FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND
To the Shareholders of the Flaherty & Crumrine Preferred Income Opportunity Fund
("PFO"):
During the Fund's first fiscal quarter ended February 28, 2007, the Fund
performed well in choppy, but ultimately little-changed, fixed-income markets by
earning a total return of 1.6% on its net asset value (NAV). These three months
saw the Fund continue its recent strong performance.
Interest rates were unchanged to slightly higher over the quarter, as the
Federal Reserve left the federal funds rate unchanged and long-term Treasury
rates rose only slightly. Corporate credit spreads also ended the quarter little
changed, while the Fund's interest-rate hedge had only a minimal impact. Both
the recent quarter and trailing twelve-month periods delivered what the Fund is
intended to produce - current income and stability of principal.
As you can see on the following pages detailing actual holdings in the
Fund's portfolio, the Fund invests in a relatively small number of industries,
including utilities and insurers, banks and other finance companies. In terms of
the industries the Fund's assets are in, its portfolio is no different than the
overall preferred securities market. Because of the preferred securities
market's overall emphasis in financial services, a portfolio of preferred
securities, including the Fund's, can be at risk if the U.S. economy goes into
recession.
One important area of recent concern for the U.S. economy in general, and
U.S. credit markets in particular, is subprime mortgage lending, which has
experienced increasing default and delinquency rates in recent months. The
numbers here are large in an absolute sense, but they are small relative to a
$13 trillion U.S. economy and to the mortgage market as a whole. Because of
this, while we cannot entirely rule it out, we currently do not believe that
problems in subprime mortgages will push the economy into recession.
The Fund holds no positions in securities issued by mortgage brokers or
subprime specialty lenders. Nonetheless, many of the banks and insurance
companies in which we have invested do have some exposure to subprime mortgages
in their lending or investment portfolios. While we are examining these
companies very closely, the lack of detailed disclosure about subprime mortgages
makes it impossible for us to make definitive statements about the Fund's
potential exposure to the problem. However, given what we now know and can infer
about the companies in which we invest, we expect that EARNINGS (which flow to
the companies' common shareholders) will be reduced at some of the companies we
hold as a result of the problems in subprime lending. However, we currently do
not expect that they will suffer losses large enough to cut meaningfully into
CAPITAL (which support the debt and preferred securities owned by the Fund).
Although we cannot rule out the possibility - despite our best judgment to the
contrary - that some of the Fund's investments could be seriously affected, we
do not currently see any serious subprime credit problems in the holdings of the
Fund.
The Fund's website at WWW.PREFERREDINCOME.COM has more information about
Fund performance and a more complete discussion of the state of the economy (in
our First Quarter Economic Update) and of subprime mortgages and their potential
impact on the economy and the Fund's portfolio (in the "Frequently Asked
Questions" section). We encourage you to explore the website for a wide range of
additional information about your Fund.
Sincerely,
/S/ DONALD F. CRUMRINE /S/ ROBERT M. ETTINGER
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
April 20, 2007
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OVERVIEW
FEBRUARY 28, 2007 (UNAUDITED)
------------------------------------------------------------------
FUND STATISTICS ON 02/28/07
-----------------------------------------------
Net Asset Value $ 12.60
Market Price $ 12.61
Premium 0.08%
Yield on Market Price 6.19%
Common Stock Shares
Outstanding 11,700,433
INDUSTRY CATEGORIES % OF PORTFOLIO
-----------------------------------------------------
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS
Other 1%
Banks 25%
Utilities 35%
Insurance 19%
Financial Services 9%
Energy 7%
REITs 4%
MOODY'S RATINGS % OF PORTFOLIO
---------------------------------------------
AAA 0.0%
AA 1.1%
A 17.6%
BBB 59.8%
BB 11.9%
Not Rated 8.6%
---------------------------------------------
Below Investment Grade* 15.1%
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND
S&P.
