N-30B-2 1 pfo_n30b.txt PFO N30B 08/31/05 FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND Dear Shareholder: During the third fiscal quarter of 2005, the Flaherty & Crumrine Preferred Income Opportunity Fund continued to deliver steady performance. For the three month period ended August 31, 2005, the Fund produced a total return on net asset value ("NAV") of 0.8% 1. During the first three quarters of fiscal 2005, the Fund's return on NAV has been 9.1%. The Fund's interest rate hedging strategy normally works best when long-term interest rates are rising or falling. In periods of relatively stable long-term interest rates, such as we've experienced for several quarters now, the costs of implementing the strategy can drag down investment performance--much like paying on-going premiums on an insurance policy but never making a claim. Given the Fund's policy of maintaining a continuing interest-rate hedge on the portfolio, the Fund's NAV returns are respectable. And don't forget, the Fund still owns the "insurance policy"! The country is still coming to grips with the impact of Hurricanes Katrina and Rita; our thoughts are very much with the victims of these terrible events. We are closely watching the effect on the Fund's investment portfolio, and, so far, we have seen no material impact. Insurance companies have become much more adept at managing the financial risk they face from hurricanes and other catastrophic events. While claims from the hurricanes certainly will adversely impact insurance industry earnings, we believe there is no threat to industry solvency. Utilities in the region should be able to recover most of the expense they will incur in returning to operation from their customers. (The New Orleans subsidiary of Entergy Corp. has filed for bankruptcy protection; however, the Fund does not own any securities issued by this company.) Changes in the banking industry have encouraged companies to expand across state lines, resulting in larger, healthier banks that are unlikely to be hurt by the hurricanes. Diversification across companies, industries and geography is an important element of the Fund's investment strategy, and helps to limit the impact of economic shocks, such as those delivered by Hurricanes Katrina and Rita. Recently, we have seen a pick-up in the supply of new preferred securities. Some were issued simply to take advantage of the low level of long-term interest rates and lock-in attractive financing costs. Other issues, however, have introduced new twists to the structure that are intended to help the issuer achieve specific financial objectives. Time will tell how broadly these new features get incorporated into the market, but for now, many of the recent new issues have fit nicely into the Fund's investment portfolio. There is not much new to report regarding the outlook for the Fund's dividend rate. Several similar funds have recently reduced their dividends, but we don't think any change is warranted at present for Flaherty & Crumrine Preferred Income Opportunity Fund. We encourage you to take advantage of the Fund's website, WWW.PREFERREDINCOME.COM. It contains a wide range of useful and up-to-date information about the Fund, including the factors which impact the Fund's dividend policy. In addition, the website includes summaries of the Fund's investment objective, its hedging strategy, its use of leverage and the risks applicable to the Fund. Sincerely, /S/ Donald F. Crumrine /S/ Robert M. Ettinger Donald F. Crumrine Robert M. Ettinger Chairman of the Board President October 17, 2005 -------------------------- (1) Based on monthly data provided by Lipper Inc. Distributions are assumed to be reinvested at NAV in accordance with Lipper's practice. DIVIDEND REINVESTMENT: BUILDING WEALTH ONE DIVIDEND AT A TIME Flaherty & Crumrine Preferred Income Opportunity Fund offers a Dividend Reinvestment and Cash Purchase Plan, unglamorously nicknamed the "DRIP", for those investors who desire a steady, reliable approach to building wealth. Why invest in the DRIP? o Disciplined monthly investing in both good and bad markets, o When shares trade below the NAV, the Fund purchases shares in the market, o When shares trade above the NAV, shares are issued at the higher of NAV or 95% of the market price. Participating shareholders get the benefit! o $1,000 invested at inception, February 1992, with dividend reinvestment would be worth over $3,800 as of August 31, 2005 (10.48% annualized return). To obtain information on the DRIP, contact your brokerage firm and ask if they are set up to participate. Information can also be found on the Fund's website at WWW.PREFERREDINCOME.COM. Select the appropriate Fund and then select the link "Dividend Reinvestment Plan". For investors who hold their shares in registered form, contact the DRIP's agent, PFPC Inc., at 1-800-331-1710. Past performance is no guarantee of future results. Participation in the DRIP does not relieve the investor of any income tax associated with the distribution. For additional performance information please refer to the attached quarterly report. 