, if the slope of the yield curve is as flat as it has been this
year, the market will not charge as much to hedge and the Fund should not need
to spend as much on its hedging strategy as it has over the past few years.
We hope investors will take advantage of the Fund's website,
WWW.PREFERREDINCOME.COM. On it, there is a more extensive discussion of enhanced
hybrid preferred securities, the impact of changing short-term interest rates on
the additional distributable income provided by the Fund's leverage and how the
slope of the yield curve affects the cost of the Fund's hedging strategy. It
also contains a wide range of additional information about the Fund.
Sincerely,
/S/ DONALD F. CRUMRINE /S/ ROBERT M. ETTINGER
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
October 19, 2006
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OVERVIEW
AUGUST 31, 2006 (UNAUDITED)
-------------------------------------
FUND STATISTICS ON 08/31/06
---------------------------------------------------
Net Asset Value $ 12.16
Market Price $ 11.94
Discount 1.81%
Yield on Market Price 6.53%
Common Stock Shares Outstanding 11,695,372
INDUSTRY CATEGORIES % OF PORTFOLIO
------------------------------------------
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS
Utilities 35%
Banks 24%
Insurance 16%
Financial Services 12%
Oil and Gas 7%
REITs 3%
Other 3%
MOODY'S RATINGS % OF PORTFOLIO
------------------------------------------
AAA 0.3%
AA 1.1%
A 20.2%
BBB 53.3%
BB 12.2%
Not Rated 11.1%
------------------------------------------
Below Investment Grade* 15.0%
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND
S&P.
TOP 10 HOLDINGS BY ISSUER % OF PORTFOLIO
------------------------------------------------------
Interstate Power & Light 4.9%
Goldman Sachs 4.6%
Xcel Energy 3.7%
Cobank 3.0%
EOG Resources 3.0%
North Fork Bancorporation 2.9%
HSBC 2.8%
Principal Financial Group 2.8%
SLM Corporation 2.7%
First Republic Bank 2.7%
% OF PORTFOLIO**
-----------------------------------------------------------------------------------------------------------
Holdings Generating Qualified Dividend Income (QDI) for Individuals 68%
Holdings Generating Income Eligible for the Corporate Dividend Received Deduction (DRD) 63%
-----------------------------------------------------------------------------------------------------------
** THIS DOES NOT REFLECT YEAR-END RESULTS OR ACTUAL TAX CATEGORIZATION OF FUND
DISTRIBUTIONS. THESE PERCENTAGES CAN, AND DO, CHANGE, PERHAPS SIGNIFICANTLY,
DEPENDING ON MARKET CONDITIONS. INVESTORS SHOULD CONSULT THEIR TAX ADVISOR
REGARDING THEIR PERSONAL SITUATION.
3
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS
AUGUST 31, 2006 (UNAUDITED)
--------------------------------------------------------------------------------
SHARES/$ PAR VALUE
------------ ------
PREFERRED SECURITIES -- 93.4%
BANKING -- 23.6%
------------------------------------------------------------------------------------------------------------------------------------
$ 3,000,000 Astoria Capital Trust I, 9.75% 11/01/29 Capital Security, Series B............... $ 3,405,360
Auction Pass-Through Trust, Cl. B:
9 Series 2006-5, Variable Rate Pfd., 144A****.................................... 268,875*
9 Series 2006-6, Variable Rate Pfd., 144A****.................................... 268,875*
$ 1,000,000 Barclays Bank PLC, Adj. Rate Pfd................................................. 937,305**(1)
$ 2,000,000 Capital One Capital III, 7.686% Pfd.............................................. 2,089,970
Cobank, ACB:
45,000 7.00% Pfd., 144A****........................................................... 2,330,775*
75,000 Adj. Rate Pfd., 144A****....................................................... 4,087,125*
$ 500,000 Comerica (Imperial) Capital Trust I, 9.98% 12/31/26 Capital Security, Series B... 539,657
4,500 FBOP Corporation, Adj. Rate Pfd., 144A****....................................... 4,590,000*
$ 2,250,000 First Hawaiian Capital I, 8.343% 07/01/27 Capital Security, Series B............. 2,371,241(1)
First Republic Bank:
200,000 6.25% Pfd...................................................................... 4,914,000*
5,000 6.70% Pfd...................................................................... 126,925*
22,500 First Republic Preferred Capital Corporation II, 8.75% Pfd., Series B, 144A****.. 605,812
7,400 Fleet Capital Trust VII, 7.20% Pfd. 12/15/31..................................... 188,737
5,000 Fleet Capital Trust VIII, 7.20% Pfd. 03/15/32.................................... 128,450
$ 4,349,000 GreenPoint Capital Trust I, 9.10% 06/01/27 Capital Security...................... 4,621,008
$ 3,500,000 HBOS Capital Funding LP, 6.85% Pfd............................................... 3,547,425(1)
5,000 HSBC Series II, Variable Inverse Pfd., Pvt....................................... 5,510,000*
HSBC USA, Inc.:
9,500 6.50% Pfd., Series H........................................................... 251,133*
