FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND

To the Shareholders of the Flaherty & Crumrine Preferred Income Opportunity Fund
("PFO"):

      Beginning  with issues  arising in the subprime  mortgage  loan market,  a
well-publicized  series of events has  roiled  financial  markets  over the past
several  months.  The  preferred  stock  market and  closed-end  funds have been
particularly impacted,  and,  consequently,  for the Fund's third fiscal quarter
ended  August 31,  2007,  the Fund had a total  return of -5.5% on the net asset
value (NAV) of its Common Stock.

      As we've  discussed in prior  letters,  problems in the subprime  mortgage
loan market first bubbled up in January of this year.  Throughout this year, the
Fund has had no direct exposure to subprime loans,  and we avoided  investing in
companies that had meaningful  risks  associated with the product.  Our research
team  closely  monitors  the loan  quality and  underwriting  standards  of each
financial  company in the  portfolio,  and we invest only in companies that meet
our  quality  thresholds.  We're not  perfect,  but we  believe  that the Fund's
portfolio is comprised of holdings in fundamentally sound companies.

      In  isolation,  the impact of this  weakness in the  subprime  loan market
should have been limited to direct  participants in this market;  unfortunately,
given the  complexity of the financial  system,  few things happen in isolation.
When the  subprime  problems  became more  pronounced  several  months ago,  the
fallout from this subprime weakness has been widespread and severe.

      Fueled by low interest rates and  relatively  relaxed  financing  terms, a
great deal more  leverage  had become built into the system than even just a few
years ago. As investments  directly  associated with subprime mortgages declined
significantly   in  value  during  the  quarter,   they  became  very  illiquid.
Highly-leveraged  investors  then were forced to sell other more liquid types of
assets like  investment-grade  preferred and debt securities to meet redemptions
or margin calls.  Risk and liquidity  premiums surged,  indiscriminately  taking
yields on all credit  instruments  with them. In short,  excess leverage created
the financial powder keg and subprime loan problems provided the spark.

      With yields on preferred securities rising more than yields on more senior
debt  securities,  the prices of the  securities  in our  portfolio  fell as the
supply of preferred  securities  exceeded demand. The rearview mirror is still a
bit foggy,  but it appears  that much of the  selling  pressure  came from hedge
funds.  Hedge  funds had become  the  800-pound  gorilla  in the credit  markets
recently,  and although  they've been forced to slim down, they can still have a
big impact.

      Hedge  funds were not the only  investors  selling,  but since they aren't
required to  disclose  their  preferred  securities  holdings,  no one knows how
extensive  their  selling  pressure  was. As a result,  prospective  buyers were
extremely  cautious because they feared additional selling would further depress
prices.  Wall  Street  brokers  and  dealers  normally  stand  ready to  provide
liquidity to sellers,  but they appeared reluctant to buy.  Long-term  investors
like the Fund, as well as individual investors,  insurance companies and pension
funds, also stayed on the sidelines for the most part.  During the quarter,  and
since it ended,  we have added some positions at attractive  levels,  but we are
continuing to take a go-slow approach.

      Subprime   fallout  also  extended  to  the  market  for  short-term,   or
money-market,  securities such as commercial paper and auction-rate  securities.
This  market  was in a state  of  disarray  throughout  August  and  into  early
September.  Investors in  money-market  securities  don't like risk, and, at the
slightest  hint of trouble,  they pull their money out and invest in  short-term
government securities.  While the perception of risk is real for a small segment
of borrowers, the reaction seems to be disproportionate.

      These  disruptions  in the  short-term  market  impacted  the  Fund in two
meaningful ways. First, they contributed to price weakness in many of the Fund's
investments, particularly in financial companies.



While banks can fulfill their short-term  financing needs with customer deposits
and through the Federal Reserve,  finance companies like  broker-dealers need to
rely on the short-term  securities  market to run their  day-to-day  operations.
This market is like oxygen to most financial  companies,  and restricting  their
borrowing  makes it more  expensive for them to operate.  We continue to believe
that none of the financial  companies in our portfolio face significant risks of
default as a result of this  increased  cost of  borrowing,  but it has  clearly
impacted their earnings outlooks and the prices of their preferred securities.

