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


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


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




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





                      [This page intentionally left blank]



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