3,250 $2.8575 Pfd.................................................................... 163,296*
12,000 Keycorp Capital VIII, 7.00% Pfd. 06/15/66........................................ 310,380
$ 1,350,000 Keycorp Institutional Capital B, 8.25% 12/15/26 Capital Security................. 1,413,504
$ 1,500,000 North Fork Capital Trust I, 8.70% 12/15/26 Capital Security...................... 1,569,690
16,000 PFGI Capital Corporation, 7.75% Pfd.............................................. 412,960
$ 650,000 RBS Capital Trust B, 6.80% Pfd................................................... 655,629**(1)
10 Roslyn Real Estate, 8.95% Pfd., Series C, 144A****............................... 1,093,816
70,500 Sovereign Bancorp, 7.30% Pfd., Series C.......................................... 1,879,530*
20,375 Sovereign Capital Trust V, 7.75% Pfd. 05/22/36................................... 537,493
6,000 USB Capital X, 6.50% Pfd. 04/12/66............................................... 149,790
$ 1,100,000 Washington Mutual Preferred Funding, Variable Rate Pfd., 144A****................ 1,079,667
-------------------------------------------------------------------------------------------------------------------
50,048,428
----------------
4
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2006 (UNAUDITED)
--------------------------------------------------------------------------------
SHARES/$ PAR VALUE
------------ ------
PREFERRED SECURITIES -- (CONTINUED)
FINANCIAL SERVICES -- 11.7%
------------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Group, Inc.:
100,000 Adj. Rate Pfd., Series D....................................................... $ 2,557,500*
25 Pass-Through Certificates, Class B, 144A****................................... 2,667,500*
3,500 STRIPES Custodial Receipts, Pvt................................................ 3,724,000*
109,505 Lehman Brothers Holdings, Inc., 5.94% Pfd., Series C............................. 5,548,071*
3,000 Merrill Lynch Series II STRIPES Custodial Receipts, Pvt.......................... 3,072,000*
9,200 Morgan Stanley Capital Trust IV, 6.25% Pfd....................................... 226,550
47,000 Morgan Stanley Capital Trust VI, 6.60% Pfd....................................... 1,181,815
SLM Corporation:
94,150 6.97% Pfd., Series A........................................................... 5,064,799*
7,500 Adj. Rate Pfd., Series B....................................................... 766,313*
-------------------------------------------------------------------------------------------------------------------
24,808,548
----------------
INSURANCE -- 13.4%
------------------------------------------------------------------------------------------------------------------------------------
20,000 ACE Ltd., 7.80% Pfd., Series C................................................... 516,600**(1)
25,000 Aegon NV, 6.50% Pfd.............................................................. 626,000**(1)
Arch Capital Group Ltd.:
10,000 7.875% Pfd., Series B.......................................................... 255,550**(1)
4,400 8.00% Pfd...................................................................... 113,652**(1)
Axis Capital Holdings:
73,950 7.25% Pfd., Series A........................................................... 1,888,313**(1)
9,300 Variable Rate Pfd., Series B................................................... 942,601(1)
16,000 Berkley W.R. Capital Trust II, 6.75% Pfd. 07/26/45............................... 393,920
64,600 Endurance Specialty Holdings, 7.75% Pfd.......................................... 1,606,279**(1)
13,750 Everest Re Capital Trust II, 6.20% Pfd., Series B................................ 315,700(1)
10,000 Lincoln National Corporation, 6.75% Pfd. 04/20/66................................ 251,150
140,000 MetLife Inc., 6.50% Pfd., Series B............................................... 3,602,200*
$ 1,925,000 Oil Insurance Ltd., Variable Rate Pfd., 144A****................................. 1,963,615(1)
4,900 PartnerRe Capital Trust I, 7.90% Pfd. 12/31/31................................... 124,631**(1)
1,930 PartnerRe Ltd., 6.75% Pfd., Series C............................................. 48,182**(1)
213,500 Principal Financial Group, 6.518% Pfd............................................ 5,895,803*
$ 511,000 Provident Financing Trust I, 7.405% 03/15/38 Capital Security.................... 485,591
$ 4,000,000 Renaissancere Capital Trust, 8.54% 03/01/27 Capital Security, Series B........... 4,212,420(1)
Renaissancere Holdings Ltd.:
25,000 6.08% Pfd., Series C........................................................... 556,500**(1)
6,000 7.30% Pfd., Series B........................................................... 150,450**(1)
14,000 8.10% Pfd., Series A........................................................... 352,100**(1)