      Second, the rates paid by the Fund on its own auction-rate Preferred Stock
have  risen  significantly  as a direct  result  of  liquidity  problems  in the
financial markets.  The frustrating irony is that the Fund's own Preferred Stock
is of very high quality  with a rating of AA and logic would  dictate that rates
should fall as investors seek out higher quality investments.  This high quality
is a function of the  Investment  Company  Act (which  governs the Fund) and the
guidelines  imposed by the rating  agencies.  As Kevin Conery,  Merrill  Lynch's
Preferred Stock Strategist,  recently observed about the Investment Company Act,
"while some have  criticized  it for being too  conservative  for its 200% asset
coverage test, at times like these in the market,  we respect this  discipline."
While we are  beginning  to see some  improvement  in the  auction  rates of our
Preferred  Stock, and the recent interest rate cut by the Federal Reserve should
help over the coming months, we haven't yet returned to more normalized  auction
rates.

      The higher cost of our auction-rate  Preferred Stock comes directly out of
money available for  distribution  as the monthly Common Stock dividend.  On the
plus  side,  higher  yields on  preferred  stock  mean that we have been able to
increase the income earned on the  portfolio.  It will take some time to see how
these two offsetting  factors  affect  income;  in the meantime we are doing our
best to manage both. Effective with the August dividend,  we raised the dividend
by 5% and we continue to be comfortable  with that increased  dividend  payment;
nonetheless,  we  strive  to pay out a rate  that is  sustainable  and will make
adjustments as conditions warrant.

      We have been through periods of fear and volatility  before, and we remain
optimistic  about  long-term   prospects  for  the  Fund.  Such  periods  create
opportunities to buy securities of sound companies at discounted prices, as many
shorter-term investors exit the market by selling both good and bad investments.
We expect both more rational pricing and reduced risk of early redemption of our
portfolio  securities  as markets  settle  down - both of which  should  benefit
future returns for long-term investors. In addition, our Preferred Stock auction
rates are likely to  normalize  in due  course,  as the market  begins to better
recognize the credit  quality of our Preferred  Stock.  While we cannot say with
certainty  when,  or if, these things will happen,  as managers we are doing our
best to position  the Fund to ride out the current  storm and prepare for better
days ahead.

      In volatile  market  conditions  like these,  we may provide more frequent
updates about the preferred  securities market and the Fund's portfolio.  We did
so this past  quarter by adding  special  Questions  and Answers  regarding  the
market   price   of   the   Fund's    shares   to   the   Fund's    website   at
WWW.PREFERREDINCOME.COM.  We encourage you to stay informed as  shareholders  by
periodically visiting the website for 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

October 17, 2007



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

              Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
                                                              PORTFOLIO OVERVIEW
                                                     AUGUST 31, 2007 (UNAUDITED)
              ------------------------------------------------------------------

FUND STATISTICS ON 08/31/07
--------------------------------------------------------------------------------
Net Asset Value                                                    $      11.24
Market Price                                                       $      11.00
Discount                                                                   2.14%
Yield on Market Price                                                      7.42%
Common Stock Shares Outstanding                                      11,736,346

MOODY'S RATINGS                                                   % OF PORTFOLIO
--------------------------------------------------------------------------------
AA                                                                          3.5%
A                                                                          14.1%
BBB                                                                        57.2%
BB                                                                         14.3%
Not Rated                                                                   8.7%
--------------------------------------------------------------------------------
Below Investment Grade*                                                    16.3%

*     BELOW INVESTMENT GRADE BY BOTH MOODY'S AND S&P.

  [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]

INDUSTRY CATEGORIES                                               % OF PORTFOLIO
--------------------------------------------------------------------------------
Utilities                                                                    34%
Banking                                                                      24%
Insurance                                                                    16%
Financial Services                                                           12%
Energy                                                                        8%
REITs                                                                         3%
Other                                                                         3%

TOP 10 HOLDINGS BY ISSUER                                         % OF PORTFOLIO
--------------------------------------------------------------------------------
Interstate Power & Light                                                    5.1%
Liberty Mutual Group                                                        4.1%
Xcel Energy                                                                 3.7%
First Republic Bank                                                         3.3%
EOG Resources                                                               3.2%
Public Storage                                                              3.2%
CoBank ACB                                                                  3.1%
Banco Santander                                                             3.0%
Goldman Sachs                                                               2.9%
HSBC Plc                                                                    2.6%

                                                                % OF PORTFOLIO**
--------------------------------------------------------------------------------
Holdings Generating Qualified Dividend Income (QDI) for
  Individuals                                                                61%
Holdings Generating Income Eligible for the Corporate Dividend
  Received Deduction (DRD)                                                   53%
--------------------------------------------------------------------------------