TOP 10 HOLDINGS BY ISSUER % OF PORTFOLIO
-------------------------------------------------------
Interstate Power & Light 5.0%
Liberty Mutual Group 4.5%
Xcel Energy 3.7%
Goldman Sachs 3.6%
RenaissanceRe Holdings 3.3%
First Republic Bank 3.0%
EOG Resources 3.0%
Cobank 2.9%
Public Storage 2.9%
Capital One Financial 2.8%
% OF PORTFOLIO**
---------------------------------------------------------------------------------------------------------------------
Holdings Generating Qualified Dividend Income (QDI) for Individuals 64%
Holdings Generating Income Eligible for the Corporate Dividend Received Deduction (DRD) 55%
---------------------------------------------------------------------------------------------------------------------
** 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
FEBRUARY 28, 2007 (UNAUDITED)
------------------------------------------------------------------
SHARES/$ PAR VALUE
-------------- ---------
PREFERRED SECURITIES -- 94.0%
BANKING -- 24.7%
-----------------------------------------------------------------------------------------------------------------------------
$ 3,000,000 Astoria Capital Trust I, 9.75% 11/01/29 Capital Security, Series B............... $ 3,451,992
Auction Pass-Through Trust, Cl. B:
9 Series 2006-5, Variable Rate Pfd., 144A****.................................... 295,200*
9 Series 2006-6, Variable Rate Pfd., 144A****.................................... 295,200*
Banco Santander:
160,000 6.50% Pfd., 144A****........................................................... 4,080,000**(1)
62,400 6.80% Pfd., 144A****........................................................... 1,601,808**(1)
$ 1,000,000 Barclays Bank PLC, 6.278% Pfd.................................................... 1,006,200**(1)
19,648 Citizens Funding Trust I, 7.50% Pfd. 09/15/66.................................... 512,076
Cobank, ACB:
45,000 7.00% Pfd., 144A****........................................................... 2,379,690*
75,000 7.814% Pfd., 144A****.......................................................... 4,020,075*
$ 500,000 Comerica (Imperial) Capital Trust I, 9.98% 12/31/26 Capital Security, Series B... 531,130
4,500 FBOP Corporation, Adj. Rate Pfd., 144A****....................................... 4,668,750*
$ 2,250,000 First Hawaiian Capital I, 8.343% 07/01/27 Capital Security, Series B............. 2,356,879(1)
First Republic Bank:
200,000 6.25% Pfd...................................................................... 5,181,260*
5,000 6.70% Pfd...................................................................... 130,469*
640 First Republic Preferred Capital Corporation, 10.50% Pfd., 144A****.............. 709,082
22,500 First Republic Preferred Capital Corporation II, 8.75% Pfd., Series B, 144A****.. 607,050
5,000 Fleet Capital Trust VIII, 7.20% Pfd. 03/15/32.................................... 127,188
$ 4,349,000 GreenPoint Capital Trust I, 9.10% 06/01/27 Capital Security...................... 4,569,899
HBOS Capital Funding LP:
$ 3,500,000 6.85% Pfd...................................................................... 3,545,150(1)
$ 250,000 6.413% Pfd., 144A****.......................................................... 259,954**(1)
5,000 HSBC Series II, Variable Inverse Pfd., Pvt....................................... 5,695,000*
2,500 HSBC USA, Inc., $2.8575 Pfd...................................................... 125,825*
12,000 Keycorp Capital VIII, 7.00% Pfd. 06/15/66........................................ 316,500
25,000 Keycorp Capital IX, 6.75% Pfd. 12/15/66.......................................... 647,658
5,000 National City Capital Trust II, 6.625% Pfd. 11/15/36............................. 126,719
$ 1,500,000 North Fork Capital Trust I, 8.70% 12/15/26 Capital Security...................... 1,564,066
16,000 PFGI Capital Corporation, 7.75% Pfd.............................................. 416,320
$ 650,000 RBS Capital Trust B, 6.80% Pfd................................................... 669,500**(1)
10 Roslyn Real Estate, 8.95% Pfd., Series C, 144A****............................... 1,104,156
70,500 Sovereign Bancorp, 7.30% Pfd., Series C.......................................... 1,962,988*
20,375 Sovereign Capital Trust V, 7.75% Pfd. 05/22/36................................... 543,758
6,000 USB Capital XI, 6.60% Pfd. 09/15/66.............................................. 153,660
-------------------------------------------------------------------------------------------------------------------
53,655,202
----------------
4
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2007 (UNAUDITED)
------------------------------------------------------------------
SHARES/$ PAR VALUE
-------------- ---------
PREFERRED SECURITIES -- (CONTINUED)
FINANCIAL SERVICES -- 8.6%
-----------------------------------------------------------------------------------------------------------------------------
36,500 Cabco Trust For Goldman Sachs Capital I, Adj. Rate Pfd. 02/15/34, Series GS...... $ 872,580
$ 1,000,000 CIT Group Inc, 6.10% Pfd......................................................... 1,000,100