2 -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated PORTFOLIO OVERVIEW AUGUST 31, 2005 (UNAUDITED) -------------------------------------------------------------------------------- FUND STATISTICS ON 08/31/05 -------------------------------------------------------------------------------- Net Asset Value $ 12.66 Market Price $ 13.50 Premium 6.64% Yield on Market Price 6.27% Common Shares Outstanding 11,658,470 INDUSTRY CATEGORIES % OF PORTFOLIO -------------------------------------------------------------------------------- [GRAPHIC OMITTED] EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS: Utilities 40% Banks 23% Insurance 15% Financial Services 10% Oil and Gas 7% Other 3% REITs 2% MOODY'S RATINGS % OF PORTFOLIO -------------------------------------------------------------------------------- AAA 0.3% AA 3.7% A 19.6% BBB 48.8% BB 17.1% Not Rated 9.5% -------------------------------------------------------------------------------- Below Investment Grade* 18.5% * BELOW INVESTMENT GRADE BY BOTH MOODY'S AND S&P. TOP 10 HOLDINGS BY ISSUER % OF PORTFOLIO -------------------------------------------------------------------------------- Interstate Power 5.3% Lehman Brothers 4.5% Alabama Power 4.3% Xcel Energy 3.8% Principal Financial Group 3.4% EOG Resources 3.0% Cobank 3.0% North Fork Bancorporation 3.0% UnumProvident 2.8% ABN AMRO 2.5%
% OF PORTFOLIO** ------------------------------------------------------------------------------------------------------------------------------------ Holdings Generating Qualified Dividend Income (QDI) for Individuals 75% Holdings Generating Income Eligible for the Corporate Dividend Received Deduction (DRD) 73% ------------------------------------------------------------------------------------------------------------------------------------ ** 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, 2005 (UNAUDITED) ------------------------------------------------------------------
SHARES/$ PAR VALUE ------------- --------- PREFERRED SECURITIES -- 96.7% BANKING -- 22.7% ------------------------------------------------------------------------------------------------------------------------------------ ABN AMRO North America, Inc.: 1,165 6.46% Pfd., 144A**** .......................................................... $ 1,205,111* 4,200 6.59% Pfd., 144A**** .......................................................... 4,336,731* $ 150,000 BT Capital Trust B, 7.90% 01/15/27 Capital Security ............................. 161,054(1) $ 660,000 BT Preferred Capital Trust II, 7.875% 02/25/27 Capital Security ................. 712,328(1) $ 250,000 Chase Capital I, 7.67% 12/01/26 Capital Security ................................ 268,427 Citigroup, Inc.: 7,700 6.213% Pfd., Series G ......................................................... 398,244* 46,000 6.231% Pfd., Series H ......................................................... 2,402,580* 29,850 6.365% Pfd., Series F ......................................................... 1,561,453* Cobank, ACB: 45,000 7.00% Pfd., 144A**** .......................................................... 2,392,650* 75,000 Adj. Rate Pfd., 144A**** ...................................................... 4,179,375* $ 500,000 Comerica (Imperial) Capital Trust I, 9.98% 12/31/26 Capital Security, Series B .. 571,260 1,500 FBOP Corporation, Adj. Rate Pfd., 144A**** ...................................... 1,503,750* $ 2,250,000 First Hawaiian Capital I, 8.343% 07/01/27 Capital Security, Series B ............ 2,468,036(1) First Republic Bank: 200,000 6.25% Pfd. .................................................................... 5,181,000* 5,000 6.70% Pfd. .................................................................... 129,950* $ 719,000 First Union Institutional Capital I, 8.04% 12/01/26 Capital Security ............ 776,930 $ 1,885,000 First Union Institutional Capital II, 7.85% 01/01/27 Capital Security ........... 2,035,169 $ 4,349,000 GreenPoint Capital Trust I, 9.10% 06/01/27 Capital Security ..................... 4,848,526 $ 2,500,000 HBOS Capital Funding LP, 6.85% Pfd. ............................................. 2,586,887(1) 36,500 J.P. Morgan Chase & Co., 6.625% Pfd., Series H .................................. 1,867,158* $ 2,000,000 Keycorp Capital VII, 5.70% 06/15/35 Capital Security ............................ 1,980,890 $ 1,350,000 Keycorp Institutional Capital B, 8.25% 12/15/26 Capital Security ................ 1,461,578 $ 1,500,000 North Fork Capital Trust I, 8.70% 12/15/26 Capital Security ..................... 1,637,648 16,000 PFGI Capital Corporation, 7.75% Pfd. ............................................ 437,200 $ 1,700,000 RBS Capital Trust B, 6.80% Pfd. ................................................. 1,749,181**(1) 10 Roslyn Real Estate, 8.95% Pfd., Pvt., Series C, 144A**** ........................ 1,130,254 $ 1,200,000 Wachovia Capital Trust V, 7.965% 06/01/27 Capital Security, 144A**** ............ 1,312,932 ------------------------------------------------------------------------------------------------------------------- 49,296,302 ---------------- FINANCIAL SERVICES -- 10.3% ------------------------------------------------------------------------------------------------------------------------------------ 175,000 CIT Group, Inc., 6.35% Pfd., Series A ........................................... 4,543,875* Freddie Mac: 33,125 5.00% Pfd., Series F .......................................................... 1,534,019* 42,650 5.30% Pfd. .................................................................... 2,086,011*