**   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, 2007 (UNAUDITED)
------------------------------------------------------------------



SHARES/$ PAR                                                                                                        VALUE
-------------                                                                                                  ---------------
                                                                                                         
PREFERRED SECURITIES -- 93.0%
                BANKING -- 23.9%
------------------------------------------------------------------------------------------------------------------------------------
$   3,000,000   Astoria Capital Trust I, 9.75% 11/01/29, Series B ..........................................   $     3,392,376
                Banco Santander:
       17,000      Adj. Rate Pfd., 144A**** ................................................................           388,960**(1)
      195,600      6.50% Pfd., 144A**** ....................................................................         4,389,264**(1)
       56,800      6.80% Pfd., 144A**** ....................................................................         1,322,872**(1)
$   1,900,000   Capital One Capital III, 7.686% 08/15/36 ...................................................         1,764,007
$   3,000,000   CBG Florida REIT Corporation, 7.114%, 144A**** .............................................         2,922,033
       19,648   Citizens Funding Trust I, 7.50% Pfd. 09/15/66 ..............................................           484,447
                Cobank, ACB:
       45,000      7.00% Pfd., 144A**** ....................................................................         2,311,200*
       75,000      7.814% Pfd., 144A**** ...................................................................         4,018,500*
$   1,250,000   Comercia Capital Trust II, 6.576%, 02/30/37 ................................................         1,109,492
        4,500   FBOP Corporation, Adj. Rate Pfd., 144A**** .................................................         4,606,875*
$   2,250,000   First Hawaiian Capital I, 8.343% 07/01/27, Series B ........................................         2,348,077(1)
                First Republic Bank:
      200,000      6.25% Pfd. ..............................................................................         4,962,500*
        5,000      6.70% Pfd. ..............................................................................           123,750*
          890   First Republic Preferred Capital Corporation, 10.50% Pfd., 144A**** ........................           996,640
       22,500   First Republic Preferred Capital Corporation II, 8.75% Pfd., Series B, 144A**** ............           577,350
        5,000   Fleet Capital Trust VIII, 7.20% Pfd. 03/15/32 ..............................................           126,094
        5,000   HSBC Series II, Variable Inverse Pfd., Pvt. ................................................         5,055,000*
        2,500   HSBC USA, Inc., $2.8575 Pfd. ...............................................................           122,734*
        7,000   ING Groep NV, 7.05% Pfd. ...................................................................           173,547**(1)
       12,000   Keycorp Capital VIII, 7.00% Pfd. 06/15/66 ..................................................           297,750
       45,000   Keycorp Capital IX, 6.75% Pfd. 12/15/66 ....................................................         1,054,688
       28,000   PFGI Capital Corporation, 7.75% Pfd. .......................................................           716,800
$     250,000   Regions Financing Trust II, 6.625%, 05/15/47 ...............................................           230,922
           10   Roslyn Real Estate, 8.95% Pfd., Series C, 144A**** .........................................         1,068,658
       70,500   Sovereign Bancorp, 7.30% Pfd., Series C ....................................................         1,883,231*
       20,375   Sovereign Capital Trust V, 7.75% Pfd. 05/22/36 .............................................           518,927
                U.S. Bancorp, Auction Pass-Through Trust, Cl. B:
            9      Series 2006-5, Variable Rate Pfd., 144A**** .............................................           202,500*
            9      Series 2006-6, Variable Rate Pfd., 144A**** .............................................           202,500*
$     900,000   Webster Capital Trust IV, 7.65% 06/15/37 ...................................................           889,636
------------------------------------------------------------------------------------------------------------------------------
                                                                                                                    48,261,330
                                                                                                               ---------------


                                        4



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

              Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
                                            PORTFOLIO OF INVESTMENTS (CONTINUED)
                                                     AUGUST 31, 2007 (UNAUDITED)
              ------------------------------------------------------------------



SHARES/$ PAR                                                                                                        VALUE
-------------                                                                                                  ---------------
                                                                                                         