115,500 Scottish Re Group Ltd., 7.25% Pfd................................................ 2,285,168**(1)
22,280 St. Paul Capital Trust I, 7.60% Pfd. 10/15/50.................................... 565,912
5
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2006 (UNAUDITED)
--------------------------------------------------------------------------------
SHARES/$ PAR VALUE
------------ ------
PREFERRED SECURITIES -- (CONTINUED)
INSURANCE -- (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
$ 560,000 USF&G Capital, 8.312% 07/01/46 Capital Security, 144A****........................ $ 672,790
22,850 XL Capital Ltd., 8.00% Pfd., Series A............................................ 589,302**(1)
-------------------------------------------------------------------------------------------------------------------
28,414,429
----------------
UTILITIES -- 34.7%
------------------------------------------------------------------------------------------------------------------------------------
Alabama Power Company:
4,980 4.60% Pfd...................................................................... 434,480*
6,485 4.72% Pfd...................................................................... 580,537*
868 4.92% Pfd...................................................................... 80,997*
6,000 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993........................ 624,900*
10,000 Calenergy Capital Trust III, 6.50% Pfd. 09/01/27................................. 472,400
1,628 Central Hudson Gas & Electric Corporation, 4.35% Pfd., Series D, Pvt............. 136,060*
3,798 Central Maine Power Company, 4.75% Pfd........................................... 324,596*
11,119 Central Vermont Public Service Corporation, 8.30% Sinking Fund Pfd., Pvt......... 1,155,209*
Connecticut Light & Power Company:
2,050 4.50% Pfd., Series 1956........................................................ 80,473*
10,000 4.50% Pfd., Series 1963, Pvt................................................... 387,200*
25,000 5.28% Pfd., Series 1967........................................................ 1,156,625*
883 $2.04 Pfd., Series 1949........................................................ 31,422*
2,900 $2.20 Pfd., Series 1949........................................................ 111,302*
9,652 $3.24 Pfd...................................................................... 509,046*
2,000 Consolidated Edison Company of New York, 4.65% Pfd., Series C.................... 175,720*
7,500 Dayton Power and Light Company, 3.90% Pfd., Series C............................. 503,100*
$ 1,500,000 Dominion Resources Capital Trust III, 8.40% 01/15/31 Capital Security............ 1,732,327
Duquesne Light Company:
15,030 3.75% Pfd...................................................................... 498,169*
25,775 6.50% Pfd...................................................................... 1,308,726*
Entergy Arkansas, Inc.:
2,840 4.56% Pfd...................................................................... 224,814*
3,050 4.56% Pfd., Series 1965........................................................ 241,438*
1,435 6.08% Pfd...................................................................... 144,131*
90,000 6.45% Pfd...................................................................... 2,313,900*
2,441 Entergy Gulf States, Inc., 7.56% Pfd............................................. 235,593*
36,000 Entergy Louisiana, Inc., 6.95% Pfd., 144A****.................................... 3,729,780*
Entergy Mississippi, Inc.:
4,616 4.36% Pfd...................................................................... 328,521*
5,000 4.92% Pfd...................................................................... 401,575*
4,400 Florida Power Company, 4.75% Pfd................................................. 393,822*
18,500 FPC Capital I, 7.10% Pfd., Series A.............................................. 467,310
6
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2006 (UNAUDITED)
--------------------------------------------------------------------------------
SHARES/$ PAR VALUE
------------ ------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
8,900 Georgia Power Capital Trust, 6.125% Pfd.......................................... $ 228,952*
Great Plains Energy, Inc.:
1,625 4.20% Pfd...................................................................... 124,897*
2,000 4.35% Pfd...................................................................... 159,210*
24,000 Gulf Power Company, 6.00% Pfd., Series 1......................................... 2,506,200*
Hawaiian Electric Company, Inc.:
2,471 5.00% Pfd., Series D........................................................... 41,377*
7,438 5.00% Pfd., Series E........................................................... 124,549*
1,383 5.00% Pfd., Series I........................................................... 23,158*
$ 3,750,000 Houston Light & Power Capital Trust II, 8.257% 02/01/37 Capital Security......... 3,939,844
