SCHEDULE 14A
                                 PROXY STATEMENT
        PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Filed by Registrant [X]
Filed by Party other than the Registrant

Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential for Use of the Commission Only as permitted by Rule 14a-6(e)(2)
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11c or Rule 14a-12

       Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
       ------------------------------------------------------------------
                (Name of Registrant as Specified in Its Charter)

                   __________________________________________
                   (Name of Person(s) Filing Proxy Statement)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11

(1)   Title of each class of securities to which transaction applies:___________
(2)   Aggregate number of securities to which transaction applies:______________
(3)   Per unit price or other underlying value of transaction computed pursuant
      to Exchange Act Rule 0-11. (Set forth the amount on which the filing fee
      is calculated and state how it was
      determined):______________________________________________________________
(4)   Proposed maximum aggregate value of transaction:__________________________
(5)   Total fee paid:___________________________________________________________

[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.

(1)   Amount previously paid:___________________________________________________
(2)   Form, Schedule or Registration Statement No.:_____________________________
(3)   Filing Party:_____________________________________________________________
(4)   Date Filed:_______________________________________________________________



       FLAHERTY & CRUMRINE PREFERRED INCOME FUND INCORPORATED (NYSE: PFD)
 FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND INCORPORATED (NYSE: PFO)
                      301 E. Colorado Boulevard, Suite 720
                           Pasadena, California 91101

                              QUESTIONS AND ANSWERS

WHY DID THE BOARDS OF DIRECTORS CALL A SPECIAL MEETING?

The Funds  currently  use Preferred  Stock  leverage as a strategy to attempt to
enhance the dividends paid to Common Stock shareholders. The auction market that
sets  the  rates  for this  Preferred  Stock  has  recently  experienced  severe
disruptions - consequently, the Funds are currently paying higher rates relative
to  other  short-term  rates  than  they  have  historically.  In  light of this
turbulence, the Boards of Directors may determine to alter the leverage strategy
employed by the Funds.  Potential alternatives could include modifying the terms
of the Preferred  Stock,  refinancing  some or all of the Preferred Stock shares
with either a new preferred  stock or  refinancing  some or all of the Preferred
Stock shares with debt financing.  The Boards of Directors have not approved any
course of action and may decide to leave the current Preferred Stock outstanding
or redeem some or all of the shares of Preferred Stock.

As discussed in greater detail below and in the Joint Proxy Statement, the Funds
do not  currently  have the  flexibility  to  pursue  borrowing  as a source  of
financing - flexibility  which is  available  to many other  closed-end  funds,
including  the  Funds'  sister  funds,  Flaherty &  Crumrine/Claymore  Preferred
Securities Income Fund (FFC) and Flaherty & Crumrine/Claymore  Total Return Fund
(FLC).

Your "Yes" vote on the  Proposals  will give the Funds  greater  flexibility  to
respond to changing market conditions.

WHY ARE THE BOARDS OF DIRECTORS RECOMMENDING A CHANGE TO THE FUNDS' INVESTMENT
POLICIES?

As discussed  above,  the Boards of  Directors  may  consider  alternatives  for
leveraging the returns to Common Stock shareholders. One path that the Boards of
Directors may select is debt financing - for example,  by borrowing money from a
bank or other  lender and then using the  proceeds  to redeem some or all of the
outstanding Preferred Stock.

When the Funds were  designed over 15 years ago, it was  contemplated  that they
would  always use  Preferred  Stock as leverage.  Consequently,  as discussed in
Proposal 1 of the attached Joint Proxy Statement, the Funds' investment policies
do not currently permit leveraging through borrowing, issuing debt securities or
using other debt financing strategies which are similar to borrowing.

These  investment  policies are more  restrictive than legally required and more
restrictive than many other closed-end  funds,  such as the Funds' sister funds,
FFC and FLC.

After reviewing options available to the Funds, Fund management has recommended,
and the Boards of Directors have approved,  modernizing  each Fund's  investment
policies to grant it the flexibility to use debt financing for leverage.

The Boards of Directors  unanimously  recommend that  shareholders vote "Yes" on
Proposals 1-A, 1-B and 1-C.

WHY DID THE BOARDS OF DIRECTORS APPROVE A CHANGE TO THE INVESTMENT ADVISORY
AGREEMENTS FOR THE FUNDS?

Each  Fund  has an  investment  advisory  agreement  with  Flaherty  &  Crumrine
Incorporated.  In exchange for the  investment  advice to and  management of the
Funds,  Flaherty  &  Crumrine  receives  a monthly  fee.  This fee is  currently
assessed against the "net assets" of each Fund, with "net assets"  calculated as
the difference  between a Fund's total assets (i.e., the value of its portfolio)
and the Fund's  liabilities.  The Preferred  Stock is  explicitly  excluded as a
liability of each Fund when calculating this fee.

If a Fund were to use a form of leverage other than Preferred  Stock, the assets
attributable  to that  leverage  would be a liability  for  purposes of the "net
assets"  calculation,  and  would  not count  when  calculating  the fee paid to
Flaherty & Crumrine.  The Boards of Directors have  previously  concluded  (most
recently  this past January) that the fees being paid to Flaherty & Crumrine are
reasonable.  They do not favor lowering the fees indirectly by changing the form
of the Fund's leverage from Preferred Stock to debt financing.

As discussed in Proposal 2 of the attached Joint Proxy Statement,  the Boards of
Directors  have  approved the change to the  investment  advisory  agreements to
clarify that financial  leverage  utilized by the Funds - whether in the form of
Preferred  Stock or debt  financing - does not  constitute  a liability  for the
calculation of the investment  advisory fee. Except for this change,  the actual
fee calculation  formula would not change  (although the amount of the fee would
depend on the amount of leverage  outstanding at any given time,  whether in the
form of  preferred  stock or debt  financing)  - in other  words, the Fund would
continue to pay the same  percentage  of net assets  available  to Common  Stock
shareholders as it does currently.

The Boards of Directors recommends that shareholders vote "Yes" on Proposal 2.



       FLAHERTY & CRUMRINE PREFERRED INCOME FUND INCORPORATED (NYSE: PFD)
 FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND INCORPORATED (NYSE: PFO)
                      301 E. Colorado Boulevard, Suite 720
                           Pasadena, California 91101

                   NOTICE OF SPECIAL MEETINGS OF SHAREHOLDERS
                           To Be Held on May 21, 2008

To the Shareholders:

      Notice is hereby given that Special Meetings of Shareholders of Flaherty &
Crumrine  Preferred Income Fund  Incorporated and Flaherty & Crumrine  Preferred
Income  Opportunity  Fund  Incorporated  (each a "Fund"  and  collectively,  the
"Funds"), each a Maryland corporation,  will be held at the offices of the Funds
at 301 E. Colorado Boulevard, Suite 720, Pasadena, California 91101 at 9:00 a.m.
PT, on May 21, 2008, for the following purposes:

      1.    To  approve  changes  to  certain  fundamental  investment  policies
            (Proposal 1).

      2.    To approve an amended investment advisory agreement (Proposal 2).

      3.    To  transact  such other  business as may  properly  come before the
            Special Meetings or any adjournments thereof.

      YOUR VOTE IS IMPORTANT!

      The Board of  Directors  of each Fund has fixed the close of  business  on
March 31, 2008 as the record date for the  determination  of shareholders of
each Fund entitled to notice of and to vote at the Special Meetings.

                                      By Order of the Boards of Directors,

[______ __], 2008                     CHAD C. CONWELL
                                      SECRETARY

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SEPARATE  PROXY  CARDS  ARE  ENCLOSED  FOR EACH  FUND IN WHICH  YOU OWN  SHARES.
SHAREHOLDERS  WHO DO NOT EXPECT TO ATTEND THE SPECIAL  MEETINGS ARE REQUESTED TO
COMPLETE,  SIGN AND DATE THE  ENCLOSED  PROXY  CARD(S),  OR VOTE BY TELEPHONE OR
INTERNET.  THE PROXY CARD(S) SHOULD BE RETURNED IN THE ENCLOSED ENVELOPE,  WHICH
NEEDS NO POSTAGE IF MAILED IN THE CONTINENTAL  UNITED STATES.  INSTRUCTIONS  FOR
THE PROPER EXECUTION OF PROXIES ARE SET FORTH ON THE INSIDE COVER.
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                      INSTRUCTIONS FOR SIGNING PROXY CARDS

      The following general rules for signing proxy cards may be of assistance
to you and may minimize the time and expense to the Fund(s) involved in
validating your vote if you fail to sign your proxy card(s) properly.

      1.    Individual Accounts: Sign your name exactly as it appears in the
registration on the proxy card(s).

      2.    Joint Accounts: Either party may sign, but the name of the party
signing should conform exactly to a name shown in the registration.

      3.    All Other Accounts: The capacity of the individual signing the proxy
card should be indicated unless it is reflected in the form of registration. For
example:

    REGISTRATION                                 VALID SIGNATURE
    ------------                                 ---------------
    CORPORATE ACCOUNTS

    (1)    ABC Corp.                             ABC Corp.
    (2)    ABC Corp.                             John Doe, Treasurer
    (3)    ABC Corp. c/o John Doe, Treasurer     John Doe
    (4)    ABC Corp. Profit Sharing Plan         John Doe, Trustee

    TRUST ACCOUNTS

    (1)    ABC Trust                             Jane B. Doe, Trustee
    (2)    Jane B. Doe, Trustee                  Jane B. Doe
           u/t/d 12/28/78

    CUSTODIAN OR ESTATE ACCOUNTS

    (1)    John B. Smith, Cust.,                 John B. Smith
           f/b/o John B. Smith, Jr. UGMA
    (2)    John B. Smith, Executor,              John B. Smith, Jr., Executor
           estate of Jane Smith



       FLAHERTY & CRUMRINE PREFERRED INCOME FUND INCORPORATED (NYSE: PFD)
 FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND INCORPORATED (NYSE: PFO)
                      301 E. Colorado Boulevard, Suite 720
                           Pasadena, California 91101

                        SPECIAL MEETINGS OF SHAREHOLDERS
                                  May 21, 2008

                              JOINT PROXY STATEMENT

      This document is a joint proxy  statement  ("Joint Proxy  Statement")  for
Flaherty & Crumrine Preferred Income Fund Incorporated  ("PREFERRED INCOME FUND"
OR "PFD") and Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
("PREFERRED  INCOME OPPORTUNITY FUND" OR "PFO") (EACH A "FUND" AND COLLECTIVELY,
THE "FUNDS").  This Joint Proxy  Statement is furnished in  connection  with the
solicitation  of proxies by each Fund's Board of  Directors  (each a "Board" and
collectively, the "Boards") for use at a Special Meeting of Shareholders of each
Fund to be held on May 21,  2008,  at 9:00 a.m. PT, at the offices of the Funds,
301 E. Colorado  Boulevard,  Suite 720,  Pasadena,  California  91101 and at any
adjournments thereof (each a "Meeting" and collectively, the "Meetings").