PREFERRED SECURITIES -- (CONTINUED)
                FINANCIAL SERVICES -- 11.2%
------------------------------------------------------------------------------------------------------------------------------------
                CIT Group, Inc.:
$   3,550,000      6.10% ...................................................................................   $     2,618,661
       60,000      6.35% Pfd., Series A ....................................................................         1,311,750*
      160,000   Countrywide Capital IV, 6.75% Pfd. .........................................................         2,978,000(2)
       12,000   Countrywide Capital V, 7.00% Pfd., 11/01/36 ................................................           222,150
                Goldman Sachs:
       11,000      Adj. Rate Pfd., Series A ................................................................           264,000*
       36,500      Cabco Trust Capital I, Adj. Rate Pfd. 02/15/34 ..........................................           821,706
           25      Pass-Through Certificates, Class B, 144A**** ............................................         2,005,000*
        3,500      STRIPES Custodial Receipts, Pvt. ........................................................         2,838,500*
                Merrill Lynch:
       83,000      Adj. Rate Pfd., Series 5 ................................................................         1,859,723*
       29,000      Adj. Rate Pfd., Series H ................................................................           667,000*
        3,000      Series II STRIPES Custodial Receipts, Pvt. ..............................................         2,298,000*
                SLM Corporation:
       94,150      6.97% Pfd., Series A ....................................................................         4,366,677*
        4,000      Adj. Rate Pfd., Series B ................................................................           308,000*
------------------------------------------------------------------------------------------------------------------------------
                                                                                                                    22,559,167
                                                                                                               ---------------
                INSURANCE -- 13.6%
------------------------------------------------------------------------------------------------------------------------------------
       48,800   ACE Ltd., 7.80% Pfd., Series C .............................................................         1,236,714**(1)
$   4,250,000   AON Capital Trust A, 8.205% 01/01/27 .......................................................         4,501,264
                Arch Capital Group Ltd.:
       10,000      7.875% Pfd., Series B ...................................................................           245,000**(1)
       24,400      8.00% Pfd., Series A ....................................................................           607,714**(1)
$   2,500,000   AXA SA, 6.463%, 144A**** ...................................................................         2,266,300**(1)
                Axis Capital Holdings:
       12,100      7.25% Pfd., Series A ....................................................................           288,736**(1)
       24,700      7.50% Pfd., Series B ....................................................................         2,472,470(1)
       22,300   Berkley W.R. Capital Trust II, 6.75% Pfd. 07/26/45 .........................................           524,329
       75,000   Delphi Financial Group, 7.376% Pfd. 05/15/37 ...............................................         1,802,250
        5,750   Everest Re Capital Trust II, 6.20% Pfd., Series B ..........................................           128,872
$     935,000   Everest Re Holdings, 6.60%, 05/15/37 .......................................................           872,307
$   4,500,000   Liberty Mutual Group, 7.80% 03/15/37, 144A**** .............................................         4,022,919
       29,350   MetLife, Inc., Adj. Rate Pfd., Series A ....................................................           726,779*
$     511,000   Provident Financing Trust I, 7.405% 03/15/38 ...............................................           495,453
                Renaissancere Holdings Ltd.:
       27,950      6.08% Pfd., Series C ....................................................................           586,391**(1)
       79,100      6.60% Pfd., Series D ....................................................................         1,748,110**(1)


                                        5



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

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2007 (UNAUDITED)
------------------------------------------------------------------



SHARES/$ PAR                                                                                                        VALUE
-------------                                                                                                  ---------------
                                                                                                         