4 -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) AUGUST 31, 2005 (UNAUDITED) ------------------------------------
SHARES/$ PAR VALUE ------------- --------- PREFERRED SECURITIES -- (CONTINUED) FINANCIAL SERVICES -- (CONTINUED) ------------------------------------------------------------------------------------------------------------------------------------ Lehman Brothers Holdings, Inc.: 5,150 5.67% Pfd., Series D .......................................................... $ 262,161* 159,505 5.94% Pfd., Series C .......................................................... 8,276,714* 44,000 6.50% Pfd., Series F .......................................................... 1,161,380* 20,000 National Rural Utility CFC, 5.95% Pfd. 02/15/45 ................................. 490,600 70,900 SLM Corporation, 6.97% Pfd., Series A ........................................... 3,989,898* ------------------------------------------------------------------------------------------------------------------- 22,344,658 ---------------- INSURANCE -- 14.8% ------------------------------------------------------------------------------------------------------------------------------------ 20,000 ACE Ltd., 7.80% Pfd., Series C .................................................. 533,500**(1) 25,000 Aegon NV, 6.375% Pfd. ........................................................... 646,000**(1) $ 2,000,000 AON Capital Trust A, 8.205% 01/01/27 Capital Security ........................... 2,367,620 16,000 Berkley W.R. Capital Trust II, 6.75% 07/26/45 ................................... 402,160 15,850 Everest Re Capital Trust II, 6.20% Pfd., Series B ............................... 385,868(1) 140,000 MetLife Inc., 6.50% Pfd., Series B .............................................. 3,649,100* $ 4,395,000 MMI Capital Trust I, 7.625% 12/15/27 Capital Security, Series B ................. 5,112,506 275,000 Principal Financial Group, 6.518% Pfd. .......................................... 7,466,250* $ 5,734,000 Provident Financing Trust I, 7.405% 03/15/38 Capital Security ................... 5,242,797 89,000 Scottish Re Group Ltd., 7.25% Pfd. .............................................. 2,249,920**(1) Zurich RegCaPS Funding Trust: 1,250 6.01% Pfd., 144A**** .......................................................... 1,251,744* 2,800 6.58% Pfd., 144A**** .......................................................... 2,968,280* ------------------------------------------------------------------------------------------------------------------- 32,275,745 ---------------- UTILITIES -- 39.4% ------------------------------------------------------------------------------------------------------------------------------------ Alabama Power Company: 4,980 4.60% Pfd. .................................................................... 466,626* 6,485 4.72% Pfd. .................................................................... 623,500* 868 4.92% Pfd. .................................................................... 86,991* 98,400 5.20% Pfd. .................................................................... 2,512,644* 225,000 5.30% Pfd. .................................................................... 5,745,375* 6,000 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 ....................... 624,660* 1,628 Central Hudson Gas & Electric Corporation, 4.35% Pfd., Series D, Pvt. ........... 152,731* 3,798 Central Maine Power Company, 4.75% Pfd. ......................................... 361,759* 16,679 Central Vermont Public Service Corporation, 8.30% Sinking Fund Pfd., Pvt. ....... 1,734,783*
5 -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) AUGUST 31, 2005 (UNAUDITED) ------------------------------------------------------------------
SHARES/$ PAR VALUE ------------- --------- PREFERRED SECURITIES -- (CONTINUED) UTILITIES -- (CONTINUED) ------------------------------------------------------------------------------------------------------------------------------------ Connecticut Light & Power Company: 2,050 4.50% Pfd., Series 1956 ....................................................... $ 86,735* 25,000 5.28% Pfd., Series 1967 ....................................................... 1,223,750* 883 $2.04 Pfd., Series 1949 ....................................................... 33,876* 2,900 $2.20 Pfd., Series 1949 ....................................................... 119,973* 9,652 $3.24 Pfd. .................................................................... 502,966* 2,000 Consolidated Edison Company of New York, 4.65% Pfd., Series C ................... 188,740* 7,500 Dayton Power and Light Company, 3.90% Pfd., Series C ............................ 562,875* Duke Energy Corporation: 5,000 4.50% Pfd., Series C, Pvt. .................................................... 476,250* 34,943 7.85% Pfd., Series S .......................................................... 3,594,412* Duquesne Light Company: 15,030 3.75% Pfd. .................................................................... 