      On or about February 19, 2008, a Joint Proxy  Statement was sent to you so
that you may vote on the election of Directors at the Funds'  annual  meeting to
be held on April 18, 2008,  and you may have  received  proxy  solicitations  by
mail, telephone,  or personal interview relating to the election of Directors at
the annual  meeting.  This new proxy  statement is for a special meeting of each
Fund's  shareholders on May 21, 2008 and involves new proposals  relating to the
operation of the Funds.  You will also receive new proxy  solicitations by mail,
telephone,  or personal interview for the new proposals  described in this proxy
statement.  YOUR  VOTE IS  IMPORTANT.  EVEN IF YOU HAVE  ALREADY  VOTED  FOR THE
ELECTION  OF  DIRECTORS  AT THE ANNUAL  MEETING,  PLEASE  VOTE ON THE  PROPOSALS
DESCRIBED HEREIN. EVEN IF YOU PLAN TO ATTEND AND VOTE IN PERSON AT THE MEETINGS,
PLEASE  PROMPTLY  FOLLOW  THE  ENCLOSED   INSTRUCTIONS  TO  SUBMIT  A  PROXY  BY
COMPLETING,  SIGNING,  AND DATING THE  ENCLOSED  PROXY CARDS,  OR  ALTERNATIVELY
PROVIDING A PROXY BY TELEPHONE OR INTERNET. THE PROXY CARD(S) SHOULD BE RETURNED
IN THE ENCLOSED  ENVELOPE,  WHICH NEEDS NO POSTAGE IF MAILED IN THE  CONTINENTAL
UNITED STATES. INSTRUCTIONS FOR THE PROPER EXECUTION OF PROXIES ARE SET FORTH ON
[THE OPPOSITE PAGE].

      A Notice of Special  Meetings of Shareholders and proxy card for each Fund
of which you are a  shareholder  accompany  this Joint  Proxy  Statement.  Proxy
solicitations will be made beginning on or about [______ __], 2008, primarily by
mail, but proxy solicitations may also be made by telephone, telefax or personal
interviews conducted by officers of each Fund, Flaherty & Crumrine  Incorporated
("Flaherty & Crumrine" or the "Adviser"),  the investment  adviser of each Fund,
and PFPC Inc. ("PFPC"),  the transfer agent and administrator of each Fund and a
member of The PNC Financial  Services Group, Inc. The Adviser,  on behalf of the
Funds, has also retained [_____________________],  a proxy solicitation firm, to
assist in the solicitation of proxies.  If you need more information or have any
questions on how to cast your vote,  please call  [____________] at [_________].
The costs of proxy  solicitation  and expenses  incurred in connection  with the
preparation  of this Joint Proxy  Statement  and its  enclosures  will be shared
proportionally by the Funds.  Each Fund also will reimburse  brokerage firms and
others for their expenses in forwarding  solicitation material to the beneficial
owners of its shares.  This proxy  statement  and the enclosed form of proxy are
first being sent to shareholders on or about April 4, 2008.

      THE ANNUAL REPORT OF EACH FUND, INCLUDING AUDITED FINANCIAL STATEMENTS FOR
THE FISCAL YEAR ENDED  NOVEMBER 30, 2007,  IS AVAILABLE  UPON  REQUEST,  WITHOUT
CHARGE,  BY WRITING TO PFPC INC.,  P.O.  BOX  43027,  PROVIDENCE,  RHODE  ISLAND
02940-3027,  OR  CALLING  1-800-331-1710.  EACH  FUND'S  ANNUAL  REPORT  IS ALSO
AVAILABLE ON THE FUNDS' WEBSITE -  WWW.PREFERREDINCOME.COM  - AND THE SECURITIES
AND EXCHANGE COMMISSION'S ("SEC") WEBSITE (WWW.SEC.GOV).

      If the enclosed proxy card is properly executed and returned in time to be
voted at the relevant Meeting, the Shares (as defined below) represented thereby
will be voted  in  accordance  with  the  instructions  marked  thereon.  Unless
instructions  to the  contrary are marked  thereon,  a proxy will be voted "FOR"
Proposal 1 and Proposal 2. Any  shareholder  who has given a proxy has the right
to revoke it at any time prior to its exercise  either by attending the relevant
Meeting  and  voting his or her  Shares in person or by  submitting  a letter of
revocation or a later-dated proxy to the appropriate Fund delivered at the above
address prior to the date of the Meeting.



      Under the Bylaws of each Fund,  the  presence in person or by proxy of the
holders of a majority  of the  outstanding  shares of the Fund  entitled to vote
shall be necessary and sufficient to constitute a quorum for the  transaction of
business (a "Quorum") at that Fund's meeting.  If a proposal is to be voted upon
by only one class of a Fund's  shares,  a Quorum of that class of shares must be
present at the Meeting in order for the proposal to be considered.  In the event
that a Quorum is not  present  at a  Meeting,  or in the event  that a Quorum is
present but  sufficient  votes to approve any of the proposals are not received,
the persons named as proxies may propose one or more adjournments of the Meeting
to permit further solicitation of proxies. Any such adjournment will require the
affirmative  vote of a majority of those  shares  represented  at the Meeting in
person or by proxy.  If a Quorum is present,  the persons  named as proxies will
vote those  proxies which they are entitled to vote "FOR" a proposal in favor of
such an  adjournment  with respect to that  proposal and will vote those proxies
required to be voted  "AGAINST" a proposal  against  any such  adjournment  with
respect to that proposal.  A shareholder  vote may be taken on a proposal in the
Joint Proxy  Statement  prior to any such  adjournment if sufficient  votes have
been received for approval of that proposal.

      Each Fund has two classes of capital stock  including  common  stock,  par
value $0.01 per share (the "Common  Stock") and preferred  stock (the "Preferred
Stock" and together  with the Common  Stock,  the  "Shares").  Each Fund has one
series of Preferred Stock  outstanding  which is classified as Auction Preferred
Stock  (formerly  known  as  "Money  Market  Cumulative   Preferred(TM)   Stock"
(MMP(R))).  Each Share is entitled to one vote at the  Meeting  with  respect to
matters to be voted on by the class to which such Share  belongs,  with pro rata
voting rights for any fractional Shares. On the record date, March 31, 2008, the
following number of Shares of each Fund were issued and outstanding:

                                                 COMMON STOCK    PREFERRED STOCK
      NAME OF FUND                                OUTSTANDING      OUTSTANDING
      ------------                               ------------    ---------------

      Preferred Income Fund (PFD)                [__________]          800
      Preferred Income Opportunity Fund (PFO)    [__________]          700

      To the knowledge of each Fund and its Board, the following  shareholder(s)
or "group," as that term is defined in Section 13(d) of the Securities  Exchange
Act of 1934, as amended (the "1934 Act"),  is the  beneficial  owner or owner of
record of more than 5% of the relevant Fund's outstanding Shares as of March 31,
2008*:



NAME AND ADDRESS OF                                AMOUNT AND NATURE
BENEFICIAL/RECORD OWNER         TITLE OF CLASS       OF OWNERSHIP      PERCENT OF CLASS
---------------------------   -----------------   ------------------   ----------------
                                                                   
Cede & Co.**                  Common Stock        PFD - 10,060,836          95.36%
Depository Trust Company                          (record)
55 Water Street, 25th Floor                       PFO - 11,300,994          96.06%
New York, NY 10041                                (record)

                              Preferred Stock     PFD - 800 (record)          100%
                                                  PFO - 700 (record)          100%


----------
*     As of [_______ __],  2008, the Directors and officers,  as a group,  owned
      less than 1% of each class of Shares of each Fund.

**    A nominee partnership of The Depository Trust Company.

      This  Joint  Proxy  Statement  is  being  used  in  order  to  reduce  the
preparation,  printing, handling and postage expenses that would result from the
use of a separate proxy statement for each Fund.  Shareholders of each Fund will
vote as a single class,  except as described  below, and will vote separately on
each proposal on which shareholders of that Fund are entitled to vote.  Separate
proxy cards are enclosed for each Fund in which a shareholder  is a record owner
of Shares.  Thus, if a proposal is approved by  shareholders of one Fund and not
approved by shareholders of the other Fund, the proposal will be implemented for
the Fund that approved the


                                        2



proposal  and will not be  implemented  for the Fund  that did not  approve  the
proposal.  It is therefore essential that shareholders  complete,  date and sign
each enclosed proxy card.  Shareholders of each Fund are entitled to vote on the
proposals pertaining to that Fund.

      In order that your  Shares may be  represented  at the  Meetings,  you are
requested to vote on the following matters:

                   SUMMARY OF VOTING RIGHTS ON PROXY PROPOSALS

PREFERRED INCOME FUND (PFD)

--------------------------------------------------------------------------------
PROPOSAL                 VOTING REQUIREMENTS
--------------------------------------------------------------------------------
1. Changes in            Common Stock and Preferred Stock  Shareholders,  voting
Fundamental Investment   together as a single  class,  and also  separately  the
Policies                 Preferred  Stock  Shareholders,  voting  as a  separate
                         class.
--------------------------------------------------------------------------------
2. Amended Investment    Common Stock and Preferred Stock  Shareholders,  voting
Advisory Agreement       together as a single class.
--------------------------------------------------------------------------------
3. Other Business        Common Stock and Preferred Stock  Shareholders,  voting
                         together as a single class
--------------------------------------------------------------------------------

PREFERRED INCOME OPPORTUNITY FUND (PFO)

--------------------------------------------------------------------------------
PROPOSAL                 VOTING REQUIREMENTS
--------------------------------------------------------------------------------
1. Changes in            Common Stock and Preferred Stock  Shareholders,  voting
Fundamental Investment   together as a single  class,  and also  separately  the
Policies                 Preferred  Stock  Shareholders,  voting  as a  separate
                         class.
--------------------------------------------------------------------------------
2. Amended Investment    Common Stock and Preferred Stock  Shareholders,  voting
Advisory Agreement       together as a single class.
--------------------------------------------------------------------------------
3. Other Business        Common Stock and Preferred Stock  Shareholders,  voting
                         together as a single class
--------------------------------------------------------------------------------

             PROPOSAL 1: REVISION OF FUNDAMENTAL INVESTMENT POLICIES

      The Funds, like all registered funds, are required by law to have policies
governing  certain of their  investment  practices that may only be changed with
the prior approval of the holders of a majority of a Fund's  outstanding  voting
securities,  voting as a single class, and approval of the holders of a majority
of a Fund's outstanding  shares of Preferred Stock,  voting as a separate class.
These policies are referred to as "fundamental."

      When the Funds were  organized,  it was assumed  that the Funds would only
leverage  their  portfolios  through this issuance of preferred  stock,  and the
Funds' ability to leverage through debt financing was restricted.  Each of PFD's
and PFO's  Boards  have  reviewed  the Fund's  current  fundamental  policies on
borrowing,  issuing senior  securities  and purchasing  securities on margin and
have determined that each Fund has fundamental  policies in these areas that are
more  restrictive  than the law  requires.  The Board of each Fund has concluded
that  those  policies  should be  revised to permit  each Fund to  leverage  its
portfolio  using debt financing in appropriate  circumstances.  At the Meetings,
shareholders of PFD and PFO will be asked to approve the revised policies.