PREFERRED SECURITIES -- (CONTINUED)
                INSURANCE -- (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
      115,500   Scottish Re Group Ltd., 7.25% Pfd. .........................................................   $     2,014,031**(1)
$   1,060,000   USF&G Capital, 8.312% 07/01/46, 144A**** ...................................................         1,263,944
$   1,888,000   XL Capital Ltd., 6.50%, Series E ...........................................................         1,669,485(1)
------------------------------------------------------------------------------------------------------------------------------
                                                                                                                    27,473,068
                                                                                                               ---------------
                UTILITIES -- 32.6%
------------------------------------------------------------------------------------------------------------------------------------
                Alabama Power Company:
        4,980      4.60% Pfd. ..............................................................................           415,282*
        6,485      4.72% Pfd. ..............................................................................           554,857*
          868      4.92% Pfd. ..............................................................................            77,417*
        6,579   Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 ..................................           682,366*
       74,270   Calenergy Capital Trust III, 6.50% Pfd. 09/01/27 ...........................................         3,554,562
        1,628   Central Hudson Gas & Electric Corporation, 4.35% Pfd., Series D, Pvt. ......................           130,224*
        3,798   Central Maine Power Company, 4.75% Pfd. ....................................................           316,069*
        8,339   Central Vermont Public Service Corporation, 8.30% Sinking Fund Pfd., Pvt. ..................           867,089*
                Connecticut Light & Power Company:
        2,050      4.50% Pfd., Series 1956 .................................................................            81,877*
       10,000      4.50% Pfd., Series 1963, Pvt. ...........................................................           397,400*
       25,000      5.28% Pfd., Series 1967 .................................................................         1,177,000*
          883      $2.04 Pfd., Series 1949 .................................................................            31,965*
        2,900      $2.20 Pfd., Series 1949 .................................................................           113,245*
        9,652      $3.24 Pfd. ..............................................................................           505,958*
        2,000   Consolidated Edison Company of New York, 4.65% Pfd., Series C ..............................           172,520*
        7,500   Dayton Power and Light Company, 3.90% Pfd., Series C .......................................           502,800*
       15,030   Duquesne Light Company, 3.75% Pfd. .........................................................           493,886*
                Entergy Arkansas, Inc.:
        2,840      4.56% Pfd. ..............................................................................           232,198*
        3,050      4.56% Pfd., Series 1965 .................................................................           249,368*
        1,435      6.08% Pfd. ..............................................................................           147,374*
       90,000      6.45% Pfd. ..............................................................................         2,322,900*
        2,441   Entergy Gulf States, Inc., 7.56% Pfd. ......................................................           240,756*
       36,000   Entergy Louisiana, Inc., 6.95% Pfd. ........................................................         3,769,920*
                Entergy Mississippi, Inc.:
        4,616      4.36% Pfd. ..............................................................................           331,290*
        5,000      4.92% Pfd. ..............................................................................           404,900*
        4,400   Florida Power Company, 4.75% Pfd. ..........................................................           386,408*
       68,500   FPC Capital I, 7.10% Pfd., Series A ........................................................         1,693,238
        8,900   Georgia Power, 6.125% Pfd. .................................................................           229,798*


                                        6



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

              Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
                                            PORTFOLIO OF INVESTMENTS (CONTINUED)
                                                     AUGUST 31, 2007 (UNAUDITED)
              ------------------------------------------------------------------



SHARES/$ PAR                                                                                                        VALUE
-------------                                                                                                  ---------------
                                                                                                         
PREFERRED SECURITIES -- (CONTINUED)
                UTILITIES -- (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
                Great Plains Energy, Inc.:
        1,625      4.20% Pfd. ..............................................................................   $       123,760*
        2,000      4.35% Pfd. ..............................................................................           157,780*
                Hawaiian Electric Company, Inc.:
        2,471      5.00% Pfd., Series D ....................................................................            43,629*
        7,438      5.00% Pfd., Series E ....................................................................           131,327*
        1,383      5.00% Pfd., Series I ....................................................................            24,419*
       30,500   Indianapolis Power & Light Company, 5.65% Pfd. .............................................         2,867,000*
      340,000   Interstate Power & Light Company, 8.375% Pfd., Series B ....................................        10,281,600*
        2,588   New York State Electric & Gas, $4.50 Pfd., Series 1949 .....................................           216,357*
                Ohio Power Company:
        3,018      4.20% Pfd. ..............................................................................           236,340*
        1,251      4.40% Pfd. ..............................................................................           102,620*
                Pacific Enterprises:
       13,680      $4.36 Pfd. ..............................................................................         1,101,787*
       24,985      $4.50 Pfd. ..............................................................................         2,076,753*
                Pacific Gas & Electric Co.:
        7,600      4.50% Pfd., Series H ....................................................................           156,712*
       41,500      5.00% Pfd., Series D ....................................................................           951,180*
       83,000      5.00% Pfd., Series E ....................................................................         1,918,960*
                PacifiCorp:
        5,672      $4.56 Pfd. ..............................................................................           470,549*
        6,708      $4.72 Pfd. ..............................................................................           576,016*
        1,250   PECO Energy Company, $4.30 Pfd., Series B ..................................................            99,888*
$   1,500,000   PECO Energy Capital Trust III, 7.38% 04/06/28, Series D ....................................         1,543,650
       14,020   Public Service Electric & Gas Company, 5.28% Pfd., Series E ................................         1,379,848*
       70,210   San Diego Gas & Electric Company, $1.70 Pfd. ...............................................         1,840,822*
                South Carolina Electric & Gas Company:
       13,974      5.125% Purchase Fund Pfd., Pvt. .........................................................           718,683*
        7,774      6.00% Purchase Fund Pfd., Pvt. ..........................................................           396,085*
       11,300   Southern California Edison, 6.00% Pfd. .....................................................         1,116,666*
                Southern Union Company:
$     700,000      7.20% 11/01/66 ..........................................................................           708,154
       51,750      7.55% Pfd. ..............................................................................         1,321,695*
$     750,000   TXU Electric Capital V, 8.175% 01/30/37 ....................................................           730,125
                Union Electric Company:
        5,700      4.56% Pfd. ..............................................................................           460,446*
       10,156      $7.64 Pfd. ..............................................................................         1,043,021*