527,252* 25,775 6.50% Pfd. .................................................................... 1,373,292* 5,000 Energy East Capital Trust I, 8.25% Pfd. ......................................... 129,750 Entergy Arkansas, Inc.: 2,840 4.56% Pfd. .................................................................... 258,866* 3,050 4.56% Pfd., Series 1965 ....................................................... 278,007* 1,150 6.08% Pfd. .................................................................... 119,617* 14,225 7.40% Pfd. .................................................................... 1,480,040* 5,880 7.80% Pfd. .................................................................... 615,019* 2,265 7.88% Pfd. .................................................................... 236,387* 24,314 $1.96 Pfd. .................................................................... 608,458* 2,441 Entergy Gulf States, Inc., 7.56% Pfd. ........................................... 248,457* Entergy Louisiana, Inc.: 299 5.16% Pfd. .................................................................... 31,018* 943 6.44% Pfd. .................................................................... 97,709* 4,174 7.36% Pfd. .................................................................... 434,326* 175,000 8.00% Pfd., Series 92 ......................................................... 4,413,500* Entergy Mississippi, Inc.: 4,616 4.36% Pfd. .................................................................... 355,386* 5,000 4.92% Pfd. .................................................................... 434,400* 10,900 Enterprise Capital Trust I, 7.44% Pfd., Series A ................................ 277,677 Florida Power Company: 10,000 4.58% Pfd. .................................................................... 961,200* 2,000 4.75% Pfd. .................................................................... 198,320* Great Plains Energy, Inc.: 1,625 4.20% Pfd. .................................................................... 133,941* 2,000 4.35% Pfd. .................................................................... 170,740*
6 -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) AUGUST 31, 2005 (UNAUDITED) ------------------------------------
SHARES/$ PAR VALUE ------------- --------- PREFERRED SECURITIES -- (CONTINUED) UTILITIES -- (CONTINUED) ------------------------------------------------------------------------------------------------------------------------------------ Hawaiian Electric Company, Inc.: 1,611 5.00% Pfd., Series D .......................................................... $ 32,744* 7,438 5.00% Pfd., Series E .......................................................... 151,177* 690 5.00% Pfd., Series I .......................................................... 14,024* $ 3,750,000 Houston Light & Power Capital Trust II, 8.257% 02/01/37 Capital Security ........ 4,046,794 30,500 Indianapolis Power & Light Company, 5.65% Pfd. .................................. 2,951,485* 340,000 Interstate Power & Light Company, 8.375% Pfd., Series B ......................... 11,510,700* 2,588 New York State Electric & Gas, $4.50 Pfd., Series 1949 .......................... 239,558* 12,265 Northern Indiana Public Service Company, Adj. Rate Pfd., Series A ............... 619,689* Ohio Power Company: 3,018 4.20% Pfd. .................................................................... 269,854* 1,251 4.40% Pfd. .................................................................... 117,181* Pacific Enterprises: 13,680 $4.36 Pfd. .................................................................... 1,156,097* 24,985 $4.50 Pfd. .................................................................... 2,179,317* 15,730 $4.75 Pfd., Series 53 ......................................................... 1,448,261* Pacific Gas & Electric Co.: 41,500 5.00% Pfd., Series D .......................................................... 937,692* 50,000 5.00% Pfd., Series E .......................................................... 1,150,500* PacifiCorp: 5,672 $4.56 Pfd. .................................................................... 509,034* 6,708 $4.72 Pfd. .................................................................... 623,140* 10,500 $7.48 Sinking Fund Pfd. ....................................................... 1,106,017* 1,250 PECO Energy Company, $4.30 Pfd., Series B ....................................... 108,194* 15,142 Portland General Electric, 7.75% Sinking Fund Pfd. .............................. 1,544,181* 14,020 Public Service Electric & Gas Company, 5.28% Pfd., Series E ..................... 1,451,701* 70,210 San Diego Gas & Electric Company, $1.70 Pfd. .................................... 1,823,354* 8,900 Savannah Electric & Gas Company, 6.00% Pfd. ..................................... 243,993* South Carolina Electric & Gas Company: 14,226 5.125% Purchase Fund Pfd., Pvt. ............................................... 731,857* 7,774 6.00% Purchase Fund Pfd., Pvt. ................................................ 396,241* Southern California Edison: 57,646 4.08% Pfd. .................................................................... 1,137,356* 5,000 4.24% Pfd. .................................................................... 102,500* 16,225 Adj. Rate Pfd. ................................................................ 1,667,086* 60,000 Southern Union Company, 7.55% Pfd. .............................................. 1,665,600* $ 750,000 TXU Electric Capital V, 8.175% 01/30/37 Capital Security ........................ 807,686 5,700 Union Electric Company, 4.56% Pfd. .............................................. 537,767*