      The  revised  fundamental  policies  are  expected  to give the  Funds the
flexibility to pursue debt financing as a means of leverage,  in addition to the
use of preferred  stock.  The revised  policies  will not affect the  investment
objectives of the Funds, which will remain unchanged. The Funds will continue to
be managed in  accordance  with the  investment  parameters  described  in their
prospectuses and in accordance with applicable law.

      The  revised   fundamental   policies   maintain   important   shareholder
protections,  while providing the Funds with greater flexibility to leverage the
Funds' assets than is currently available. Accordingly, the policies are written
and will be interpreted  broadly.  For example,  the revised  policies allow the
investment practice in question to be


                                        3



conducted to the extent  permitted  by the  Investment  Company Act of 1940,  as
amended (the "1940 Act"). It is possible that, as the financial markets continue
to evolve over time,  the 1940 Act and the related rules may be further  amended
to address changed  circumstances and new investment  opportunities.  It is also
possible that the 1940 Act and the related rules could change for other reasons.
For  flexibility,  the revised policies will be interpreted to refer to the 1940
Act and the  related  rules as they are in effect  from time to time.  This will
allow the Funds to benefit from future changes in applicable law without seeking
additional costly and time-consuming  shareholder  approvals.  To the extent the
Funds engage in new investment practices, the Funds may be subject to additional
risks.  Before a material  change is made in a Fund's  investment  practices  in
response to the revised  policies,  the Fund's  Board will  consider and approve
such change and the Fund's shareholders will be notified, as appropriate.

      Two of the revised  fundamental  policies also refer to interpretations or
modifications  of, or  relating  to, the 1940 Act from the SEC or members of its
staff, as well as  interpretations  or modifications of other authorities having
jurisdiction over the Funds.  These authorities could include courts.  From time
to time the SEC and  members  of its staff  issue  formal or  informal  views on
various  provisions  of the 1940 Act and the related  rules,  including  through
no-action letters and exemptive orders. The revised policies will be interpreted
to refer to these  interpretations  or modifications as they are given from time
to time. Again, this will allow the Funds the flexibility to benefit from future
changes in the positions  taken by regulators and others without the expense and
delay of seeking further shareholder approvals.

      When  a  revised  policy  provides  that  an  investment  practice  may be
conducted as permitted by the 1940 Act, the policy will be  interpreted  to mean
either that the 1940 Act  expressly  permits  the  practice or that the 1940 Act
does not prohibit the practice.

      If the revised  policies are approved,  subject to future Board  approval,
the  policies  could  permit the Funds to engage in  borrowing or other forms of
debt  leverage in order to  potentially  redeem  Shares of Preferred  Stock.  As
discussed in a website  posting dated February 14, 2008, the auction process for
the Funds'  Preferred  Stock began to fail and has continued to fail. This means
that there has not been  sufficient  interest  from  bidders in the  auctions to
purchase all the Shares being offered for sale. In a "failed" auction,  existing
Preferred Stock shareholders are able to sell some of their Shares to the extent
that there are buyers, but are not able to sell their remaining Shares.  Rather,
they continue to hold their Shares and earn a "maximum  rate" set according to a
pre-determined  formula.  A failed auction is not an event of default.  A failed
auction  does not  require  the  redemption  of  Preferred  Stock by the  Funds.
Therefore,  the Shares remain outstanding,  and pay the maximum rate until "buy"
and "hold" orders again exceed "sell" orders in a future auction. The provisions
allowing  for failed  auctions are  intended to provide  fair  compensation  for
Preferred Stock shareholders during periods of disruptions,  while also allowing
the Funds the  necessary  time to properly  consider the  situation  and explore
potential  alternatives.  One potential alternative that would be permitted as a
result of the proposed  changes in fundamental  policies would be the redemption
of some or all of the  Preferred  Stock  through the use of  borrowing,  issuing
senior debt securities or purchasing  securities on margin.  THE BOARDS HAVE NOT
DETERMINED TO REDEEM ANY PREFERRED  STOCK AND THE  PRESENTATION OF THIS PROPOSAL
SHOULD  NOT BE  INTERPRETED  TO MEAN THAT  EITHER PFD OR PFO HAS  DETERMINED  TO
REDEEM ANY SHARES OF PREFERRED STOCK.

      THE FOLLOWING DESCRIBES RISKS ASSOCIATED WITH LEVERAGING THE FUNDS THROUGH
THE USE OF BORROWING,  ISSUING SENIOR  SECURITIES  AND PURCHASING  SECURITIES ON
MARGIN,  WHICH DO NOT MATERIALLY  DIFFER FROM THE RISKS THE FUNDS CURRENTLY FACE
THROUGH LEVERAGING USING PREFERRED STOCK.

      Borrowing,  issuing senior securities and purchasing  securities on margin
are forms of leverage.  Because this leverage would subject a Fund to additional
costs, the Fund would only engage in these transactions when the Adviser and the
Board of  Directors  believe that the cost of carrying the assets to be acquired
through  leverage  would  be  lower  than  the  Fund's  expected  return  on its
investment.  Should this  differential  narrow,  a Fund would  realize less of a
positive return, with the additional risk that, during periods of adverse market
conditions,  the market value of the Fund's entire portfolio holdings (including
those acquired  through  leverage) may decline far in excess of the  incremental
returns the Fund may have achieved, resulting in a loss to the Fund. Indeed, any
such  leveraging  tends to magnify market exposure and can result in higher than
expected losses to a Fund.

      Because the investment risk associated  with investment  assets  purchased
with funds obtained through  leveraging would be borne solely by a Fund's Common
Stock shareholders, adverse movements in the price of a


                                        4



Fund's portfolio  holdings would have a more severe effect on a Fund's net asset
value than if a Fund were not  leveraged.  Leverage  creates  risks for a Fund's
Common Stock  shareholders,  including the likelihood of greater volatility of a
Fund's net asset  value and the market  price of its  shares,  and the risk that
fluctuations  in interest  rates on borrowings  or in the dividend  rates on any
Preferred  Stock may  affect  the return to Common  Stock  shareholders.  If the
income from the securities  purchased with such funds is not sufficient to cover
the cost of  leverage,  the net income of a Fund would be less than if  leverage
had not been used, and therefore the amount available for distribution to Common
Stock  shareholders  as dividends will be reduced.  In such an event, a Fund may
nevertheless  determine  to maintain  its  leveraged  position in order to avoid
capital losses on securities purchased with the leverage.  Further, all expenses
associated with borrowing, such as interest expenses and transaction costs, will
be borne solely by a Fund's Common Stock shareholders.

      Also, if the asset coverage for borrowing or other senior  securities of a
Fund  declines  below the  limits  specified  in the 1940  Act,  the Fund may be
required to sell a portion of its investments when it may not be advantageous to
do so. In the  extreme,  sales of  investments  required to meet asset  coverage
tests  imposed  by the 1940 Act could  also cause a Fund to lose its status as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the  "Code").  If  a  Fund  were  unable  to  make  adequate  distributions  to
shareholders  because of asset coverage or other restrictions,  it could fail to
qualify as a regulated  investment  company for federal income tax purposes and,
even if it did not fail to so  qualify,  it could  become  liable for income and
excise tax on the portion of its earnings which are not  distributed on a timely
basis in accordance with applicable provisions of the Code. A Fund's willingness
to engage in leverage  transactions,  and the amount of such transactions,  will
depend on many  factors,  the most  important of which are  investment  outlook,
market  conditions and interest rates.  Successful use of a leveraging  strategy
depends on the Adviser's ability to predict correctly  interest rates and market
movements, and there is no assurance that a leveraging strategy will be employed
or will be successful  during any period in which it is employed.  If Proposal 2
is approved by shareholders  and a Fund leverages using  borrowing,  senior debt
securities  or  margin  purchases,  the  Adviser  could be  viewed  as having an
economic  incentive  to  utilize  leverage  because  the use of  leverage  would
increase  the Fund's "net  assets" (as defined  below) and hence the fee paid by
the Funds to the Adviser.  However,  the Funds were  initially  structured to be
leveraged with Preferred Stock, so that changing the form of leverage,  in whole
or in part, should not enhance any such incentive.  In fact, this  consideration
would be mitigated because of the higher asset coverage  requirements  under the
1940 Act if the Funds, engaged in leverage through debt financing.

      Flaherty & Crumrine has advised the Boards of PFD and PFO that,  except as
described  herein,  the proposed  revisions to the fundamental  policies are not
expected to materially  affect the manner in which each Fund is being managed at
this time. On this basis, the Boards of PFD and PFO recommend that  shareholders
of PFD and PFO vote to revise the fundamental policies as discussed below.

PROPOSAL 1-A: REVISE THE FUNDAMENTAL POLICY RELATING TO BORROWING MONEY.

      The Funds  currently  have a  fundamental  investment  policy  relating to
borrowing money. Each Fund may not:

      BORROW MONEY, EXCEPT FOR TEMPORARY OR EMERGENCY PURPOSES, OR IN CONNECTION
      WITH REPURCHASES OF ITS SHARES OR FOR CLEARANCE OF TRANSACTIONS,  AND THEN
      ONLY IN AMOUNTS NOT EXCEEDING  10% OF ITS TOTAL ASSETS (NOT  INCLUDING THE
      AMOUNT BORROWED) AND AS OTHERWISE  DESCRIBED IN THIS PROSPECTUS.  WHEN THE
      FUND'S  BORROWINGS  EXCEED 5% OF THE VALUE OF ITS TOTAL  ASSETS,  THE FUND
      WILL NOT MAKE ANY ADDITIONAL INVESTMENTS.

      If  shareholders  of a Fund  approve  this  proposal,  the Fund's  current
fundamental  policy  relating to the  borrowing of money will be revised so that
the Fund may not:

      BORROW MONEY,  EXCEPT AS PERMITTED UNDER THE 1940 ACT, AS AMENDED,  AND AS
      INTERPRETED OR MODIFIED BY REGULATORY AUTHORITY HAVING JURISDICTION,  FROM
      TIME TO TIME.

      DISCUSSION OF PROPOSED MODIFICATION.  All registered funds are required to
have a fundamental  policy about the borrowing of money.  The 1940 Act generally
requires a  registered  fund to maintain  asset  coverage of 300% for  so-called
"senior  securities"  that represent  indebtedness.  This means that,  generally
speaking, for the registered


                                        5



fund to borrow or otherwise  issue debt (other than limited  exceptions  such as
temporary borrowing or a borrowing for emergency purposes up to 5% of the fund's
total  assets),  the fund must have  total  assets of at least  twice the amount
borrowed.  A registered  fund that issues  preferred  stock must maintain  asset
coverage of at least 200% with respect to the preferred  stock.  Asset  coverage
means the ratio that the value of the fund's  total  assets,  minus  liabilities
other than borrowings, bears to the aggregate amount of all borrowings.  Certain
widely used investment  practices that involve a commitment by a fund to deliver
money or  securities  in the future are not  considered  by the SEC to be senior
securities.  These include repurchase and reverse repurchase agreements,  dollar
rolls, options, futures and forward contracts, provided that in each case a fund
segregates  cash  or  liquid  securities  in an  amount  necessary  to  pay  the
obligation or the fund holds an offsetting  commitment  from another party.  The
revised policy will not affect the Funds' existing  abilities to engage in these
practices.  Similarly,  the revised  policy will be  interpreted  not to prevent
collateral  arrangements  with  respect  to swaps,  options,  forward or futures
contracts or other derivatives, or the posting of initial or variation margin.