                                        7



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

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2007 (UNAUDITED)
------------------------------------------------------------------



SHARES/$ PAR                                                                                                        VALUE
-------------                                                                                                  ---------------
                                                                                                         
PREFERRED SECURITIES -- (CONTINUED)
                UTILITIES -- (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
                Virginia Electric & Power Company:
        1,665      $4.04 Pfd. ..............................................................................   $       123,843*
        2,470      $4.20 Pfd. ..............................................................................           191,005*
        1,673      $4.80 Pfd. ..............................................................................           147,860*
        3,878      $6.98 Pfd. ..............................................................................           394,950*
       12,500      $7.05 Pfd. ..............................................................................         1,264,844*
       58,100   Virginia Power Capital Trust, 7.375% Pfd. 07/30/42 .........................................         1,461,941
        2,262   Washington Gas & Light Company, $4.25 Pfd. .................................................           186,072*
$   1,700,000   Wisconsin Energy Corporation, 6.25%, 05/15/67 ..............................................         1,649,660
                Xcel Energy, Inc.:
       15,000      $4.08 Pfd., Series B ....................................................................         1,132,500*
       20,040      $4.10 Pfd., Series C ....................................................................         1,520,435*
       35,510      $4.11 Pfd., Series D ....................................................................         2,700,891*
       17,750      $4.16 Pfd., Series E ....................................................................         1,366,395*
       10,000      $4.56 Pfd., Series G ....................................................................           843,800*
------------------------------------------------------------------------------------------------------------------------------
                                                                                                                    65,862,735
                                                                                                               ---------------
                ENERGY -- 5.8%
------------------------------------------------------------------------------------------------------------------------------------
        8,000   Devon Energy Corporation, 6.49% Pfd., Series A .............................................           818,750*
$   2,500,000   Enterprise Products Partners, 7.034%, 01/15/68 .............................................         2,255,585
        6,125   EOG Resources, Inc., 7.195% Pfd., Series B .................................................         6,521,349*
$   1,200,000   KN Capital Trust III, 7.63% 04/15/28 .......................................................         1,069,080
       10,000   Lasmo America Limited, 8.15% Pfd., 144A**** ................................................         1,043,800*(1)
------------------------------------------------------------------------------------------------------------------------------
                                                                                                                    11,708,564
                                                                                                               ---------------
                REAL ESTATE INVESTMENT TRUST (REIT) -- 3.4%
------------------------------------------------------------------------------------------------------------------------------------
       12,600   BRE Properties, Inc., 6.75% Pfd., Series D .................................................           286,650
        1,000   Equity Residential Properties, 8.29% Pfd., Series K ........................................            57,600
                Public Storage, Inc.:
      121,975      6.45% Pfd., Series F ....................................................................         2,729,191
       97,700      6.625% Pfd., Series M ...................................................................         2,216,569
       10,500      6.75% Pfd., Series E ....................................................................           243,469
        5,500      6.75% Pfd., Series L ....................................................................           127,016
        4,500      6.95% Pfd., Series H ....................................................................           107,297
       40,100      7.25% Pfd., Series K ....................................................................           989,969
------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     6,757,761
                                                                                                               ---------------


                                        8



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

              Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
                                            PORTFOLIO OF INVESTMENTS (CONTINUED)
                                                     AUGUST 31, 2007 (UNAUDITED)
              ------------------------------------------------------------------



SHARES/$ PAR                                                                                                        VALUE
-------------                                                                                                  ---------------
                                                                                                         