Goldman Sachs Group, Inc.:
25 Pass-Through Certificates, Class B, 144A****................................... 2,905,000*
3,500 STRIPES Custodial Receipts, Pvt................................................ 4,039,000*
3,000 Merrill Lynch Series II STRIPES Custodial Receipts, Pvt.......................... 3,369,000*
47,000 Morgan Stanley Capital Trust VI, 6.60% Pfd....................................... 1,199,088
94,150 SLM Corporation, 6.97% Pfd., Series A............................................ 5,213,086*
-------------------------------------------------------------------------------------------------------------------
18,597,854
----------------
INSURANCE -- 16.5%
-----------------------------------------------------------------------------------------------------------------------------
20,000 ACE Ltd., 7.80% Pfd., Series C................................................... 515,250**(1)
$ 500,000 AMBAC Financial Group, Inc., 6.15% Pfd., 02/15/37................................ 496,300
$ 3,500,000 AON Capital Trust A, 8.205% 01/01/27 Capital Security............................ 4,121,698
Arch Capital Group Ltd.:
10,000 7.875% Pfd., Series B.......................................................... 261,875**(1)
4,400 8.00% Pfd...................................................................... 116,875**(1)
$ 2,500,000 AXA SA 6.463% Pfd. Series 144A****............................................... 2,488,767**(1)
Axis Capital Holdings:
73,950 7.25% Pfd., Series A........................................................... 1,929,636**(1)
12,750 7.50% Pfd., Series B........................................................... 1,356,345(1)
22,300 Berkley W.R. Capital Trust II, 6.75% Pfd. 07/26/45............................... 567,256
37,100 Endurance Specialty Holdings, 7.75% Pfd.......................................... 980,831**(1)
13,750 Everest Re Capital Trust II, 6.20% Pfd., Series B................................ 331,719(1)
$ 1,250,000 Glen Meadow Pass Through, 6.505% Pfd., Capital Security 144A****................. 1,286,500
$ 5,000,000 Liberty Mutual Group, 7.80%, 03/15/37, 144A****.................................. 4,990,050
175,000 Principal Financial Group, 6.518% Pfd............................................ 4,998,438*
$ 511,000 Provident Financing Trust I, 7.405% 03/15/38 Capital Security.................... 539,338(2)
$ 4,000,000 Renaissancere Capital Trust, 8.54% 03/01/27 Capital Security, Series B........... 4,170,540(1)
25,000 Renaissancere Holdings Ltd., 6.08% Pfd., Series C................................ 603,500**(1)
100,000 Renaissancere Holdings Ltd., 6.60% Pfd., Series D................................ 2,473,000**(1)
115,500 Scottish Re Group Ltd., 7.25% Pfd................................................ 2,370,060**(1)
$ 560,000 USF&G Capital, 8.312% 07/01/46 Capital Security, 144A****........................ 708,792
22,850 XL Capital Ltd., 8.00% Pfd., Series A............................................ 586,959**(1)
-------------------------------------------------------------------------------------------------------------------
35,893,729
----------------
5
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2007 (UNAUDITED)
------------------------------------------------------------------
SHARES/$ PAR VALUE
-------------- ---------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- 33.8%
-----------------------------------------------------------------------------------------------------------------------------
Alabama Power Company:
4,980 4.60% Pfd...................................................................... $ 439,933*
6,485 4.72% Pfd...................................................................... 587,865*
868 4.92% Pfd...................................................................... 82,009*
6,579 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993........................ 689,767*
10,000 Calenergy Capital Trust III, 6.50% Pfd. 09/01/27................................. 483,750
1,628 Central Hudson Gas & Electric Corporation, 4.35% Pfd., Series D, Pvt............. 133,008*
3,798 Central Maine Power Company, 4.75% Pfd........................................... 322,640*
8,339 Central Vermont Public Service Corporation, 8.30% Sinking Fund Pfd., Pvt......... 866,005*
Connecticut Light & Power Company:
2,050 4.50% Pfd., Series 1956........................................................ 82,799*
10,000 4.50% Pfd., Series 1963, Pvt................................................... 398,500*
25,000 5.28% Pfd., Series 1967........................................................ 1,190,500*
883 $2.04 Pfd., Series 1949........................................................ 32,335*
2,900 $2.20 Pfd., Series 1949........................................................ 114,521*
9,652 $3.24 Pfd...................................................................... 505,379*
2,000 Consolidated Edison Company of New York, 4.65% Pfd., Series C.................... 169,960*
7,500 Dayton Power and Light Company, 3.90% Pfd., Series C............................. 475,800*