      The revised policy will permit the Funds to borrow money, and to engage in
trading practices that may be considered to be borrowing,  to the fullest extent
permitted by the 1940 Act and related interpretations, as in effect from time to
time.  The  revised  policy  will be  interpreted  to permit a Fund to engage in
trading  practices and investments that may be considered to be borrowing,  such
as reverse repurchase  agreements,  dollar rolls, options,  futures,  options on
futures and forward contracts. In addition, short-term credits necessary for the
settlement  of  securities   transactions  and  arrangements   with  respect  to
securities  lending will not be considered  to be  borrowings  under the revised
policy.  Practices  and  investments  that  may  involve  leverage  but  are not
considered to be borrowings are not subject to the revised policy.

EACH BOARD OF DIRECTORS, INCLUDING ALL OF THE INDEPENDENT DIRECTORS, UNANIMOUSLY
RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" PROPOSAL 1-A.

PROPOSAL  1-B:  REVISE  THE  FUNDAMENTAL   POLICY  RELATING  TO  ISSUING  SENIOR
SECURITIES.

      The Funds  currently  have a  fundamental  investment  policy  relating to
senior securities. Each Fund may not:

      ISSUE SENIOR SECURITIES OTHER THAN PREFERRED STOCK.

      If  shareholders  of a Fund  approve  this  proposal,  the Fund's  current
fundamental policy relating to issuing senior securities will be revised so that
the Fund may not:

      ISSUE  SENIOR  SECURITIES  TO  THE  EXTENT  SUCH  ISSUANCE  WOULD  VIOLATE
      APPLICABLE LAW.

      DISCUSSION OF PROPOSED POLICY. All registered funds are required to have a
fundamental policy about issuing "senior  securities," which are defined as fund
obligations  that have a priority  over the fund's common shares with respect to
the  payment of  dividends  or the  distribution  of fund  assets.  The 1940 Act
establishes limits on the ability of the Funds to engage in leverage through the
issuance of "senior  securities."  The  revised  policy will permit the Funds to
issue  senior  securities  to the fullest  extent  permitted by the 1940 Act and
related interpretations, as in effect from time to time.

      Certain  widely used  investment  practices that involve a commitment by a
fund to deliver money or securities in the future are not  considered by the SEC
to be  senior  securities.  These  include  repurchase  and  reverse  repurchase
agreements,  dollar rolls, options, futures and forward contracts, provided that
in each case a fund segregates cash or liquid  securities in an amount necessary
to pay the  obligation or the fund holds an offsetting  commitment  from another
party.  The revised  policy  will not affect the Funds'  existing  abilities  to
engage in these practices. Similarly, the revised policy will be interpreted not
to prevent collateral  arrangements with respect to swaps,  options,  forward or
futures contracts or other  derivatives,  or the posting of initial or variation
margin.


                                        6



EACH BOARD OF DIRECTORS, INCLUDING ALL OF THE INDEPENDENT DIRECTORS, UNANIMOUSLY
RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" PROPOSAL 1-B.

PROPOSAL 1-C: REVISE THE FUNDAMENTAL POLICY RELATING TO PURCHASING SECURITIES ON
MARGIN.

      The Funds currently have a fundamental  investment  policy relating to the
purchase of securities on margin. Each Fund may not:

      SELL SECURITIES  SHORT OR PURCHASE  SECURITIES ON MARGIN,  EXCEPT FOR SUCH
      SHORT-TERM CREDITS AS ARE NECESSARY FOR THE CLEARANCE OF TRANSACTIONS, BUT
      THE FUND MAY MAKE  MARGIN  DEPOSITS IN  CONNECTION  WITH  TRANSACTIONS  IN
      OPTIONS ON SECURITIES,  FUTURES AND OPTIONS ON FUTURES, AND MAY MAKE SHORT
      SALES OF SECURITIES "AGAINST THE BOX."

      If  shareholders  of a Fund  approve  this  proposal,  the Fund's  current
fundamental  policy  relating to the  purchase of  securities  on margin will be
revised so that a Fund may not:

      SELL  SECURITIES  SHORT  OR  PURCHASE  SECURITIES  ON  MARGIN,  EXCEPT  AS
      PERMITTED  UNDER THE 1940 ACT, AS AMENDED,  AND AS INTERPRETED OR MODIFIED
      BY REGULATORY AUTHORITY HAVING JURISDICTION, FROM TIME TO TIME.

      DISCUSSION OF PROPOSED  POLICY.  Section 12 of the 1940 Act authorizes the
SEC to  regulate  two  trading  practices  that may result in  leverage:  margin
purchases  and short sales.  The SEC has not adopted any rules under Section 12,
but instead has  regulated  margin  purchases  and short sales under Section 18,
which limits the ability of the Funds to engage in leverage through the issuance
of  "senior  securities."  The  revised  policy  will  permit  the Funds to sell
securities  short  and  purchase  securities  on margin  to the  fullest  extent
permitted by the 1940 Act and related interpretations, as in effect from time to
time.

      Certain  widely used  investment  practices that involve a commitment by a
fund to deliver money or securities in the future are not  considered by the SEC
to be  senior  securities.  These  include  repurchase  and  reverse  repurchase
agreements,  dollar rolls, options, futures and forward contracts, provided that
in each case a fund segregates cash or liquid  securities in an amount necessary
to pay the  obligation or the fund holds an offsetting  commitment  from another
party.  The revised  policy  will not affect the Funds'  existing  abilities  to
engage in these practices. Similarly, the revised policy will be interpreted not
to prevent collateral  arrangements with respect to swaps,  options,  forward or
futures contracts or other  derivatives,  or the posting of initial or variation
margin.

EACH BOARD OF DIRECTORS, INCLUDING ALL OF THE INDEPENDENT DIRECTORS, UNANIMOUSLY
RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" PROPOSAL 1-C.

REQUIRED VOTE

      Approval of the change in  fundamental  policies,  with respect to each of
Proposals  1-A,  1-B and 1-C,  will  require  the  approval  of the holders of a
majority of the Fund's outstanding voting securities,  voting as a single class,
and  approval of the holders of a majority of the Fund's  outstanding  shares of
Preferred  Stock,  voting  as a  separate  class.  A  "majority  of  the  Fund's
outstanding  voting  securities" for this purpose means the lesser of (1) 67% or
more of the Shares of Common Stock and Shares of Preferred  Stock,  present at a
meeting of  shareholders,  voting as a single class, if the holders of more than
50% of such Shares are present or  represented  by proxy at the meeting,  or (2)
more than 50% of the outstanding  Shares of Common Stock and outstanding  Shares
of  Preferred  Stock,  voting  as a  single  class.  A  majority  of the  Fund's
outstanding  Shares of  Preferred  Stock for this  purpose  is  determined  in a
similar  manner,  by  applying  the  percentages  in the  previous  sentence  to
outstanding Shares of Preferred Stock.

        PROPOSAL 2: APPROVAL OF AN AMENDED INVESTMENT ADVISORY AGREEMENT

      At the  Meetings,  you will be asked to approve an  amended  and  restated
investment  advisory agreement (each, an "Amended Investment Advisory Agreement"
and collectively,  the "Amended  Investment Advisory  Agreements")  between your
Fund  and the  Adviser.  The  Adviser  currently  provides  investment  advisory
services to each Fund under investment advisory  agreements  currently in effect
(each, a "Current Investment Advisory Agreement" and collectively,  the "Current
Investment  Advisory  Agreements"),  and is responsible  for each Fund's overall
investment  strategy and its  implementation.  PFD's Current Investment Advisory
Agreement is dated as of


                                        7



January 24, 1991 and was last approved by PFD  shareholders on January 22, 1991,
in  connection  with  the  initial  approval  of the  Agreement.  PFO's  Current
Investment  Advisory  Agreement  is dated as of  February  5,  1992 and was last
approved by PFO shareholders on February 3, 1992, in connection with the initial
approval of the Agreement. The Board of Directors of each Fund last approved for
continuance of an additional year the Current Investment  Advisory Agreements on
January 29, 2008.  The form of Amended  Investment  Advisory  Agreement  for the
Funds, marked to show changes from the Current Investment Advisory Agreement, is
attached  hereto as EXHIBIT A, and the  description  of the  Amended  Investment
Advisory  Agreements in this Joint Proxy  Statement is qualified in its entirety
by reference to EXHIBIT A.

TERMS OF THE CURRENT INVESTMENT ADVISORY AGREEMENTS

      Under the terms of the Current Investment Advisory Agreements, the Adviser
is  responsible  for making  investment  decisions  and  placing  orders for the
purchase  and sale of a Fund's  investments  directly  with the  issuers or with
brokers or dealers  selected by the Adviser at its discretion.  The Adviser also
furnishes to the Boards, which have overall  responsibility for the business and
affairs of the Funds,  periodic  reports on the  investment  performance  of the
Funds.

      The Adviser is obligated to manage a Fund in  accordance  with  applicable
laws and  regulations.  Consistent  with the  requirements  of the 1940 Act, the
Current Investment Advisory Agreements provide that the Adviser generally is not
liable  to a Fund  for any  error in  judgment,  mistake  of law,  or any act or
omission or any loss suffered by a Fund in connection with the Agreement, except
by  reason  of  willful  misfeasance,  bad  faith  or  gross  negligence  in the
performance  of its  duties  or by  reason  of  its  reckless  disregard  of its
obligations and duties under the Agreement.

      The Current  Investment  Advisory  Agreements  may be terminated by a Fund
without  penalty upon 60 days' written notice by the Boards of Directors or by a
vote of the holders of a majority of the Fund's  outstanding  Shares, or upon 60
days' written notice by the Adviser.  The Current Investment Advisory Agreements
terminate  automatically in the event of an "assignment" (as defined in the 1940
Act).

      For the  fiscal  year  ended  November  30,  2007,  PFD paid  the  Adviser
$1,312,364  in advisory  fees,  and PFO paid the Adviser  $1,173,308 in advisory
fees.

COMPARISON OF AMENDED  INVESTMENT  ADVISORY  AGREEMENTS  AND CURRENT  INVESTMENT
ADVISORY AGREEMENTS

      The only change to the Current Investment  Advisory Agreements is to amend
the  description  of the  Adviser's  fee to clarify  that any debt  representing
financial  leverage  will not be  considered  a  liability.  Section 6(a) of the
Current Investment  Advisory Agreement of each Fund describes the fee to be paid
to the Adviser as follows:

      IN CONSIDERATION OF THE SERVICES RENDERED PURSUANT TO THIS AGREEMENT,  THE
      [FUND] WILL PAY THE ADVISER  AFTER THE END OF THE  CALENDAR  MONTH  DURING
      WHICH THE CLOSING DATE (AS DEFINED BELOW) OCCURS AND AFTER THE END OF EACH
      CALENDAR MONTH THEREAFTER A FEE FOR THE PREVIOUS MONTH COMPUTED MONTHLY AT
      THE  ANNUAL  RATE OF .625 OF 1.00% ON THE  [FUND]'S  AVERAGE  MONTHLY  NET
      ASSETS UP TO $100 MILLION AND .50 OF 1.00% ON THE [FUND]'S AVERAGE MONTHLY
      NET ASSETS OF $100 MILLION OR MORE.