PREFERRED SECURITIES -- (CONTINUED)
                MISCELLANEOUS INDUSTRIES -- 2.1%
------------------------------------------------------------------------------------------------------------------------------------
       13,600   E.I. Du Pont de Nemours and Company, $4.50 Pfd., Series B ..................................   $     1,076,848*
       35,000   Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** ........................................         3,178,000*
------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     4,254,848
                                                                                                               ---------------
                U.S. GOVERNMENT SECURITIES -- 0.4%
------------------------------------------------------------------------------------------------------------------------------------
                Freddie Mac:
        9,500      5.00%, Series F .........................................................................           407,075*
       20,000      5.66%, Series W .........................................................................           472,800*
------------------------------------------------------------------------------------------------------------------------------
                                                                                                                       879,875
                                                                                                               ---------------
                TOTAL PREFERRED SECURITIES
                   (Cost $188,161,522) .....................................................................       187,757,348
                                                                                                               ---------------
CORPORATE DEBT SECURITIES -- 6.2%
                FINANCIAL SERVICES -- 0.8%
------------------------------------------------------------------------------------------------------------------------------------
$   1,600,000   Lehman Brothers Holdings, 6.875% 07/17/37, Sub. Note .......................................         1,507,702
------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     1,507,702
                                                                                                               ---------------
                INSURANCE -- 2.5%
------------------------------------------------------------------------------------------------------------------------------------
$     900,000   Farmers Exchange Capital, 7.20% 07/15/48, 144A**** .........................................           875,880
$   4,417,000   Liberty Mutual Insurance, 7.697% 10/15/97, 144A**** ........................................         4,231,928
------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     5,107,808
                                                                                                               ---------------
                UTILITIES -- 1.0%
------------------------------------------------------------------------------------------------------------------------------------
$   1,000,000   Duke Capital Corporation, 8.00% 10/01/19, Senior Notes .....................................         1,123,007
       10,000   Entergy Louisiana LLC, 7.60% 04/01/32 ......................................................           251,250
       30,500   PPL Capital Funding, Inc., 6.85% 07/01/47 ..................................................           730,475
------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     2,104,732
                                                                                                               ---------------
                ENERGY -- 1.9%
------------------------------------------------------------------------------------------------------------------------------------
$   2,450,000   KN Energy, Inc., 7.45% 03/01/98 ............................................................         2,123,449
       71,900   Nexen, Inc., 7.35% Subordinated Notes ......................................................         1,797,500(1)
------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     3,920,949
                                                                                                               ---------------
                TOTAL CORPORATE DEBT SECURITIES
                   (Cost $12,898,640) ......................................................................        12,641,191
                                                                                                               ---------------


                                        9



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

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2007 (UNAUDITED)
------------------------------------------------------------------



SHARES/$ PAR                                                                                                        VALUE
-------------                                                                                                  ---------------
                                                                                                      
OPTION CONTRACTS -- 0.0%
          470   December Put Options on December U.S. Treasury Bond Futures, Expiring 11/20/07                 $        29,375+
          930   October Put Options on December U.S. Treasury Bond Futures, Expiring 09/21/07                           18,750+
------------------------------------------------------------------------------------------------------------------------------
                TOTAL OPTION CONTRACTS
                   (Cost $174,307) .........................................................................            48,125
                                                                                                               ---------------
MONEY MARKET FUND -- 0.2%
      382,732   BlackRock Provident Institutional, TempFund ................................................           382,732
------------------------------------------------------------------------------------------------------------------------------
                TOTAL MONEY MARKET FUND
                   (Cost $382,732) .........................................................................           382,732
                                                                                                               ---------------
SECURITIES LENDING COLLATERAL -- 0.7%
    1,383,200   Institutional Money Market Trust ...........................................................         1,383,200
------------------------------------------------------------------------------------------------------------------------------
                TOTAL SECURITIES LENDING COLLATERAL
                   (Cost $1,383,200) .......................................................................         1,383,200
                                                                                                               ---------------

TOTAL INVESTMENTS (Cost $203,000,401***) .....................................................     100.1%          202,212,596
OTHER ASSETS AND LIABILITIES (Net) ...........................................................      (0.1)%            (291,876)
                                                                                                 -------       ---------------
TOTAL NET ASSETS AVAILABLE TO COMMON AND PREFERRED STOCK .....................................     100.0%++    $   201,920,720
                                                                                                 -------       ---------------
MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (MMP(R)) REDEMPTION VALUE ......................................       (70,000,000)
                                                                                                               ---------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK .................................................................   $   131,920,720
                                                                                                               ===============