7 -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) AUGUST 31, 2005 (UNAUDITED) ------------------------------------------------------------------
SHARES/$ PAR VALUE ------------- --------- PREFERRED SECURITIES -- (CONTINUED) UTILITIES -- (CONTINUED) ------------------------------------------------------------------------------------------------------------------------------------ Virginia Electric & Power Company: 1,665 $4.04 Pfd. .................................................................... $ 139,935* 2,470 $4.20 Pfd. .................................................................... 215,816* 1,673 $4.80 Pfd. .................................................................... 168,814* 2,878 $6.98 Pfd. .................................................................... 295,786* 12,500 $7.05 Pfd. .................................................................... 1,280,625* 2,262 Washington Gas & Light Company, $4.25 Pfd. ...................................... 201,273* 12,863 Wisconsin Power & Light, 6.20% Pfd. ............................................. 1,319,937* Xcel Energy, Inc.: 15,000 $4.08 Pfd., Series B .......................................................... 1,238,250* 20,040 $4.10 Pfd., Series C .......................................................... 1,662,418* 35,510 $4.11 Pfd., Series D .......................................................... 2,952,657* 17,750 $4.16 Pfd., Series E .......................................................... 1,493,929* 10,000 $4.56 Pfd., Series G .......................................................... 922,550* ------------------------------------------------------------------------------------------------------------------- 85,654,778 ---------------- OIL AND GAS -- 5.9% ------------------------------------------------------------------------------------------------------------------------------------ 17,200 Anadarko Petroleum Corporation, 5.46% Pfd. ...................................... 1,767,300* 6,650 Apache Corporation, 5.68% Pfd., Series B ........................................ 685,415* 8,000 Devon Energy Corporation, 6.49% Pfd., Series A .................................. 823,600* 6,125 EOG Resources, Inc., 7.195% Pfd., Series B ...................................... 6,589,765* $ 1,650,000 KN Capital Trust III, 7.63% 4/15/28 Capital Security ............................ 1,908,770 10,000 Lasmo America Limited, 8.15% Pfd., 144A**** ..................................... 1,126,150*(1) ------------------------------------------------------------------------------------------------------------------- 12,901,000 ---------------- REAL ESTATE INVESTMENT TRUST (REIT) -- 1.7% ------------------------------------------------------------------------------------------------------------------------------------ PS Business Parks, Inc.: 10,000 7.00% Pfd., REIT, Series H .................................................... 250,350 18,120 7.20% Pfd., REIT, Series M .................................................... 456,352 Public Storage, Inc.: 11,100 6.18% Pfd., REIT, Series D .................................................... 269,563 22,500 6.75% Pfd., REIT, Series E .................................................... 571,613 40,000 Realty Income Corporation, 7.375% Pfd., REIT, Series D .......................... 1,047,800 40,000 Regency Centers Corporation, 7.25% Pfd., REIT ................................... 1,029,400 ------------------------------------------------------------------------------------------------------------------- 3,625,078 ----------------
8 -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) AUGUST 31, 2005 (UNAUDITED) ------------------------------------
SHARES/$ PAR VALUE ------------- --------- PREFERRED SECURITIES -- (CONTINUED) MISCELLANEOUS INDUSTRIES -- 1.9% ------------------------------------------------------------------------------------------------------------------------------------ 13,600 E.I. Du Pont de Nemours and Company, $4.50 Pfd., Series B ....................... $ 1,261,672* 36,200 Farmland Industries, Inc., 8.00% Pfd., 144A**** ................................. 18,100*+ 30,500 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** ............................. 2,872,185* 26,000 Touch America Holdings, $6.875 Pfd. ............................................. --*+ ------------------------------------------------------------------------------------------------------------------- 4,151,957 ---------------- TOTAL PREFERRED SECURITIES (Cost $192,947,501) ........................................................... 