23,000 Dominion CNG Capital Trust I, 7.80% 10/31/41 Capital Security.................... 580,750
$ 1,500,000 Dominion Resources Capital Trust III, 8.40% 01/15/31 Capital Security............ 1,878,136
15,030 Duquesne Light Company, 3.75% Pfd................................................ 486,972*
Entergy Arkansas, Inc.:
2,840 4.56% Pfd...................................................................... 235,663*
3,050 4.56% Pfd., Series 1965........................................................ 253,089*
1,435 6.08% Pfd...................................................................... 148,236*
90,000 6.45% Pfd...................................................................... 2,343,600*
2,441 Entergy Gulf States, Inc., 7.56% Pfd............................................. 244,564*
36,000 Entergy Louisiana, Inc., 6.95% Pfd............................................... 3,707,640*
Entergy Mississippi, Inc.:
4,616 4.36% Pfd...................................................................... 336,922*
5,000 4.92% Pfd...................................................................... 411,850*
4,400 Florida Power Company, 4.75% Pfd................................................. 391,248*
128,500 FPC Capital I, 7.10% Pfd., Series A.............................................. 3,216,522
101,000 FPL Group Capital, Inc., 6.60% Pfd. 10/01/66, Series A........................... 2,613,375
8,900 Georgia Power, 6.125% Pfd........................................................ 233,069*
Great Plains Energy, Inc.:
1,625 4.20% Pfd...................................................................... 128,863*
2,000 4.35% Pfd...................................................................... 164,260*
6
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2007 (UNAUDITED)
------------------------------------------------------------------
SHARES/$ PAR VALUE
-------------- ---------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
-----------------------------------------------------------------------------------------------------------------------------
Hawaiian Electric Company, Inc.:
2,471 5.00% Pfd., Series D........................................................... $ 43,984*
7,438 5.00% Pfd., Series E........................................................... 132,396*
1,383 5.00% Pfd., Series I........................................................... 24,617*
30,500 Indianapolis Power & Light Company, 5.65% Pfd.................................... 2,924,950*
340,000 Interstate Power & Light Company, 8.375% Pfd., Series B.......................... 10,773,750*
2,588 New York State Electric & Gas, $4.50 Pfd., Series 1949........................... 221,170*
Ohio Power Company:
3,018 4.20% Pfd...................................................................... 243,885*
1,251 4.40% Pfd...................................................................... 105,897*
Pacific Enterprises:
13,680 $4.36 Pfd...................................................................... 1,144,469*
24,985 $4.50 Pfd...................................................................... 2,157,205*
15,730 $4.75 Pfd., Series 53.......................................................... 1,433,632*
Pacific Gas & Electric Co.:
7,600 4.50% Pfd., Series H........................................................... 158,612*
41,500 5.00% Pfd., Series D........................................................... 919,640*
83,000 5.00% Pfd., Series E........................................................... 1,889,080*
PacifiCorp:
5,672 $4.56 Pfd...................................................................... 467,600*
6,708 $4.72 Pfd...................................................................... 572,461*
8,750 $7.48 Sinking Fund Pfd......................................................... 890,313*
1,250 PECO Energy Company, $4.30 Pfd., Series B........................................ 102,050*
$ 1,500,000 PECO Energy Capital Trust III, 7.38% 04/06/28 Capital Security, Series D......... 1,638,600
12,748 Portland General Electric, 7.75% Sinking Fund Pfd................................ 1,292,010*
14,020 Public Service Electric & Gas Company, 5.28% Pfd., Series E...................... 1,423,030*
70,210 San Diego Gas & Electric Company, $1.70 Pfd...................................... 1,834,236*
South Carolina Electric & Gas Company:
13,974 5.125% Purchase Fund Pfd., Pvt................................................. 717,984*
7,774 6.00% Purchase Fund Pfd., Pvt.................................................. 395,697*
Southern California Edison:
5,000 4.24% Pfd...................................................................... 103,000*
11,300 6.00% Pfd...................................................................... 1,164,606*
Southern Union Company:
$ 700,000 7.20% 11/01/66, Capital Security............................................... 705,482
51,750 7.55% Pfd...................................................................... 1,347,570*