-----------------
*     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)   Security 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

                                       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, 2006 THROUGH AUGUST 31, 2007 (UNAUDITED)
       -------------------------------------------------------------------------


                                                                                         
OPERATIONS:
   Net investment income ................................................................   $   9,372,333
   Net realized gain/(loss) on investments sold during the period .......................        (991,550)
   Change in net unrealized appreciation/depreciation of investments held during the
     period. ............................................................................     (15,040,896)
   Distributions to MMP(R)* Shareholders from net investment income, including changes
     in accumulated undeclared distributions ............................................      (2,390,637)
                                                                                            -------------
   NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS .................................      (9,050,750)

DISTRIBUTIONS:
   Dividends paid from net investment income to Common Stock Shareholders(2) ............      (6,888,954)
                                                                                            -------------
   TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS .....................................      (6,888,954)

FUND SHARE TRANSACTIONS:
   Increase from shares issued under the Dividend Reinvestment and Cash Purchase Plan ...         503,098
                                                                                            -------------
   NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING FROM
     FUND SHARE TRANSACTIONS ............................................................         503,098

NET DECREASE IN NET ASSETS AVAILABLE TO COMMON STOCK                                        -------------
   FOR THE PERIOD .......................................................................   $ (15,436,606)
                                                                                            =============
------------------------------------------------------------------------------------------------------------
NET ASSETS AVAILABLE TO COMMON STOCK:
   Beginning of period ..................................................................   $ 147,357,326
   Net decrease in net assets during the period .........................................     (15,436,606)
                                                                                            -------------
   End of period ........................................................................   $ 131,920,720
                                                                                            =============

-----------------
*     Money Market Cumulative Preferred(TM) StocK.
(1)   These tables summarize the nine months ended August 31, 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.

                                       11

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

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
FINANCIAL HIGHLIGHTS(1)
FOR THE PERIOD FROM DECEMBER 1, 2006 THROUGH AUGUST 31, 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 ................................................................            0.80
   Net realized and unrealized gain/(loss) on investments ...............................           (1.37)
DISTRIBUTIONS TO MMP(R)* SHAREHOLDERS:
   From net investment income ...........................................................           (0.20)
   From net realized capital gains ......................................................              --
                                                                                            -------------
   Total from investment operations .....................................................           (0.77)
                                                                                            -------------
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
   From net investment income ...........................................................           (0.59)
   From net realized capital gains ......................................................              --
                                                                                            -------------
   Total distributions to Common Stock Shareholders .....................................           (0.59)
                                                                                            -------------
   Net asset value, end of period .......................................................   $       11.24
                                                                                            =============
   Market value, end of period ..........................................................   $       11.00
                                                                                            =============
   Common Stock shares outstanding, end of period .......................................      11,736,346
                                                                                            =============
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
   Net investment income+ ...............................................................            6.54%**
   Operating expenses ...................................................................            1.57%**
----------------------------------
SUPPLEMENTAL DATA:++
   Portfolio turnover rate ..............................................................              51%***
   Total net assets available to Common and Preferred Stock, end of period
     (in 000's). ........................................................................   $     201,921
   Ratio of operating expenses to total average net assets available to
     Common and Preferred Stock .........................................................            1.05%**


(1)   These tables summarize the nine months ended August 31, 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 Preferred (TM) 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, 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
March 31, 2007 ..............    0.0650     12.32        12.66          12.32
April 30, 2007 ..............    0.0650     12.33        12.62          12.33
May 31, 2007 ................    0.0650     12.10        12.13          12.10
June 30, 2007 ...............    0.0650     11.97        12.00          11.97
July 31, 2007 ...............    0.0650     11.55        11.46          11.39
August 31, 2007 .............    0.0680     11.24        11.00          11.04

-----------------
(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 reinvestment 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, 2007,  the aggregate  cost of securities  for federal income
tax purposes was $203,135,259,  the aggregate gross unrealized  appreciation for
all  securities  in  which  there  is an  excess  of  value  over  tax  cost was
$8,564,450,  and the aggregate gross unrealized  depreciation for all securities
in which there is an excess of tax cost over value was $9,487,113.

                                       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
   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.

                                   Flaherty & Crumrine
                          [LOGO]   ===================
                                   PREFERRED INCOME
                                   OPPORTUNITY FUND

                                    Quarterly
                                     Report

                                 August 31, 2007

                             www.preferredincome.com