`M A C C
                              Private Equities Inc.





                                  ANNUAL REPORT

                               SEPTEMBER 30, 2006`

---

`TO OUR SHAREHOLDERS




Fiscal  year  2006 was a year of mixed  results  for MACC and its  wholly  owned
subsidiary,  MorAmerica  Capital  Corporation.  While net  assets  decreased  by
$2,046,741, management completed the disposition of several portfolio assets for
a total of $4,166,600,  received $1,590,815 in portfolio repayments and was able
to repay  $6,000,000  in SBA long  term  debt.  For a second  consecutive  year,
investment  expense was  substantially  reduced.  Long term debt  reduction  and
reduction of investment  expense were two of our key operating  goals for fiscal
2006

In fiscal  2006,  MACC  continued  on course  in its  effort to look for  viable
opportunities to sell portfolio assets and to further reduce our outstanding SBA
debt rather than making new investments. MACC reduced SBA debt by $6,000,000, or
36%, and currently has an outstanding balance of $10,790,000. At fiscal year end
we held cash of $2,132,350  which along with anticipated cash flows will provide
adequate funds to meet our cash needs in fiscal 2007.

For a  second  consecutive  year,  we  reduced  net  investment  expense.  As we
successfully  sell  portfolio  assets and pay down SBA debt, the net result of a
reduction  of revenue and  expense is a decline in net  investment  expense.  In
fiscal  2006,  management  fees and interest  expense  decreased by $273,251 and
$876,409, respectively.  Because the majority of our SBA debt repayment occurred
in the fourth  quarter of 2006,  management  fees and  interest  expense will be
further reduced in fiscal 2007.

In fiscal 2006,  management made no new  investments,  and continued the sale of
portfolio  investments,  expense  reduction and the repayment of SBA debt. These
actions are pursuant to our December,  2004 agreement with the SBA providing for
repayment of our SBA debt and our agreement not to request new leverage from the
SBA.  Once SBA debt is  repaid,  MACC will  evaluate  alternatives  to  maximize
shareholder  value which may include a resumption of new  investment  funding or
seeking shareholder approval to make liquidating distributions.

For fiscal 2007,  MACC's cash position and market  conditions  appear supportive
for the continued sale of portfolio assets,  continued repayment of SBA debt and
the improvement in our net investment  expense. We are encouraged that our focus
will  bring  maximum  value  and  future   liquidity  for  the  benefit  of  our
shareholders.`

| |                                            |  |                             
| | ------------------------------------------ |  | ----------------------------
| |                                            |  |                             
| | Geoffrey T. Woolley,
Chairman of the Board |  | David R. Schroder,
President

`CONTENTS

1          LETTER TO SHAREHOLDERS
2          FINANCIAL HIGHLIGHTS
5          SELECTED FINANCIAL DATA
6          MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS
14         REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
32         SHAREHOLDER INFORMATION
33         MANAGERS, OFFICERS AND DIRECTORS

                                       1`

---

`CORPORATE PROFILE

MACC PRIVATE EQUITIES INC.

MACC  Private  Equities  Inc.  (Nasdaq  Capital  Market:  MACC)  is  a  Delaware
corporation and the parent of MorAmerica Capital Corporation. Additionally, MACC
is a  business  development  company  (BDC).  MACC's  wholly  owned  subsidiary,
MorAmerica Capital  Corporation,  conducts all of its venture investing.  MACC's
primary goal is to create long-term appreciation of shareholder value based upon
the successful management of later stage venture capital activities.

MORAMERICA CAPITAL CORPORATION

Founded in 1959,  MorAmerica Capital is one of the nation's oldest and most well
known small business investment  companies (SBIC),  federally licensed under the
Small Business Investment Act of 1958. MorAmerica Capital generally has invested
from  $1,000,000 up to $3,800,000  in growth and later stage  manufacturing  and
service businesses with annual sales typically from $10,000,000 to $100,000,000.
These growth and buyout  investments  have been made in the form of subordinated
debt or preferred  stock with warrants or common stock.  Since 1980,  MorAmerica
Capital has  provided  equity  financing  of over  $90,000,000  to more than one
hundred twenty companies and has played a significant role in the syndication of
equity funding for later stage, middle market growth and buyout financings.

INVESTAMERICA INVESTMENT ADVISORS, INC.

MACC and MorAmerica Capital are managed by InvestAmerica,  an investment advisor
affiliated with the InvestAmerica group of venture capital management companies,
the first of which was organized in 1985. The  InvestAmerica  group manages more
than  $80,000,000  in  assets,   including  committed  capital,  and  the  three
InvestAmerica principals combined have over eighty years of venture capital fund
management experience.`

| | 
| | 

`FINANCIAL HIGHLIGHTS

                                                      [Dollars in Thousands Except Per Share Data]
BALANCES AT YEAR END SEPTEMBER 30                                       2006             2005
-----------------------------------------------------------------------------------------------------------
       Total Assets                                              $    22,830           31,336
       Total Long Term Debt                                           10,790           16,790
       Total Net Assets                                               11,618           13,665

OPERATIONS FOR THE YEAR
       Total Investment Income                                   $     1,190            2,492
       Investment Expense, Net                                       (1,171)          (1,856)
       Net Realized Gain on Investments                                    4            3,673
       Net Change in Unrealized Depreciation/                          (880)              772
           Appreciation on Investments and Other Assets
       Net Change in Net Assets from Operations                      (2,047)            2,588

PER SHARE DATA
       Net Assets Per Share                                      $      4.71             5.54

                                       2`

---

`FINANCIAL HISTORY


                                                2006               2005              2004            2003              2002
                                          ------------       -----------     -------------    ------------    -------------
Total Assets                              $22,830,055        $31,336,214        38,944,116      41,233,118       44,013,701

   Total Assets decreased
   by $8,506,159, or 27%,
   in fiscal 2006, as MACC
   is paying down its
   outstanding
   SBA debentures.