$ 750,000 TXU Electric Capital V, 8.175% 01/30/37 Capital Security......................... 766,017
7
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2007 (UNAUDITED)
------------------------------------------------------------------
SHARES/$ PAR VALUE
-------------- ---------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
-----------------------------------------------------------------------------------------------------------------------------
Union Electric Company:
5,700 4.56% Pfd...................................................................... $ 482,961*
10,156 $7.64 Pfd...................................................................... 1,051,349*
Virginia Electric & Power Company:
1,665 $4.04 Pfd...................................................................... 126,707*
2,470 $4.20 Pfd...................................................................... 195,426*
1,673 $4.80 Pfd...................................................................... 151,273*
3,878 $6.98 Pfd...................................................................... 400,525*
12,500 $7.05 Pfd...................................................................... 1,295,313*
24,200 Virginia Power Capital Trust, 7.375% Pfd. 07/30/42............................... 615,951
2,262 Washington Gas & Light Company, $4.25 Pfd........................................ 190,257*
13,863 Wisconsin Power & Light Company, 6.20% Pfd....................................... 1,423,124*
Xcel Energy, Inc.:
15,000 $4.08 Pfd., Series B........................................................... 1,201,500*
20,040 $4.10 Pfd., Series C........................................................... 1,613,220*
35,510 $4.11 Pfd., Series D........................................................... 2,865,302*
17,750 $4.16 Pfd., Series E........................................................... 1,449,643*
10,000 $4.56 Pfd., Series G........................................................... 886,700*
-------------------------------------------------------------------------------------------------------------------
73,492,724
----------------
OIL AND GAS -- 4.4%
-----------------------------------------------------------------------------------------------------------------------------
8,000 Devon Energy Corporation, 6.49% Pfd., Series A................................... 815,500*
6,125 EOG Resources, Inc., 7.195% Pfd., Series B....................................... 6,566,796*
$ 1,200,000 KN Capital Trust III, 7.63% 04/15/28 Capital Security............................ 1,171,200
10,000 Lasmo America Limited, 8.15% Pfd., 144A****...................................... 1,055,400*(1)
-------------------------------------------------------------------------------------------------------------------
9,608,896
----------------
REAL ESTATE INVESTMENT TRUST (REIT) -- 3.7%
-----------------------------------------------------------------------------------------------------------------------------
BRE Properties, Inc.:
12,600 6.75% Pfd., Series D........................................................... 316,969
18,900 8.08% Pfd., Series B........................................................... 483,723
10,000 Equity Office Property Trust, 7.75% Pfd., Series G............................... 250,938
1,000 Equity Residential Properties, 8.29% Pfd., Series K.............................. 60,440
8
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2007 (UNAUDITED)
------------------------------------------------------------------
SHARES/$ PAR VALUE
-------------- ---------
PREFERRED SECURITIES -- (CONTINUED)
REAL ESTATE INVESTMENT TRUST (REIT) -- (CONTINUED)
-----------------------------------------------------------------------------------------------------------------------------
Public Storage, Inc.:
129,575 6.45% Pfd., Series F........................................................... $ 3,223,178
38,600 6.625% Pfd., Series M.......................................................... 960,175
2,900 6.75% Pfd., Series E........................................................... 73,588
79,900 7.25% Pfd., Series K........................................................... 2,089,888
20,000 Realty Income Corp., 6.75% Pfd., Series E........................................ 503,126
-------------------------------------------------------------------------------------------------------------------
7,962,025
----------------
MISCELLANEOUS INDUSTRIES -- 2.0%
-----------------------------------------------------------------------------------------------------------------------------
13,600 E.I. Du Pont de Nemours and Company, $4.50 Pfd., Series B........................ 1,166,626*
35,000 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A****.............................. 3,150,000*
26,000 Touch America Holdings, $6.875 Pfd............................................... --*+
-------------------------------------------------------------------------------------------------------------------
4,316,626
----------------
U.S. GOVERNMENT SECURITIES -- 0.3%