      The Current  Investment  Advisory  Agreements  do not define the term "net
assets"  but  instead  refer  to the  description  as  included  in  the  Funds'
registration statements. The Funds' registration statements, dated as of January
24, 1991 for PFD and February 6, 1992 for PFO, each define "net assets" to mean,
for purposes of calculating  the advisory fee, the average  monthly value of the
Fund's total assets minus the sum of the Fund's  liabilities,  which liabilities
exclude the aggregate liquidation preference of the outstanding Preferred Stock,
and accumulated dividends, if any, on the Preferred Stock.

      If approved by shareholders,  the Amended Investment Advisory Agreement of
each Fund will describe the fee to be paid to the Adviser as follows:


                                        8



      IN CONSIDERATION OF THE SERVICES RENDERED PURSUANT TO THIS AGREEMENT,  THE
      [FUND] WILL PAY THE ADVISER AFTER THE END OF EACH CALENDAR MONTH A FEE FOR
      THE PREVIOUS MONTH COMPUTED MONTHLY AT THE ANNUAL RATE OF .625 OF 1.00% ON
      THE [FUND]'S  AVERAGE  MONTHLY TOTAL MANAGED ASSETS UP TO $100 MILLION AND
      .50 OF 1.00% ON THE [FUND]'S  AVERAGE MONTHLY TOTAL MANAGED ASSETS OF $100
      MILLION OR MORE. FOR PURPOSES OF CALCULATING  SUCH FEE, THE [FUND]'S TOTAL
      MANAGED ASSETS MEANS THE TOTAL ASSETS OF THE [FUND]  (INCLUDING ANY ASSETS
      ATTRIBUTABLE  TO ANY  [FUND]  AUCTION  RATE  PREFERRED  STOCK  THAT MAY BE
      OUTSTANDING OR OTHERWISE  ATTRIBUTABLE  TO THE USE OF LEVERAGE)  MINUS THE
      SUM  OF  ACCRUED  LIABILITIES  (OTHER  THAN  DEBT,  IF  ANY,  REPRESENTING
      FINANCIAL LEVERAGE). FOR PURPOSES OF DETERMINING TOTAL MANAGED ASSETS, THE
      LIQUIDATION  PREFERENCE OF THE [FUND]  PREFERRED STOCK IS NOT TREATED AS A
      LIABILITY.

      As described in the Funds' registration statements, the calculation of net
assets for purposes of  calculating  the advisory  fees payable  pursuant to the
Current  Investment  Advisory  Agreements  excludes the liquidation value of any
outstanding  preferred  stock,  including the Preferred  Stock,  from the Funds'
liabilities.  However,  debt  representing  financial  leverage is not similarly
excluded.  Therefore,  the amount of outstanding debt would reduce the amount of
Fund  assets  on which the  Adviser's  fee is paid.  At the time the Funds  were
launched  it was not  contemplated  that  the  Funds  would  engage  in any debt
financings and the Funds' fundamental  investment policies in this area severely
limited the Funds'  ability to do so. If the  changes in the Funds'  fundamental
investment policies on borrowing,  issuing senior debt securities and purchasing
securities on margin as described in Proposal 1 are approved, however, the Funds
could borrow up to the limits  permitted under  applicable law. Any such amounts
borrowed or the proceeds of any debt issuance would,  like the Preferred  Stock,
form part of the total assets being actively managed by the Adviser.  The Boards
of Directors are of the view that it is fair and  appropriate for the Adviser to
be paid for doing so and that there is no reason to make a distinction  based on
whether a Fund is leveraged with preferred  stock or with debt.  Therefore,  the
Boards are  proposing  that the  provision  in the Current  Investment  Advisory
Agreements  concerning the calculation of the advisory fee be amended to exclude
from liabilities,  in addition to the liquidation value of preferred stock, debt
representing  financial leverage, as is typical for closed-end funds such as the
Funds.

      If the  proposed  change in the fee  language  of the  Amended  Investment
Advisory  Agreements had been in effect during a Fund's most recently  completed
fiscal year, there would have been no change in the fees paid by the Fund to the
Adviser  because  the Fund did not borrow  during  that  time.  There will be no
increase in the fees payable to the Adviser unless or until action is taken that
increases a Fund's assets under management  through  borrowing or other forms of
debt  leverage  in  amounts   greater  than  the  amount  of  assets   currently
attributable to a Fund's outstanding  Preferred Stock. If the amount of a Fund's
assets under management  increases through debt financing,  this could result in
an  increase  in the  amount of the fees  payable  by a Fund  under the  Amended
Investment Advisory Agreement.  However,  the net impact on fees would depend on
the net increase in Fund assets that would result from those  activities,  which
cannot be predicted.

BOARD CONSIDERATION OF THE AMENDED INVESTMENT ADVISORY AGREEMENTS

      In  connection  with  the  decision  of each  Board of  Directors  to seek
shareholder approval of amendments of the Funds' fundamental investment policies
regarding  borrowing,  issuing senior  securities  and purchasing  securities on
margin,  it was  determined  that,  as  currently  formulated,  the language for
calculating  the fees paid by the Funds to the  Adviser was not written in a way
that  permitted  the  calculation  of net assets to exclude  debt  leverage as a
liability.  The current fee formulation provides that fees shall be based on the
Funds' "net assets," and Fund  liabilities  did not exclude debt leverage in the
way that the liquidation value of Preferred Stock had been excluded.  The Boards
considered  this omission to be related to the Funds' initial  structure,  which
did not contemplate debt financing.

      In  considering  this  matter,  each  Board of  Directors  noted  that the
proceeds of any  borrowings  used by the Funds could increase the amount of Fund
assets for which the Adviser would be expected to provide  services to the Fund.
In addition to being attentive to the various technical concerns in dealing with
senior  securities  and  borrowings,  each Board noted that the Adviser would be
responsible for identifying additional investment opportunities for the proceeds
of these securities and borrowings and for managing the additional  investments.
Each Board also determined that the original  formulation of the fee language in
the Current Investment Advisory Agreement was designed to compensate the Adviser
on the basis of the amount of assets as to which it makes investment  decisions.
Each Board  noted  that they had  determined  to seek  shareholder  approval  to
broaden the


                                        9



Funds' authority to borrow,  issue senior securities and purchase  securities on
margin.  The Boards of Directors have determined those actions to be in the best
interests of the Funds and the Funds'  shareholders  (see Proposals 1-A, 1-B and
1-C). In the view of the Boards of Directors, it would be unfair to take actions
that  increase  assets  which the Adviser is obliged by the  Current  Investment
Advisory Agreements to manage without  compensating the Adviser for doing so. In
this regard,  the Boards of Directors  considered that many funds that engage in
leveraging  activity provide for compensation of their investment adviser on the
basis of total managed assets, including Flaherty & Crumrine/Claymore  Preferred
Securities  Income Fund  Incorporated  and  Flaherty &  Crumrine/Claymore  Total
Return Fund Incorporated,  two other closed-end funds managed by the Adviser. In
considering  this matter,  the  Independent  Directors  had the  opportunity  to
consult  with  counsel to the  Directors  who are not  "interested  persons" (as
defined in the 1940 Act) of the Funds or the Adviser  ("Independent  Directors")
regarding the proposed Amended Investment Advisory Agreements.

      At a meeting held on March 13, 2008,  the Board of Directors of each Fund,
including the Independent  Directors  present  in-person at the meeting,  voting
separately,  unanimously  determined to recommend that shareholders of each Fund
approve its Amended Investment Advisory Agreement.

      In their review of the Amended Investment Advisory Agreement, the Board of
Directors of each Fund  assessed the nature,  extent and quality of the services
to be provided to the Fund by the Adviser. In their deliberations, the Boards of
Directors  considered  information received in connection with their most recent
approval of the continuation of the Current Investment  Advisory  Agreement,  in
addition  to  information  provided  by the  Adviser  in  connection  with their
evaluation  of the terms  and  conditions  of the  Amended  Investment  Advisory
Agreement.  The Boards of Directors did not identify any particular  information
that was  all-important  or  controlling,  and  Directors  may  have  attributed
different  weights  to  the  various  factors.   The  Directors   evaluated  all
information  available  to them.  The  Directors,  including  a majority  of the
Independent  Directors,  concluded  that  the  terms of the  Amended  Investment
Advisory Agreements are appropriate,  that the fees to be paid are reasonable in
light of the  services  to be  provided  to the  Funds,  and  that  the  Amended
Investment  Advisory Agreements should be approved and recommended to the Funds'
shareholders.

      NATURE,  EXTENT  AND  QUALITY OF THE  SERVICES  TO BE  PROVIDED  UNDER THE
AMENDED INVESTMENT  ADVISORY  AGREEMENTS.  The Directors  considered the nature,
extent and quality of management  services  proposed to be provided to the Funds
under the Amended Investment Advisory  Agreements.  The Directors took note that
the Adviser  had advised the Boards that there is not  expected to be any change
in the nature,  extent and  quality of services  provided to the Funds and their
shareholders  under the  Amended  Investment  Advisory  Agreements.  The Boards'
evaluation  of the  services  expected to be  provided by the Adviser  took into
account the Directors' knowledge and familiarity gained as Directors of funds in
the Flaherty & Crumrine Fund Family.  The Boards  recognized  that they received
information  at regular  meetings  throughout  the year  regarding  the services
rendered by the Adviser,  noting that these services  included the management of
each Fund's investment program, as well as providing significant  administrative
services beyond what the Current Investment  Advisory Agreements  provided.  The
Directors  also  noted  that  they had  engaged  in an  extensive  review of the
services  provided  to the  Funds by the  Adviser  at the  Boards'  last  annual
contract renewal meeting.

      The Boards  concluded  that,  overall,  it was satisfied  with the nature,
extent and  quality of  services  expected to be provided to the Funds under the
Amended Investment Advisory Agreements.

      INVESTMENT PERFORMANCE. The Directors noted that they received information
throughout  the  year  at  periodic   intervals  with  respect  to  each  Fund's
performance, and had engaged in an extensive review of Fund performance at their
last annual contract renewal  meeting.  As the services to be provided under the
Amended Investment Advisory Agreements in comparison with the Current Investment
Advisory  Agreements  were not  proposed  to be changed in  connection  with the
approval of the Amended Investment  Advisory  Agreements,  the Directors did not
specifically  consider Fund  performance in their  consideration  of the Amended
Investment Advisory Agreements.

      ADVISER PROFITABILITY.  Profitability of the Adviser in providing services
to each Fund under the Amended Investment  Advisory  Agreements was not a factor
considered by the  Directors.  The  Directors  noted that they expect to receive
cost,  expense and  profitability  information at the next annual Board contract
renewal meeting and, thus, be in a position to evaluate at that time whether any
adjustments in Fund fees would be appropriate in connection


                                       10



with a renewal of the Amended Investment Advisory Agreements. The Directors also
recognized that they had reviewed the  profitability  of the Adviser at its last
annual contract renewal meeting.