30,500 Indianapolis Power & Light Company, 5.65% Pfd.................................... 2,823,995*
340,000 Interstate Power & Light Company, 8.375% Pfd., Series B.......................... 10,460,100*
2,588 New York State Electric & Gas, $4.50 Pfd., Series 1949........................... 214,364*
Ohio Power Company:
3,018 4.20% Pfd...................................................................... 240,761*
1,251 4.40% Pfd...................................................................... 104,546*
Pacific Enterprises:
13,680 $4.36 Pfd...................................................................... 1,119,845*
24,985 $4.50 Pfd...................................................................... 2,110,983*
15,730 $4.75 Pfd., Series 53.......................................................... 1,402,801*
Pacific Gas & Electric Co.:
7,600 4.50% Pfd., Series H........................................................... 151,278*
41,500 5.00% Pfd., Series D........................................................... 909,680*
83,000 5.00% Pfd., Series E........................................................... 1,868,330*
PacifiCorp:
5,672 $4.56 Pfd...................................................................... 462,438*
6,708 $4.72 Pfd...................................................................... 566,055*
8,750 $7.48 Sinking Fund Pfd......................................................... 890,094*
1,250 PECO Energy Company, $4.30 Pfd., Series B........................................ 99,881*
$ 1,500,000 PECO Energy Capital Trust III, 7.38% 04/06/28 Capital Security, Series D......... 1,600,620
12,748 Portland General Electric, 7.75% Sinking Fund Pfd................................ 1,299,340*
30,000 PPL Electric Utilities Corporation, 6.25% Pfd.................................... 769,650*
14,020 Public Service Electric & Gas Company, 5.28% Pfd., Series E...................... 1,355,454*
70,210 San Diego Gas & Electric Company, $1.70 Pfd...................................... 1,821,247*
South Carolina Electric & Gas Company:
13,974 5.125% Purchase Fund Pfd., Pvt................................................. 718,124*
7,774 6.00% Purchase Fund Pfd., Pvt.................................................. 395,774*
7
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2006 (UNAUDITED)
--------------------------------------------------------------------------------
SHARES/$ PAR VALUE
------------ ------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
Southern California Edison:
5,000 4.24% Pfd...................................................................... $ 97,100*
11,300 6.00% Pfd...................................................................... 1,121,322*
60,000 Southern Union Company, 7.55% Pfd................................................ 1,559,100*
$ 750,000 TXU Electric Capital V, 8.175% 01/30/37 Capital Security......................... 789,866
Union Electric Company:
5,700 4.56% Pfd...................................................................... 509,495*
4,800 $7.64 Pfd...................................................................... 495,624*
Virginia Electric & Power Company:
1,665 $4.04 Pfd...................................................................... 124,967*
2,470 $4.20 Pfd...................................................................... 192,722*
1,673 $4.80 Pfd...................................................................... 150,595*
2,878 $6.98 Pfd...................................................................... 295,455*
12,500 $7.05 Pfd...................................................................... 1,279,188*
11,200 Virginia Power Capital Trust, 7.375% Pfd. 07/30/42............................... 286,776
2,262 Washington Gas & Light Company, $4.25 Pfd........................................ 183,448*
12,863 Wisconsin Power & Light Company, 6.20% Pfd....................................... 1,318,393*
Xcel Energy, Inc.:
15,000 $4.08 Pfd., Series B........................................................... 1,175,025*
20,040 $4.10 Pfd., Series C........................................................... 1,577,549*
35,510 $4.11 Pfd., Series D........................................................... 2,802,272*
17,750 $4.16 Pfd., Series E........................................................... 1,417,693*
10,000 $4.56 Pfd., Series G........................................................... 875,500*
-------------------------------------------------------------------------------------------------------------------
73,569,810
----------------
OIL AND GAS -- 4.8%
------------------------------------------------------------------------------------------------------------------------------------
8,000 Devon Energy Corporation, 6.49% Pfd., Series A................................... 816,000*