210,249,518 ---------------- CORPORATE DEBT SECURITIES -- 1.5% OIL AND GAS -- 1.0% ------------------------------------------------------------------------------------------------------------------------------------ 85,900 Nexen, Inc., 7.35% Subordinated Notes ........................................... 2,261,318(1) ------------------------------------------------------------------------------------------------------------------- UTILITIES -- 0.5% ------------------------------------------------------------------------------------------------------------------------------------ $ 1,000,000 Duquesne Light Holdings, 6.25% 08/15/35 ......................................... 1,034,970 ------------------------------------------------------------------------------------------------------------------- TOTAL CORPORATE DEBT SECURITIES (Cost $3,241,538) ............................................................. 3,296,288 ---------------- COMMON STOCK AND CONVERTIBLE SECURITY -- 0.8% BANKING -- 0.4% ------------------------------------------------------------------------------------------------------------------------------------ 50,000 New York Community Bancorp, Inc. ................................................ 876,250* ------------------------------------------------------------------------------------------------------------------- 876,250 ---------------- INSURANCE -- 0.4% ------------------------------------------------------------------------------------------------------------------------------------ 25,000 UnumProvident Corporation, 8.25% Mandatory Convertible, 05/16/06 ................ 931,375 ------------------------------------------------------------------------------------------------------------------- 931,375 ---------------- TOTAL COMMON STOCK AND CONVERTIBLE SECURITY (Cost $1,724,355) ............................................................. 1,807,625 ----------------
9 -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) AUGUST 31, 2005 (UNAUDITED) ------------------------------------------------------------------
SHARES/$ PAR VALUE ------------- --------- OPTION CONTRACTS -- 0.2% 1,375 December Put Options on December U.S. Treasury Bond Futures, Expiring 11/22/05 ............................................................. $ 453,516+ ------------------------------------------------------------------------------------------------------------------- TOTAL OPTION CONTRACTS (Cost $1,425,675) ............................................................. 453,516 ---------------- MONEY MARKET FUND -- 0.3% 628,140 BlackRock Provident Institutional, TempFund ..................................... 628,140 ------------------------------------------------------------------------------------------------------------------- TOTAL MONEY MARKET FUND (Cost $628,140) ............................................................... 628,140 ---------------- TOTAL INVESTMENTS (Cost $199,967,209***) ........................................... 99.5% 216,435,087 OTHER ASSETS AND LIABILITIES (Net) ................................................. 0.5% 1,110,214 --------- ---------------- TOTAL NET ASSETS AVAILABLE TO COMMON AND PREFERRED STOCK ........................... 100.0%++ $ 217,545,301 --------- ---------------- MONEY MARKET CUMULATIVE PREFERRED STOCK(TM) (MMP(R)) REDEMPTION VALUE ......................... (70,000,000) ---------------- TOTAL NET ASSETS AVAILABLE TO COMMON STOCK .................................................... $ 147,545,301 ================
----------------------------- * 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. (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: REIT -- Real Estate Investment Trust 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, 2004 THROUGH AUGUST 31, 2005 (UNAUDITED) ------------------------------------------------------------------------
VALUE -------- OPERATIONS: Net investment income ........................................................................ $ 8,498,341 Net realized gain on investments sold during the period ...................................... 5,503,484 Change in net unrealized appreciation of investments held during the period .................. 11,139 Distributions to Money Market Cumulative PreferredTM Stock Shareholders from net investment income, including changes in accumulated undeclared distributions ..................................................... (1,401,795) --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ......................................... 12,611,169 DISTRIBUTIONS: Dividends paid from net investment income to Common Stock Shareholders (2) ................... (8,133,583) --------------- TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS ............................................. (8,133,583) FUND SHARE TRANSACTIONS: Increase from Common Stock Transactions ...................................................... 922,663 --------------- NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING FROM FUND SHARE TRANSACTIONS ............................................................. 922,663 NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK --------------- FOR THE PERIOD ............................................................................... $ 5,400,249 =============== ------------------------------------------------------------------------------------------------------------------------------------ NET ASSETS AVAILABLE TO COMMON STOCK: Beginning of period .......................................................................... $ 142,145,052 Net increase during the period ............................................................... 