-----------------------------------------------------------------------------------------------------------------------------
4,450 Federal National Mortgage Association, 4.75% Series M............................ 206,091*
10,600 Federal Home Loan Mortgage, Adj. Rate Pfd., Series B............................. 478,272*
-------------------------------------------------------------------------------------------------------------------
684,363
----------------
TOTAL PREFERRED SECURITIES
(Cost $192,203,958).......................................................... 204,211,419
----------------
CORPORATE DEBT SECURITIES -- 6.2%
INSURANCE -- 2.6%
-----------------------------------------------------------------------------------------------------------------------------
$ 900,000 Farmers Exchange Capital, 7.20% 07/15/48, 144A****............................... 954,071
$ 4,417,000 Liberty Mutual Insurance, 7.697% 10/15/97, 144A****.............................. 4,757,135
-------------------------------------------------------------------------------------------------------------------
5,711,206
----------------
UTILITIES -- 1.2%
-----------------------------------------------------------------------------------------------------------------------------
$ 1,000,000 Duquesne Light Holdings, 6.25% 08/15/35.......................................... 917,571
10,000 Entergy Louisiana LLC, 7.60% 04/01/32............................................ 254,375
Southern Union Company:
$ 750,000 7.60% 02/01/24, Senior Notes................................................... 808,413
$ 500,000 8.25% 11/15/29, Senior Notes................................................... 578,924
-------------------------------------------------------------------------------------------------------------------
2,559,283
----------------
9
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2007 (UNAUDITED)
------------------------------------------------------------------
SHARES/$ PAR VALUE
-------------- ---------
CORPORATE DEBT SECURITIES -- (CONTINUED)
OIL AND GAS -- 2.2%
-----------------------------------------------------------------------------------------------------------------------------
$ 2,450,000 KN Energy, Inc., 7.45% 03/01/98.................................................. $ 2,402,926
97,900 Nexen, Inc., 7.35% Subordinated Notes............................................ 2,517,871(1)
-------------------------------------------------------------------------------------------------------------------
4,920,797
----------------
MISCELLANEOUS -- 0.2%
-----------------------------------------------------------------------------------------------------------------------------
15,000 AT&T Inc., 6.375% 02/15/56 ...................................................... 374,062
----------------
374,062
----------------
TOTAL CORPORATE DEBT SECURITIES
(Cost $12,858,312)........................................................... 13,565,348
----------------
COMMON STOCK -- 0.1%
BANKING -- 0.1%
-----------------------------------------------------------------------------------------------------------------------------
15,000 New York Community Bancorp, Inc.................................................. 251,100*
-------------------------------------------------------------------------------------------------------------------
251,100
----------------
TOTAL COMMON STOCK
(Cost $246,408).............................................................. 251,100
----------------
OPTION CONTRACTS -- 0.1%
1,400 June Put Options on June U.S. Treasury Bond Futures, Expiring 05/25/07........... 142,750+
-------------------------------------------------------------------------------------------------------------------
TOTAL OPTION CONTRACTS
(Cost $601,808).............................................................. 142,750
----------------
MONEY MARKET FUND -- 0.3%
685,665 BlackRock Provident Institutional, TempFund...................................... 685,665
-------------------------------------------------------------------------------------------------------------------
TOTAL MONEY MARKET FUND
(Cost $685,665).............................................................. 685,665
----------------
10
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2007 (UNAUDITED)
------------------------------------------------------------------
VALUE
---------
TOTAL INVESTMENTS (Cost $206,596,151***).......................................... 100.7% $ 218,856,282
OTHER ASSETS AND LIABILITIES (Net)................................................ (0.7)% (1,479,633)
---------- ----------------
TOTAL NET ASSETS AVAILABLE TO COMMON AND PREFERRED STOCK.......................... 100.0%++ $ 217,376,649
---------- ----------------
MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (MMP(R)) REDEMPTION VALUE.......................... (70,000,000)
----------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK..................................................... $ 147,376,649
================
-----------------------------
* 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.