$ 372,000 Enterprise Products Partners, Variable Rate Pfd.................................. 387,107
6,125 EOG Resources, Inc., 7.195% Pfd., Series B....................................... 6,414,161*
$ 1,650,000 KN Capital Trust III, 7.63% 04/15/28 Capital Security............................ 1,489,043
10,000 Lasmo America Limited, 8.15% Pfd., 144A****...................................... 1,068,800*(1)
-------------------------------------------------------------------------------------------------------------------
10,175,111
----------------
REAL ESTATE INVESTMENT TRUST (REIT) -- 3.3%
------------------------------------------------------------------------------------------------------------------------------------
BRE Properties, Inc.:
12,600 6.75% Pfd., Series D........................................................... 305,424
18,900 8.08% Pfd., Series B........................................................... 484,879
8
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2006 (UNAUDITED)
--------------------------------------------------------------------------------
SHARES/$ PAR VALUE
------------ ------
PREFERRED SECURITIES -- (CONTINUED)
REAL ESTATE INVESTMENT TRUST (REIT) -- (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
20,000 Duke Realty Corporation, 6.625% Pfd., Series J................................... $ 490,600
10,000 Equity Office Property Trust, 7.75% Pfd., Series G............................... 253,900
1,000 Equity Residential Properties, 8.29% Pfd., Series K.............................. 59,105
10,000 PS Business Parks, Inc., 7.00% Pfd., Series H.................................... 248,950
Public Storage, Inc.:
13,600 6.18% Pfd., Series D........................................................... 322,728
114,075 6.45% Pfd., Series F........................................................... 2,767,459
6,300 6.60% Pfd., Series C........................................................... 155,831
2,900 6.75% Pfd., Series E........................................................... 72,834
70,000 7.25% Pfd., Series K........................................................... 1,783,250
3,700 7.625% Pfd., Series U.......................................................... 94,424
-------------------------------------------------------------------------------------------------------------------
7,039,384
----------------
MISCELLANEOUS INDUSTRIES -- 1.9%
------------------------------------------------------------------------------------------------------------------------------------
13,600 E.I. Du Pont de Nemours and Company, $4.50 Pfd., Series B........................ 1,120,504*
35,000 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A****.............................. 3,036,600*
26,000 Touch America Holdings, $6.875 Pfd............................................... --+*
-------------------------------------------------------------------------------------------------------------------
4,157,104
----------------
TOTAL PREFERRED SECURITIES
(Cost $188,311,094) ........................................................... 198,212,814
----------------
CORPORATE DEBT SECURITIES -- 5.5%
FINANCIAL SERVICES -- 0.4%
------------------------------------------------------------------------------------------------------------------------------------
36,300 Saturns-GS, 6.00% 02/15/33, Series Goldman Sachs................................. 864,121
-------------------------------------------------------------------------------------------------------------------
864,121
----------------
INSURANCE -- 2.5%
------------------------------------------------------------------------------------------------------------------------------------
$ 900,000 Farmers Exchange Capital, 7.20% 07/15/48, 144A****............................... 895,990
Liberty Mutual Insurance:
$ 533,000 7.50% 08/15/36, 144A****....................................................... 548,633
$ 3,869,000 7.697% 10/15/97, 144A****...................................................... 3,860,624
-------------------------------------------------------------------------------------------------------------------
5,305,247
----------------
UTILITIES -- 0.6%
------------------------------------------------------------------------------------------------------------------------------------
$ 1,000,000 Duquesne Light Holdings, 6.25% 08/15/35.......................................... 926,850
10,000 Entergy Louisiana LLC, 7.60% 04/01/32............................................ 255,550
-------------------------------------------------------------------------------------------------------------------
1,182,400
----------------
9
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2006 (UNAUDITED)
--------------------------------------------------------------------------------
SHARES/$ PAR VALUE
------------ ------
CORPORATE DEBT SECURITIES -- (CONTINUED)
OIL AND GAS -- 2.0%