      ECONOMIES OF SCALE.  The Directors  considered  whether any changes in the
economies  of scale  realized (or  potentially  realized) by the Adviser and any
benefits the Funds may incur from such  economies  of scale were  proposed to be
changed  if the  Amended  Investment  Advisory  Agreements  were  approved.  The
Directors noted that the Funds,  as closed-end  investment  companies,  were not
expected to increase  materially  in size;  thus,  the Adviser would not benefit
from economies of scale.  The Directors  considered  whether  economies of scale
could be realized  because the Adviser  advises  other similar  funds.  Based on
their  experience,   the  Directors  accepted  the  Adviser's  explanation  that
significant  economies of scale would not be realized  because of the complexity
of  managing  preferred  securities  for  separate  funds and other  portfolios.
Nonetheless,  the Directors noted that the Funds' advisory fee schedule declines
as assets increase  beyond a certain level  (commonly known as a  "breakpoint"),
and that breakpoints provide for a sharing with shareholders of benefits derived
as a result of economies of scale arising from  increased  assets.  Accordingly,
the Directors  determined that the existing advisory fee levels reflect possible
economies of scale.

      FEES.  The Directors  considered  the fees to be paid to the Adviser under
the Amended Investment Advisory  Agreements.  The Boards noted that although the
contractual  investment  advisory fee rate payable under each  proposed  Amended
Investment  Advisory Agreement with the Adviser is the same as under the Current
Investment Advisory  Agreement,  the method for calculating the fee is different
because it would exclude from liabilities,  in addition to the liquidation value
of Preferred Stock, debt representing  financial  leverage.  The Directors noted
that the proceeds of any borrowings or other forms of leverage used by the Funds
would increase the amount of Fund assets for which the Adviser would be expected
to provide  services to the Fund, and that the Adviser would be responsible  for
managing such  proceeds.  The Boards noted that the original fee language in the
Current Investment  Advisory  Agreements was designed and intended to compensate
the Adviser on the basis of the amount of assets as to which it makes investment
decisions.  The Boards of  Directors  reviewed  pro forma  fiscal 2007 fees that
would have been paid to the Adviser  under the  calculation  methodology  in the
Current Investment Advisory Agreements and under the Amended Investment Advisory
Agreements,  based on whether the Funds used 100% Preferred  Stocks as leverage,
50% Preferred Stock and 50% debt leverage, and 100% debt leverage. The Boards of
Directors noted that under both the Current Investment  Advisory  Agreements and
the Amended Investment Advisory  Agreements,  pro forma advisory fees would have
remained the same if the Funds used only Preferred  Stock as leverage.  However,
the Boards of Directors  noted that, if the Funds only used debt  leverage,  the
pro  forma  fee paid to the  Adviser  would be  greater  under a Fund's  Amended
Investment  Advisory  Agreement  than it would be under its  Current  Investment
Advisory Agreement,  but that total fees were less than those actually paid when
the  Funds  only used  Preferred  Stock as  leverage.  The  Boards of  Directors
concluded that,  because the rates for advisory  services were the same and that
the new calculation  methodology was reasonable and fair, it was appropriate for
the  Adviser to be  compensated  on the amount of  borrowings,  proceeds of debt
issuances and margin borrowings,  as it would be responsible for managing assets
attributable  to such  amounts.  The  Directors,  including  a  majority  of the
Independent  Directors,  concluded  that the fees to be paid are  reasonable  in
light of the services to be provided to the Funds.  In this  regard,  the Boards
considered  that many funds  that  engage in  leveraging  activity  provide  for
compensation of their  investment  adviser on the basis of total managed assets,
including  Flaherty  &  Crumrine/Claymore   Preferred   Securities  Income  Fund
Incorporated and Flaherty &  Crumrine/Claymore  Total Return Fund  Incorporated,
two other closed-end funds managed by the Adviser.

      CONCLUSION.  After the Independent  Directors of the Funds  deliberated in
executive  session,  the entire Board of Directors of each Fund,  including  the
Independent  Directors,  approved each Amended  Investment  Advisory  Agreement,
concluding that the advisory fee rate was reasonable in relation to the services
provided and that each Amended  Investment  Advisory  Agreement  was in the best
interests of the shareholders.

INFORMATION ABOUT THE ADVISER

      Flaherty & Crumrine serves as the investment adviser to each Fund, and its
business address is 301 E. Colorado Boulevard,  Suite 720, Pasadena,  California
91101. The Adviser,  which was organized in 1983,  specializes in the management
of portfolios of preferred securities, including related hedging activities, for
institutional  investors  and  had  aggregate  assets  under  management,  as of
December  31,  2007  (which  include  the  total  net  assets  of the  Funds) of
approximately $3.67 billion.  The Adviser is registered as an investment adviser
under the


                                       11



Investment  Advisers Act of 1940, as amended.  The Adviser is owned by Donald F.
Crumrine, Robert M. Ettinger, R. Eric Chadwick, Bradford S. Stone, and Robert T.
Flaherty,  each of  whose  address  is 301 E.  Colorado  Boulevard,  Suite  720,
Pasadena, California 91101.

      For the most recently  completed  fiscal year ended November 30, 2007, the
Funds did not pay any brokerage  commissions to any broker  affiliated  with the
Adviser. The Adviser has no affiliates that are engaged in brokerage.

      The names of each  Director  and  Principal  Officer of the Adviser is set
forth below.  The address of each Director and Principal  Officer of the Adviser
is 301 E. Colorado Boulevard, Suite 720, Pasadena, California 91101.

         NAME                                POSITION
  ------------------       ----------------------------------------------------
  Donald F. Crumrine                Director and Chairman of the Board
  Robert M. Ettinger                      Director and President
   R. Eric Chadwick                    Director and Vice President
    Chad C. Conwell            Chief Compliance Officer and Vice President
   Bradford S. Stone                   Director and Vice President
     Rick J. Seto                             Vice President
   Laurie C. Lodolo        Assistant Compliance Officer, Secretary, and Account
                                            Administrator

OTHER FUNDS ADVISED BY THE ADVISER AND FEE SCHEDULES

      The following  table lists certain  information  regarding funds for which
the Adviser provides investment advisory services.  All of the information below
is given as of the end of the last fiscal year of each fund.



                                                    TOTAL NET             INVESTMENT ADVISORY FEE
                                                    ASSETS ($        (AS A PERCENTAGE OF AVERAGE DAILY
                       FUND                         MILLIONS)               NET ASSETS) (%) (1)
-------------------------------------------------   ----------   ------------------------------------------
                                                           
Flaherty & Crumrine/Claymore Preferred Securities    1,363,177   0.525 of 1.00% on the first $200 million
Income Fund Incorporated                                         of the fund average weekly total managed
                                                                 assets, .45 of 1.00% on the next $300
                                                                 million of the fund's average weekly total
                                                                 managed assets and .40 of 1.00% on the
                                                                 fund's average weekly total managed assets
                                                                 above $500 million

Flaherty & Crumrine/Claymore Total Return Fund         321,237   0.575 of 1.00% on the first $200 million
Incorporated                                                     of the fund's average weekly total managed
                                                                 assets, 0.50 of 1.00% on the next $300
                                                                 million of the fund's average weekly total
                                                                 managed assets and 0.45 of 1.00% on the
                                                                 fund's average weekly total managed assets
                                                                 above $500 million


(1)   For purposes of  calculating  such fee, the fund's  total  managed  assets
      means the total assets of the fund  (including any assets  attributable to
      any fund auction rate preferred stock that may be outstanding or otherwise
      attributable to the use of leverage) minus the sum of accrued  liabilities
      (other than debt, if any, representing  financial leverage).  For purposes
      of determining total managed assets, the liquidation preference of auction
      rate preferred stock is not treated as a liability.

REQUIRED VOTE

      To become effective for a Fund, the Amended Investment  Advisory Agreement
must be approved by the holders of a majority of the Fund's  outstanding  voting
securities,  voting as a single  class.  A "majority  of the Fund's  outstanding
voting  securities"  for this purpose means the lesser of (1) 67% or more of the
Shares of Common Stock


                                       12



and Shares of Preferred Stock, present at a meeting of shareholders, voting as a
single  class,  if the  holders of more than 50% of such  Shares are  present or
represented  by proxy at the  meeting,  or (2) more than 50% of the  outstanding
Shares of Common Stock and outstanding  Shares of Preferred  Stock,  voting as a
single class.

EACH BOARD OF DIRECTORS, INCLUDING ALL OF THE INDEPENDENT DIRECTORS, UNANIMOUSLY
RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" PROPOSAL 2.

                             ADDITIONAL INFORMATION

ADMINISTRATOR

      PFPC  acts  as the  administrator  to each  Fund  and is  located  at 4400
Computer Drive, Westborough, Massachusetts 01581.

COMPLIANCE WITH THE SECURITIES EXCHANGE ACT OF 1934

      Section  16(a) of the 1934 Act and  Section  30(h) of the 1940 Act require
each Fund's Directors and officers,  certain persons  affiliated with Flaherty &
Crumrine and persons who beneficially own more than 10% of a registered class of
each Fund's  securities,  to file reports of ownership  and changes of ownership
with the SEC, the NYSE and each Fund.  Directors,  officers and greater-than-10%
shareholders are required by SEC regulations to furnish each Fund with copies of
such forms they file.  Based  solely upon its review of the copies of such forms
received by it and written  representations  from certain of such persons,  each
Fund believes that during 2007, all such filing requirements  applicable to such
persons were met.

BROKER NON-VOTE AND ABSTENTIONS

      A  proxy  which  is  properly   executed  and  returned   accompanied   by
instructions to withhold  authority to vote represents an abstention or a broker
"non-vote"  (i.e.,   shares  held  by  brokers  or  nominees  as  to  which  (i)
instructions  have not been received from the  beneficial  owners or the persons
entitled  to vote and (ii) the  broker or  nominee  does not have  discretionary
voting power on a particular matter). Proxies that reflect abstentions or broker
non-votes  (collectively,  "abstentions")  will be  counted  as shares  that are
present and  entitled to vote at the meeting  for  purposes of  determining  the
presence of a Quorum.  With  respect to  Proposals 1 and 2,  abstentions  do not
constitute a vote "for" the proposal and will instead count as a vote  "against"
the proposal.

                    OTHER MATTERS TO COME BEFORE THE MEETING

      Each Fund does not intend to present any other  business  at the  relevant
Meeting,  nor is any Fund  aware  that any  shareholder  intends  to do so.  If,
however,  any other matters are properly brought before the Meeting, the persons
named in the  accompanying  form of proxy will vote thereon in  accordance  with
their judgment.

                         EXPENSES OF PROXY SOLICITATION

      The total expenses of the Meetings,  including the solicitation of proxies
and the expenses incurred in connection with the preparation of this Joint Proxy
Statement, are approximately $[______]. The Adviser, on behalf of the Funds, has
retained  [_____________________],  a proxy  solicitation firm, to assist in the
solicitation  of  proxies.  It is  anticipated  that  [_________]  will  be paid
approximately  $[______] for such solicitation  services (plus reimbursements of
out-of-pocket  expenses),  to be borne by the Funds.  [____________] may solicit
proxies personally and by telephone.

