EXHIBIT 77Q1(b)
FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND INCORPORATED
(the "Fund")


Investment Policy Modifications

Summary of Risks and Benefits

       At their January 21, 2005 meeting (the "Meeting"), the Fund's
Board of Directors (the "Board") approved the use of interest rate
swaps, swap futures and Eurodollar futures contracts for interest rate
hedging purposes. The new policy will allow the Fund to further
diversify potential hedging instruments beyond Treasury-based
contracts, potentially improving hedge performance or lowering cost.

       The Board also approved the sale of credit derivatives as an
alternative to buying a corporate security, up to a limit of one-third
of Fund assets. This will allow the Fund to pursue various "synthetic
asset" strategies, whereby it can acquire exposure to particular
credits and manage its interest rate exposure more efficiently than it
could dealing only in cash securities. In essence, there may be times
when Fund management can sell credit protection via credit derivatives
at wider spreads (or with better call protection) than where Fund
management can purchase a portfolio security, resulting in higher
returns for shareholders. Fund management will not use credit
derivatives to leverage credit exposure, but rather as an alternative
to buying a security of a particular issuer. The ability to buy and
sell synthetic assets offers another way for active management of the
Fund to add value to shareholders.

       Of course, using derivative securities entails risks. There are
counterparty risks on over-the-counter derivatives and exchange-traded
futures contracts. These risks are limited by proper documentation,
collateralization, daily valuation, and the high credit standing of
approved swap counterparties and the futures exchanges, but the Fund is
exposed to valuation changes in a contract between the time the
collateral or margin requirement arises and when it receives such
collateral or margin payments. Second, there is basis risk between the
derivative contracts and the Fund's investments. LIBOR-based hedges may
or may not correlate with underlying portfolio assets as well as our
current Treasury-based hedges, possibly resulting in poorer hedge
performance. Credit derivatives may not perform in the same way as cash
securities. In particular, the timing of payments on a credit default
swap and the events that trigger those payments may be materially
different than on a cash security, possibly requiring the Fund to
liquidate assets at disadvantageous prices or leaving the Fund with
additional interest rate risk. Fund management intend to monitor and
evaluate those risks on an ongoing basis, but shareholders should be
aware that they exist.

       The Board approved rules to permit the Fund to buy or sell option
spreads, which may allow the Fund to reduce the cost of hedging or add
total return in periods of high implied volatility. The Fund has always
had the ability to sell options, but the new policy clarifies the
special situation of selling options when much or all of its risk is
covered by a long position in another option. However, the sale of any
option may limit the return on an asset (for example, in the case of a
call spread) or reduce the protection from a hedge (for example, in the
case of a put spread), possibly resulting in poorer performance.

       Finally, the Board authorized the Fund to engage in securities
lending on up to 15% of total assets. Certain securities held in the
portfolio may be lent profitably by the Fund. Proceeds from any
securities loan will be invested in a fund managed according to SEC
guidelines applicable to money market funds. Essentially, Fund
management would borrow money at a rate lower than where Fund
management would reinvest the proceeds. Fund management would not take
incremental interest rate risk, as both the borrowing and reinvestment
would be short- term. There are risks to securities lending, however.
There is counterparty risk on the securities lending side of the
transaction. Although risk is limited since the loan is collateralized
by cash, the Fund could suffer losses if the counterparty fails to
return securities that have risen in value. There is also investment
risk on the proceeds from the securities loans: These monies are
invested in short-term investments, and if those investments lose
value, the Fund will still owe the amount borrowed. Fund management
intend to mitigate this risk by investing proceeds from securities
lending in a short-term fund managed according to SEC guidelines
applicable to money market funds.


G:\Clients\Preferred\PFO\N-SAR\053105\PFO Exhibit 77Q1(b) - 053105.doc