------------------------------------------------------------------------------------------------------------------------------------
$ 2,000,000 KN Energy, Inc., 7.45% 03/01/98.................................................. $ 1,766,990
97,900 Nexen, Inc., 7.35% Subordinated Notes............................................ 2,491,555(1)
-------------------------------------------------------------------------------------------------------------------
4,258,545
----------------
TOTAL CORPORATE DEBT SECURITIES
(Cost $11,486,108)............................................................. 11,610,313
----------------
OPTION CONTRACTS -- 0.0%
1,150 December Put Options on December U.S. Treasury Bond Futures, Expiring 11/21/06... 125,781+
265 October Put Options on December U.S. Treasury Bond Futures, Expiring 09/22/06.... 4,141+
-------------------------------------------------------------------------------------------------------------------
TOTAL OPTION CONTRACTS
(Cost $742,210)................................................................ 129,922
----------------
MONEY MARKET FUND -- 0.3%
607,814 BlackRock Provident Institutional, TempFund...................................... 607,814
-------------------------------------------------------------------------------------------------------------------
TOTAL MONEY MARKET FUND
(Cost $607,814)................................................................ 607,814
----------------
TOTAL INVESTMENTS (Cost $201,147,226***)................................................. 99.2% 210,560,863
OTHER ASSETS AND LIABILITIES (Net)....................................................... 0.8% 1,679,461
----- ----------------
TOTAL NET ASSETS AVAILABLE TO COMMON AND PREFERRED STOCK................................ 100.0%++ $ 212,240,324
------ ----------------
MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (MMP(R)) REDEMPTION VALUE .......................... (70,000,000)
----------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ..................................................... $ 142,240,324
================
-----------------------------
* Securities eligible for the Dividends Received Deduction and distributing Qualified Dividend Income.
** Securities distributing Qualified Dividend Income only.
*** 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. These
securities have been determined to be liquid under the guidelines established by the Board of
Directors.
(1) Foreign Issuer.
+ 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:
PFD. -- Preferred Securities
PVT. -- Private Placement Securities
REIT -- Real Estate Investment Trust
10
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)
FOR THE PERIOD FROM DECEMBER 1, 2005 THROUGH AUGUST 31, 2006 (UNAUDITED)
--------------------------------------------------------------------------------
VALUE
--------
OPERATIONS:
Net investment income .................................................................... $ 8,790,307
Net realized gain/(loss) on investments sold during the period ........................... 3,268,067
Change in net unrealized appreciation/depreciation of investments held
during the period .................................................................... (2,621,191)
Distributions to MMP(R)* Shareholders from net investment income,
including changes in accumulated undeclared distributions ............................ (2,113,658)
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ..................................... 7,323,525
DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock Shareholders (2)................ (7,031,420)
---------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS ......................................... (7,031,420)
FUND SHARE TRANSACTIONS:
Increase from shares issued under the Dividend Reinvestment
and Cash Purchase Plan ............................................................... 231,696
---------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING
FROM FUND SHARE TRANSACTIONS ......................................................... 231,696
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK ---------------
FOR THE PERIOD ........................................................................... $ 523,801
===============
------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period ...................................................................... $ 141,716,523
Net increase in net assets during the period ............................................. 523,801
---------------
End of period ............................................................................ $ 142,240,324
===============
--------------------------------------------------------
* Money Market Cumulative PreferredTM Stock.
(1) These tables summarize the nine months ended August 31, 2006 and should be read in conjunction with
the Fund's audited financial statements, including footnotes, in its Annual Report dated November 30,
2005.