(2) A portion of this security is on loan.
+ 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
11
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)
FOR THE PERIOD FROM DECEMBER 1, 2006 THROUGH FEBRUARY 28, 2007 (UNAUDITED)
-------------------------------------------------------------------------
VALUE
--------
OPERATIONS:
Net investment income......................................................................... $ 3,049,498
Net realized gain/(loss) on investments sold during the period................................ 1,943,464
Change in net unrealized appreciation/depreciation of investments held
during the period........................................................................... (1,992,960)
Distributions to MMP(R)* Shareholders from net investment income,
including changes in accumulated undeclared distributions .................................. (762,125)
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.......................................... 2,237,877
DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock Shareholders(2)..................... (2,281,255)
---------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS.............................................. (2,281,255)
FUND SHARE TRANSACTIONS:
Increase from shares issued under the Dividend Reinvestment
and Cash Purchase Plan...................................................................... 62,701
---------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING FROM
FUND SHARE TRANSACTIONS..................................................................... 62,701
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK ---------------
FOR THE PERIOD ............................................................................... $ 19,323
===============
----------------------------------------------------------------------------------------------------------------------------
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period........................................................................... $ 147,357,326
Net increase in net assets during the period.................................................. 19,323
---------------
End of period................................................................................. $ 147,376,649
===============
--------------------------------------------------------
* Money Market Cumulative Preferred(TM) StocK.
(1) These tables summarize the three months ended February 28, 2007 and should
be read in conjunction with the Fund's audited financial statements,
including footnotes, in its Annual Report dated November 30, 2006.
(2) May include income earned, but not paid out, in prior fiscal year.
12
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Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
FINANCIAL HIGHLIGHTS(1)
FOR THE PERIOD FROM DECEMBER 1, 2006 THROUGH FEBRUARY 28, 2007 (UNAUDITED)
FOR A COMMON STOCK SHARE OUTSTANDING THROUGHOUT THE PERIOD.
-----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......................................................... $ 12.60
-----------
INVESTMENT OPERATIONS:
Net investment income......................................................................... 0.26
Net realized and unrealized gain/(loss) on investments........................................ 0.01
DISTRIBUTIONS TO MMP(R)* SHAREHOLDERS:
From net investment income.................................................................... (0.07)
From net realized capital gains............................................................... --
-----------
Total from investment operations.............................................................. 0.20
-----------
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
From net investment income.................................................................... (0.20)
From net realized capital gains............................................................... --
-----------
Total distributions to Common Stock Shareholders.............................................. (0.20)
-----------
Net asset value, end of period................................................................ $ 12.60
===========
Market value, end of period................................................................... $ 12.61
===========
Common Stock shares outstanding, end of period................................................ 11,700,433
===========
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
Net investment income+........................................................................ 6.28%**
Operating expenses............................................................................ 1.58%**
--------------------------------------------------------
SUPPLEMENTAL DATA:++
Portfolio turnover rate....................................................................... 15%***
Total net assets available to Common and Preferred Stock, end of period (in 000's)............ $ 217,377
Ratio of operating expenses to total average net assets available to
Common and Preferred Stock ................................................................ 1.07%**
(1) These tables summarize the three months ended February 28, 2007 and should
be read in conjunction with the Fund's audited financial statements,
including footnotes, in its Annual Report dated November 30, 2006.
* 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)*.
13
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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, 2006............................... $0.0650 $12.39 $12.36 $12.39
January 31, 2007................................ 0.0650 12.42 12.39 12.42
February 28, 2007............................... 0.0650 12.60 12.61 12.60
--------------------
(1) Whenever the net asset value per share of the Fund's Common Stock is less
than or equal to the market price per share on the payment date, new shares
issued will be valued at the higher of net asset value or 95% of the then
current market price. Otherwise, the reinvestment shares of Common Stock
will be purchased in the open market.
14
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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 February 28, 2007, the aggregate cost of securities for federal income tax
purposes was $206,731,009, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $16,334,630
and the aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value was $4,209,357.
15
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
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
FEBRUARY 28, 2007
www.preferredincome.com