                                 VOTING RESULTS

      Each Fund will  advise  its  shareholders  of the  voting  results  of the
matters  voted  upon  at  its  Meeting  in  its  next   Semi-Annual   Report  to
Shareholders.


                                       13



     NOTICE TO BANKS, BROKER/DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES

      Please advise the Funds whether other persons are the beneficial owners of
the Funds'  Shares for which proxies are being  solicited  from you, and, if so,
the number of copies of the Joint Proxy Statement and other soliciting  material
you wish to receive in order to supply  copies to the  beneficial  owners of the
Funds' Shares.

IT IS  IMPORTANT  THAT  PROXIES BE RETURNED  PROMPTLY.  SHAREHOLDERS  WHO DO NOT
EXPECT TO ATTEND THE MEETINGS ARE THEREFORE  URGED TO COMPLETE,  SIGN,  DATE AND
RETURN  ALL  PROXY  CARDS  AS  SOON AS  POSSIBLE  IN THE  ENCLOSED  POSTAGE-PAID
ENVELOPE.

SEPARATE  PROXY  CARDS  ARE  ENCLOSED  FOR EACH  FUND IN WHICH  YOU OWN  SHARES.
SHAREHOLDERS  WHO DO NOT EXPECT TO ATTEND THE SPECIAL  MEETINGS ARE REQUESTED TO
COMPLETE,  SIGN AND DATE THE  ENCLOSED  PROXY  CARD(S),  OR VOTE BY TELEPHONE OR
INTERNET.  The proxy card(s) should be returned in the enclosed envelope,  which
needs no postage if mailed in the continental  United States.  Instructions  for
the proper execution of proxies are set forth on the inside cover.


                                       14



                       This Page Left Blank Intentionally.



                                    EXHIBIT A

                                     FORM OF

               AMENDED AND RESTATED INVESTMENT ADVISORY AGREEMENT

                                                      [______ __, ____]

                    As amended and restated [_____, __], 2008

Flaherty & Crumrine Incorporated
301 E. Colorado Boulevard
Suite 720
Pasadena, California 91101

Ladies and Gentlemen:

            [Fund] (the "Company"), a corporation organized under the laws of
the State of Maryland, herewith confirms its agreement with Flaherty & Crumrine
Incorporated (the "Adviser"), a corporation organized under the laws of the
State of California, as follows:

            1.    INVESTMENT DESCRIPTION; APPOINTMENT

            The Company desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the limitations
specified in its Articles of Incorporation, as the same may from time to time be
amended, and in its Registration Statement as from time to time in effect, and
in such manner and to such extent as may from time to time be approved by the
Board of Directors of the Company. Copies of the Company's Registration
Statement and Articles of Incorporation, as amended, have been or will be
submitted to the Adviser. The Company agrees to provide copies of all amendments
to the Company's Registration Statement and Articles of Incorporation to the
Adviser on an on-going basis. The Company desires to employ and hereby appoints
the Adviser to act as investment adviser to the Company. The Adviser accepts the
appointment and agrees to furnish the services described herein for the
compensation set forth below.

            2.    SERVICES AS INVESTMENT ADVISER

            Subject to the supervision and direction of the Board of Directors
of the Company, the Adviser will (a) act in accordance with the Company's
Articles of Incorporation, the Investment Company Act of 1940, and the
Investment Advisers Act of 1940, as the same may from time to time be amended,
(b) manage the Company's portfolio on a discretionary basis in accordance with
its investment objective and policies as stated in the Company's Registration
Statement as from time to time in effect, (c) make investment decisions and
exercise voting rights in respect of portfolio securities for the Company, (d)
place purchase and sale orders on behalf of the Company and (e) employ
professional portfolio managers and securities analysts to provide research
services to the Company. The Adviser is authorized to retain the services of an
economic consultant at the expense of the Fund to provide such services with
respect to the Company as the parties to any agreement may agree upon. In
providing these services, the Adviser will provide investment research and
supervision of the Company's evaluation and, if appropriate, sale and
reinvestment of the Company's assets. In addition, the Adviser will furnish the
Company with whatever statistical information the Company may reasonably request
with respect to the securities that the Company may hold or contemplate
purchasing.



            3.    BROKERAGE

            In executing transactions for the Company and selecting brokers or
dealers, the Adviser will use its best efforts to seek the best overall terms
available. In assessing the best overall terms available for any Company
transaction, the Adviser will consider all factors it deems relevant including,
but not limited to, breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker or
dealer and the reasonableness of any commission for the specific transaction and
on a continuing basis. In selecting brokers or dealers to execute any
transaction and in evaluating the best overall terms available, the Adviser may
consider the brokerage and research services (as those terms are defined in
Section 28(e) of the Securities and Exchange Act of 1934) provided to the
Company and/or other accounts over which the Adviser or an affiliate exercises
investment discretion.

            4.    INFORMATION PROVIDED TO THE COMPANY

            The Adviser will use its best efforts to keep the Company informed
of developments materially affecting the Company, and will, on its own
initiative, furnish the Company from time to time with whatever information the
Adviser believes is appropriate for this purpose.

            5.    STANDARD OF CARE

            The Adviser shall exercise its best judgment in rendering the
services described in paragraphs 2, 3, and 4 above. The Adviser shall not be
liable for any error of judgment or mistake of law or for any act or omission or
any loss suffered by the Company in connection with the matters to which this
Agreement relates, provided that nothing herein shall be deemed to protect or
purport to protect the Adviser against any liability to the Company or its
shareholders to which the Adviser would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its obligations
and duties under this Agreement ("disabling conduct"). The Company will
indemnify the Adviser against, and hold it harmless from, any and all losses,
claims, damages, liabilities or expenses (including reasonable counsel fees and
expenses), including any amounts paid in satisfaction of judgments, in
compromise or as fines or penalties, not resulting from disabling conduct by the
Adviser. Indemnification shall be made only following: (i) a final decision on
the merits by a court or other body before whom the proceeding was brought that
the Adviser was not liable by reason of disabling conduct or (ii) in the absence
of such a decision, a reasonable determination, based upon a review of the
facts, that the Adviser was not liable by reason of disabling conduct by (a) the
vote of a majority of a quorum of directors of the Company who are neither
"interested persons" of the Company nor parties to the proceeding
("disinterested non-party directors") or (b) an independent legal counsel in a
written opinion. The Adviser shall be entitled to advances from the Company for
payment of the reasonable expenses incurred by it in connection with the matter
as to which it is seeking indemnification in the manner and to the fullest
extent permissible under the Maryland General Corporation law. The Adviser shall
provide to the Company a written affirmation of its good faith belief that the
standard of conduct necessary for indemnification by the Company has been met
and a written undertaking to repay any such advance if it should ultimately be
determined that the standard of conduct has not been met. In addition, at least
one of the following additional conditions shall be met: (a) the Adviser shall
provide a security in form and amount acceptable to the Company for its
undertaking; (b) the Company is insured against losses arising by reason of the
advance; or (c) a majority of a quorum of disinterested non-party directors, or
independent legal counsel, in a written opinion, shall have determined, based on
a review of facts readily available to the Company at the time the advance is
proposed to be made, that there is reason to believe that the Adviser will
ultimately be found to be entitled to indemnification.

            6.    COMPENSATION

            (a) In consideration of the services rendered pursuant to this
Agreement, the Company will pay the Adviser after the end of each calendar month
a fee for the previous month computed monthly at the annual rate of .625 of
1.00% on the Company's average monthly total managed assets up to $100 million
and .50 of 1.00% on the Company's average monthly total managed assets of $100
million or more.


                                       17



For purposes of calculating such fee, the Company's total managed assets means
the total assets of the Company (including any assets attributable to any
Company auction rate preferred stock that may be outstanding or otherwise
attributable to the use of leverage) minus the sum of accrued liabilities (other
than debt, if any, representing financial leverage). For purposes of determining
total managed assets, the liquidation preference of the Company preferred stock
is not treated as a liability.

            (b) Upon any termination of the Agreement before the end of a month,
the fee for such part of that month shall be prorated according to the
proportion that such period bears to the full monthly period and shall be
payable upon the date of termination of this Agreement. For the purpose of
determining fees payable to the Adviser, the value of the Company's average
monthly net assets shall be computed at the times and in the manner specified in
the Company's Registration Statement as from time to time in effect.

            7.    EXPENSES

            The Adviser will bear all expenses in connection with the
performance of its services under this Agreement, including compensation of an
office space for its officers and employees connected with investment and
economic research, trading and investment management and administration of the
Company, as well as the fees of all directors of the Company who are affiliated
with the Adviser or any of its affiliates; provided that the Company shall
reimburse the Adviser for the travel and out-of-pocket expenses or an
appropriate portion thereof of directors, officers and employees of the Adviser
in connection with attendance at meetings of the Board of Directors of the Fund
of any committee thereof. The Company will bear all other expenses to be
incurred in its operation other than those that other parties have agreed to
bear, including: organizational expenses; taxes, interest, brokerage costs and
commissions and stock exchange fees; fees of directors of the Company who are
not officers, directors or employees of the Adviser; Securities and Exchange
Commission fees; state Blue Sky qualification fees; charges of the custodian,
any subcustodians and transfer and dividend-paying agent; expenses in connection
with the Company's Dividend Reinvestment and Cash Purchase Plan; insurance
premiums; outside auditing and legal expenses; costs of maintenance of the
Company's existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of printing stock
certificates; costs of shareholders' reports and meetings of the shareholders of
the Company and of the officers or Board of Directors of the Company; membership
fees in trade associations; stock exchange listing fees and expenses; expenses
in connection with auctions of shares of auction rate preferred stock proposed
to be issued by the Company; litigation and other extraordinary or non-recurring
expenses.

            8.    SERVICES TO OTHER COMPANIES OR ACCOUNTS

            The Company understands that the Adviser now acts, will continue to
act or may in the future act, as investment adviser to fiduciary and other
managed accounts or as investment adviser to one or more other investment
companies, and the Company has no objection to the Adviser so acting, provided
that whenever the Company and one or more other accounts or investment companies
advised by the Adviser have available funds for investment, investments suitable
and appropriate for each will be allocated in accordance with procedures
believed by the Adviser to be equitable to each entity. Similarly, opportunities
to sell securities will be allocated in an equitable manner. The Company
recognizes that in some cases this procedure may adversely affect the size of
the position obtained for or disposed of by the Company. In addition, the
Company understands that the persons employed by the Adviser to assist in the
performance of the Adviser's duties hereunder will not devote their full time to
such service and nothing contained herein shall be deemed to limit or restrict
the right of the Adviser or any affiliate of the Adviser to engage in and devote
time and attention to other business or to render services or whatever kind or
nature.