5,400,249 --------------- End of period ................................................................................ $ 147,545,301 =============== -------------------------------------------------------- (1) These tables summarize the nine months ended August 31, 2005 and should be read in conjunction with the Fund's audited financial statements, including footnotes, in its Annual Report dated November 30, 2004. (2) Includes 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, 2004 THROUGH AUGUST 31, 2005 (UNAUDITED) FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD. -----------------------------------------------------
PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period ......................................................... $ 12.27 ------------- INVESTMENTOPERATIONS: Net investment income ........................................................................ 0.73 Net realized and unrealized gain on investments .............................................. 0.48 DISTRIBUTIONS TO MMP(R)* SHAREHOLDERS: From net investment income ................................................................... (0.12) From net realized capital gains .............................................................. -- ------------- Total from investment operations ............................................................. 1.09 ------------- DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS: From net investment income ................................................................... (0.70) From net realized capital gains .............................................................. -- ------------- Total distributions to Common Stock Shareholders . .......................................... (0.70) ------------- Net asset value, end of period ............................................................... $ 12.66 ============= Market value, end of period .................................................................. $ 13.50 ============= Common shares outstanding, end of period ..................................................... 11,658,470 ============= RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS: Net investment income + ...................................................................... 6.43%** Operating expenses ........................................................................... 1.54%** -------------------------------------------------------- SUPPLEMENTAL DATA:++ Portfolio turnover rate ...................................................................... 36%*** Total net assets available to Common and Preferred Stock, end of period (in 000's) ........... $ 217,545 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, 2005 and should be read in conjunction with the Fund's audited financial statements, including footnotes, in its Annual Report dated November 30, 2004. * Money Market Cumulative PreferredTM Stock. ** Annualized. *** Not Annualized. + The net investment income ratio reflects 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, 2004 - EXTRA ....................... $0.0450 $12.58 $13.50 $12.83 December 31, 2004 ............................... 0.0755 12.58 13.50 12.83 January 31, 2005 ................................ 0.0755 12.78 13.59 12.91 February 28, 2005 ............................... 0.0755 12.74 13.85 13.16 March 31, 2005 .................................. 0.0755 12.65 11.91 12.39 April 30, 2005 .................................. 0.0705 12.75 12.50 12.67 May 31, 2005 .................................... 0.0705 12.78 12.92 12.78 June 30, 2005 ................................... 0.0705 12.69 12.88 12.69 July 31, 2005 ................................... 0.0705 12.42 13.25 12.59 August 31, 2005 ................................. 0.0705 12.66 13.50 12.83 -------------------- (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, 2005, the aggregate cost of securities for federal income tax purposes was $200,975,880, the aggregate gross unrealized appreciation for all securities in which there is an excess of value over tax cost was $21,355,089 and the aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over value was $5,895,882. 14 [This page intentionally left blank] DIRECTORS Donald F. Crumrine, CFA David Gale Morgan Gust Karen H. Hogan Robert F. Wulf, CFA OFFICERS Donald F. Crumrine, CFA Chairman of the Board and Chief Executive Officer Robert M. Ettinger, CFA President R. Eric Chadwick, CFA Chief Financial Officer, Vice President, Treasurer and Secretary Peter C. Stimes, CFA Chief Compliance Officer and Vice President Chad C. Conwell Vice President and Asst. Compliance Officer Bradford S. Stone Vice President and Asst. Treasurer Christopher D. Ryan, CFA Vice President Laurie Lodolo Asst. Compliance Officer, Asst. Treasurer and Asst. 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 GRAPHIC Flaherty & Crumrine PREFERRED INCOME OPPORTUNITY FUND Quarterly Report August 31, 2005 web site: www.preferredincome.com