(2) May include income earned, but not paid out, in prior fiscal year.
11
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Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
FINANCIAL HIGHLIGHTS(1)
FOR THE PERIOD FROM DECEMBER 1, 2005 THROUGH AUGUST 31, 2006 (UNAUDITED)
FOR A COMMON STOCK SHARE OUTSTANDING THROUGHOUT THE PERIOD.
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ..................................................... $ 12.14
---------------
INVESTMENT OPERATIONS:
Net investment income .................................................................... 0.75
Net realized and unrealized gain/(loss) on investments .................................. 0.05
DISTRIBUTIONS TO MMP(R)* SHAREHOLDERS:
From net investment income ............................................................... (0.18)
From net realized capital gains .......................................................... --
---------------
Total from investment operations ......................................................... 0.62
---------------
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
From net investment income ............................................................... (0.60)
From net realized capital gains --
---------------
Total distributions to Common Stock Shareholders ......................................... (0.60)
---------------
Net asset value, end of period ........................................................... $ 12.16
===============
Market value, end of period .............................................................. $ 11.94
===============
Common Stock shares outstanding, end of period ........................................... 11,695,372
===============
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
Net investment income + .................................................................. 6.25%**
Operating expenses ....................................................................... 1.55%**
--------------------------------------------------------
SUPPLEMENTAL DATA:++
Portfolio turnover rate .................................................................. 55%***
Total net assets available to Common and Preferred Stock, end of period (in 000's)........ $ 212,240
Ratio of operating expenses to total average net assets available to
Common and Preferred Stock ........................................................... 1.04%**
(1) These tables summarize the nine months ended August 31, 2006 and should be read in conjunction with
the Fund's audited financial statements, including footnotes, in its Annual Report dated November 30,
2005.
* Money Market Cumulative PreferredTM Stock.
** Annualized.
*** Not Annualized.
+ The net investment income ratios reflect income net of operating expenses and payments to MMP(R)*
Shareholders.
++ Information presented under heading Supplemental Data includes MMP(R)*.
12
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Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
FINANCIAL HIGHLIGHTS (CONTINUED)
PER SHARE OF COMMON STOCK (UNAUDITED)
--------------------------------------------------------------------------------
TOTAL DIVIDEND
DIVIDENDS NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE(1)
------------ ------------ ---------------- ----------------
December 31, 2005............................... $0.0705 $12.24 $11.09 $11.43
January 31, 2006................................ 0.0705 12.28 12.63 12.28
February 28, 2006............................... 0.0705 12.38 12.39 12.38
March 31, 2006.................................. 0.0650 12.25 11.46 11.54
April 30, 2006.................................. 0.0650 12.11 11.22 11.27
May 31, 2006.................................... 0.0650 12.00 11.05 11.20
June 30, 2006................................... 0.0650 11.86 11.10 11.21
July 31, 2006................................... 0.0650 11.83 11.53 11.79
August 31, 2006................................. 0.0650 12.16 11.94 12.02
--------------------
(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.
13
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Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
1. AGGREGATE INFORMATION FOR FEDERAL INCOME TAX PURPOSES
At August 31, 2006, the aggregate cost of securities for federal income tax
purposes was $200,973,070, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $14,533,803,
and the aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value was $4,946,010.
14
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DIRECTORS
Donald F. Crumrine, CFA
Chairman of the Board
David Gale
Morgan Gust
Karen H. Hogan
Robert F. Wulf, CFA
OFFICERS
Donald F. Crumrine, CFA
Chief Executive Officer
Robert M. Ettinger, CFA
President
R. Eric Chadwick, CFA
Chief Financial Officer,
Vice President and Treasurer
Chad C. Conwell
Chief Compliance Officer,
Vice President and Secretary
Bradford S. Stone
Vice President and
Assistant Treasurer
Christopher D. Ryan, CFA
Vice President
Laurie C. 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 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 FLAHERTY & CRUMRINE 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]
LIGHTHOUSE ART
FLAHERTY & CRUMRINE
PREFERRED INCOME
OPPORTUNITY FUND
QUARTERLY
REPORT
AUGUST 31, 2006
www.preferredincome.com