            9.    TERM OF AGREEMENT

            This Agreement shall become effective as of the date the Company's
Registration Statement is declared effective by the Securities and Exchange
Commission and shall continue for an initial two-year term and shall continue
thereafter so long as such continuance is specifically approved at least
annually by (i) the Board of Directors of the Company or (ii) a vote of a
"majority" (as defined in the Investment Company Act of 1940, as amended) of the
Company's outstanding voting securities, provided that in either event the
continuance is also approved by a majority of the Board of Directors who are not
"interested persons" (as defined in said Act) of any


                                       18



party to this Agreement, by vote cast in person at a meeting called for the
purpose of voting on such approval. This Agreement is terminable, without
penalty, on 60 days' written notice, by the Board of Directors of the Company or
by vote of holders of a majority of the Company's shares, or upon 60 days'
written notice, by the Adviser. This Agreement will also terminate automatically
in the event of its assignment (as defined in said 1940 Act).

            10.   ENTIRE AGREEMENT

            This Agreement constitutes the entire agreement between the parties
            hereto.

            11.   GOVERNING LAW

            This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York without giving effect to the
conflicts of laws principles thereof.

            If the foregoing accurately sets forth our agreement, kindly
indicate your acceptance hereof by signing and returning the enclosed copy
hereof.

                                                  Very truly yours.

                                                  [Fund]

                                                  By: _________________
                                                      Title:

Accepted:

FLAHERTY & CRUMRINE INCORPORATED

By: _______________
    Title:


                                       19

                o PLEASE FOLD ALONG THE PERFORATION, DETACH AND
              RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. o
--------------------------------------------------------------------------------

FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND INCORPORATED

--------------------------------------------------------------------------------
PROXY -- FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND INCORPORATED
--------------------------------------------------------------------------------

PROXY SOLICITED BY BOARD OF DIRECTORS

The  undersigned  holder  of  shares  of Common  Stock of  Flaherty  &  Crumrine
Preferred Income  Opportunity Fund Incorporated,  a Maryland  incorporation (the
"Fund"),  hereby  appoints Donald F. Crumrine,  Robert M. Ettinger,  Teresa M.R.
Hamlin and Emily H. Harris, attorneys and proxies for the undersigned, each with
full powers of  substitution  and revocation to represent the undersigned and to
vote  at the  Special  Meeting  of  Shareholders  of the  Fund to be held at the
offices of Flaherty & Crumrine  Incorporated,  301 E. Colorado Boulevard,  Suite
720,  Pasadena,  California  91101,  at 9:00 a.m. PT, on May 21,  2008,  and any
adjournments  or  postponements  thereof.  The undersigned  hereby  acknowledges
receipt  of the  Notice of  Special  Meeting  and  Proxy  Statement  and  hereby
instructs said attorneys and proxies to vote said shares as indicated hereon. In
their  discretion the proxies are authorized to vote upon such other business as
may  properly  come before the  Meeting.  A majority of the proxies  present and
acting at the  Meeting in person or by  substitute  (or, if only one shall be so
present,  then  that  one)  shall  have and may  exercise  all of the  power and
authority of said proxies  hereunder.  The undersigned  hereby revokes any proxy
previously given.

-----------                                                          -----------
SEE REVERSE                                                          SEE REVERSE
   SIDE            CONTINUED AND TO BE SIGNED ON REVERSE SIDE           SIDE
-----------                                                          -----------






                                                                                            
                                                                              [BAR CODE]

            FLAHERTY & CRUMRINE PREFERRED
            INCOME OPPORTUNITY FUND INCORPORATED
                                                                              [BAR CODE]                                  C123456789

                                                                  000004      000000000.000000 ext      000000000.000000 ext
                                                                              000000000.000000 ext      000000000.000000 ext
[BAR CODE]  MR A SAMPLE                                                       000000000.000000 ext      000000000.000000 ext
            DESIGNATION (IF ANY)
            ADD 1
            ADD 2
            ADD 3
            ADD 4
            ADD 5
            ADD 6

            [IMAGE]

Using a BLACK INK pen, mark your votes with an X
as shown in this example. Please do not write outside
the designated areas.                                       [X]

------------------------------------------------------------------------------------------------------------------------------------
SPECIAL MEETING PROXY CARD
------------------------------------------------------------------------------------------------------------------------------------
                o PLEASE FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. o
------------------------------------------------------------------------------------------------------------------------------------

1-A  Revise the Fundamental Policy Relating to Borrowing Money

          FOR     WITHHOLD      ABSTAIN

          [ ]       [ ]           [ ]


1-B    Approval of Revised Fundamental Policy on Issuing Senior Securities

         FOR      WITHHOLD      ABSTAIN

         [ ]        [ ]           [ ]

1-C    Approval of Revised Fundamental Policy on Purchasing Securities on Margin

         FOR      WITHHOLD      ABSTAIN

         [ ]        [ ]           [ ]


2      Approve an Amended Investment Advisory Agreement

         FOR      WITHHOLD      ABSTAIN

         [ ]        [ ]           [ ]



      THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS. THIS PROXY, IF
      PROPERLY  EXECUTED,  WILL BE VOTED IN THE MANNER DIRECTED BY THE THE BOARD
      OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS. IF NO DIRECTION IS MADE,
      THIS PROXY WILL BE VOTED FOR THE PROPOSALS.

   PLEASE REFER TO THE PROXY STATEMENT FOR A DISCUSSION OF THE PROPOSALS.

   NON-VOTING ITEMS

CHANGE OF ADDRESS -- Please print new address below.
------------------------------------------------------------------------------------------------------------------------------------

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

   AUTHORIZED SIGNATURES -- THIS SECTION MUST BE COMPLETED FOR YOUR VOTE TO BE COUNTED. -- DATE AND SIGN BELOW

Please sign exactly as name(s) appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator,
corporate officer, trustee, guardian, or custodian, please give full title.

Date (mm/dd/yyyy) -- Please print     Signature 1 -- Please keep signature     Signature 2 -- Please keep signature
date below.                           within the box.                          within the box.
-----------------------------------   --------------------------------------   -----------------------------------------------------
         /           /
-----------------------------------   --------------------------------------   -----------------------------------------------------

                                      C 1234567890                     J N T   MR A SAMPLE (THIS AREA IS SET UP TO ACCOMMODATE
                                                                               140 CHARACTERS) MR A SAMPLE AND MR A SAMPLE AND
                                                                               MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND
[IMAGE]          [BAR CODE]           1 0 A V                  0 1 6 3 8 1 1   MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND   +


(STOCK#)           00U5CC




                 o PLEASE FOLD ALONG THE PERFORATION, DETACH AND
              RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. o
--------------------------------------------------------------------------------

FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND INCORPORATED

--------------------------------------------------------------------------------
PROXY -- FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND INCORPORATED
--------------------------------------------------------------------------------

PROXY SOLICITED BY BOARD OF DIRECTORS

The  undersigned  holder of shares of  Preferred  Stock of  Flaherty  & Crumrine
Preferred Income  Opportunity  Fund  Incorporated,  a Maryland  corporation (the
"Fund"),  hereby  appoints Donald F. Crumrine,  Robert M. Ettinger,  Teresa M.R.
Hamlin and Emily H. Harris, attorneys and proxies for the undersigned, each with
full powers of substitution and revocation,  to represent the undersigned and to
vote on behalf  of the  undersigned  all  shares of  Preferred  Stock  which the
undersigned is entitled to vote at the Special  Meeting of  Shareholders  of the
Fund to be held at the  offices  of  Flaherty &  Crumrine  Incorporated,  301 E.
Colorado Boulevard,  Suite 720, Pasadena,  California 91101, at 9:00 a.m. PT, on
May 21, 2008, and any  adjournments or  postponements  thereof.  The undersigned
hereby acknowledges receipt of the Notice of Special Meeting and Proxy Statement
and hereby instructs said attorneys and proxies to vote said shares as indicated
hereon.  In their  discretion the proxies are authorized to vote upon such other
business  as may  properly  come before the  Meeting.  A majority of the proxies
present  and acting at the Meeting in person or by  substitute  (or, if only one
shall be so present, then that one) shall have and may exercise all of the power
and authority of said proxies  hereunder.  The  undersigned  hereby  revokes any
proxy previously given.

-----------                                                          -----------
SEE REVERSE                                                          SEE REVERSE
   SIDE            CONTINUED AND TO BE SIGNED ON REVERSE SIDE           SIDE
-----------                                                          -----------





                                                                                            
                                                                              [BAR CODE]

            FLAHERTY & CRUMRINE PREFERRED
            INCOME OPPORTUNITY FUND INCORPORATED
                                                                              [BAR CODE]                                  C123456789

                                                                  000004      000000000.000000 ext      000000000.000000 ext
                                                                              000000000.000000 ext      000000000.000000 ext
[BAR CODE]  MR A SAMPLE                                                       000000000.000000 ext      000000000.000000 ext
            DESIGNATION (IF ANY)
            ADD 1
            ADD 2
            ADD 3
            ADD 4
            ADD 5
            ADD 6

            [IMAGE]

Using a BLACK INK pen, mark your votes with an X
as shown in this example. Please do not write outside
the designated areas.                                       [X]

------------------------------------------------------------------------------------------------------------------------------------
SPECIAL MEETING PROXY CARD
------------------------------------------------------------------------------------------------------------------------------------
                o PLEASE FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. o
------------------------------------------------------------------------------------------------------------------------------------

1-A  Revise the Fundamental Policy Relating to Borrowing Money

          FOR     WITHHOLD      ABSTAIN

          [ ]       [ ]           [ ]


1-B    Approval of Revised Fundamental Policy on Issuing Senior Securities

         FOR      WITHHOLD      ABSTAIN

         [ ]        [ ]           [ ]

1-C    Approval of Revised Fundamental Policy on Purchasing Securities on Margin

         FOR      WITHHOLD      ABSTAIN

         [ ]        [ ]           [ ]


2      Approve an Amended Investment Advisory Agreement

         FOR      WITHHOLD      ABSTAIN

         [ ]        [ ]           [ ]

      THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS. THIS PROXY, IF
      PROPERLY  EXECUTED,  WILL BE VOTED IN THE MANNER DIRECTED BY THE THE BOARD
      OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS. IF NO DIRECTION IS MADE,
      THIS PROXY WILL BE VOTED FOR THE PROPOSALS.


   PLEASE REFER TO THE PROXY STATEMENT FOR A DISCUSSION OF THE PROPOSALS.

   NON-VOTING ITEMS

CHANGE OF ADDRESS -- Please print new address below.
------------------------------------------------------------------------------------------------------------------------------------

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

   AUTHORIZED SIGNATURES -- THIS SECTION MUST BE COMPLETED FOR YOUR VOTE TO BE COUNTED. -- DATE AND SIGN BELOW

Please sign exactly as name(s) appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator,
corporate officer, trustee, guardian, or custodian, please give full title.

Date (mm/dd/yyyy) -- Please print     Signature 1 -- Please keep signature     Signature 2 -- Please keep signature
date below.                           within the box.                          within the box.
-----------------------------------   --------------------------------------   -----------------------------------------------------
          /           /
-----------------------------------   --------------------------------------   -----------------------------------------------------

                                      C 1234567890                     J N T   MR A SAMPLE (THIS AREA IS SET UP TO ACCOMMODATE
                                                                               140 CHARACTERS) MR A SAMPLE AND MR A SAMPLE AND
                                                                               MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND
[IMAGE]          [BAR CODE]           1 0 A V                  0 1 6 3 8 1 2   MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND   +


(STOCK#)           00U5DD