Total Long Term Debt                      $10,790,000        16,790,000        25,790,000      27,940,000       27,934,004

   Total Long Term Debt
   decreased by $6,000,000,
   or 36%, in fiscal 2006.


Net Asset Value Per Share*                  $    4.71              5.54              4.61            5.47             6.72

   Year end Net Asset Value
   Per Share decreased by $0.83,
   or 15%, as of the end
   of fiscal 2006.

Market Bid Price Per Share*                 $    1.78              2.57              3.45            2.52             3.40

   Year end Market Bid Price
   Per Share decreased by
   $0.79, or 31%, as of the end
   of fiscal 2006.


Stock Price as a Percentage of Net              37.8%             46.4%             74.8%           46.1%            50.6%
Asset Value Per Share*

   Stock Price as a Percentage
   of Net Asset Value Per Share
   decreased by 19% as
   of the end of fiscal 2006.


Annual Capital Invested                  $    333,325           781,611           681,983       1,301,027        8,377,006

   Annual capital invested
   decreased by $448,286,
   or 57%, in fiscal 2006.
   MACC currently is doing
   only follow-on investing.


Investment Income                         ($1,171,152)       (1,855,902)      (3,021,359)      (1,917,391)        (926,634)
(Expense), Net

   Investment Expense,
   Net decreased $684,750,
   or 37%, in fiscal 2006

*Restated to reflect a stock split effected in the form of a stock dividend paid
in March 2001.


                                       3`

---

`FINANCIAL REPORT













CONTENTS


5             SELECTED FINANCIAL DATA

6             MANAGEMENT'S DISCUSSION AND ANALYSIS
                 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

14            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

32            SHAREHOLDER INFORMATION

33            MANAGERS, OFFICERS AND DIRECTORS

                                       4`

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`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
SELECTED FINANCIAL DATA
FOR THE FISCAL YEARS ENDING SEPTEMBER 30



                                            2006                 2005                  2004                 2003                   2002
----------------------------------------------------------------------------------------------------------------------------------------

Investment expense, net             $(1,171,152)          (1,855,902)           (3,021,359)          (1,917,391)              (926,634)

Net realized gain (loss) on                3,645            3,672,664             3,021,176          (3,600,749)            (4,592,480)
investments, net of tax

Loss on litigation settlement                ---                  ---           (1,277,263)                  ---                    ---

Net change in unrealized               (879,234)              771,576             (730,245)            2,607,548              1,132,647
depreciation/appreciation         ---------------       --------------      ----------------      ---------------        ---------------
on investments and other assets

Net change in net assets           $ (2,046,741)           2,588,338           (2,007,691)          (2,910,592)            (4,386,467)
from operations                   ===============     ===============      ================      ===============        ===============

Net change in net assets
from operations per                   (0.83(1))              1.05(1)             (0.86(2))            (1.25(2))              (1.88(2))
common share                      ===============      ==============     ================       ==============         ===============


Total assets                       $  22,830,055           31,336,214            38,944,116           41,233,118             44,013,701
                                   =============      ===============      ================      ===============        ===============


Total long term debt               $  10,790,000           16,790,000            25,790,000           27,940,000             27,934,004
                                   =============      ===============      ================      ===============        ===============


(1) Computed  using  2,464,621  shares  outstanding  at  September  30, 2006 and
September 30, 2005.

(2) Computed using 2,329,255 shares outstanding at September 30, 2004, September
30, 2003, and September 30, 2002.

                                       5`

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`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


     This Annual Report contains certain  forward-looking  statements within the
meaning  of the  Private  Securities  Litigation  Reform  Act of 1995 (the "1995
Act").  Such  statements  are  made  in  good  faith  by  MACC  pursuant  to the
safe-harbor  provisions of the 1995 Act, and are  identified as including  terms
such as "may," "will," "should," "expects," "anticipates," "estimates," "plans,"
or similar language. In connection with these safe-harbor  provisions,  MACC has
identified  herein  important  factors that could cause actual results to differ
materially from those contained in any  forward-looking  statement made by or on
behalf of MACC,  including,  without limitation,  the high risk nature of MACC's
portfolio  investments,  the effects of general  economic  conditions  on MACC's
portfolio  companies,  the effects of recent or future  losses on the ability of
MorAmerica  Capital to comply with applicable  regulations of the Small Business
Administration  and  MorAmerica  Capital's  ability  to obtain  future  funding,
changes in prevailing market interest rates, and contractions in the markets for
corporate acquisitions and initial public offerings.  MACC further cautions that
such factors are not exhaustive or exclusive.  MACC does not undertake to update
any  forward-looking  statement  which  may be made  from  time to time by or on
behalf of MACC.


RESULTS OF OPERATIONS

     Consistent with MACC's  agreement with the SBA, MACC's current  strategy is
to make no new investments,  continue the sale of portfolio investments, expense
reduction  and the  repayment  of SBA debt.  Once SBA debt is repaid,  MACC will
evaluate  alternatives  to  maximize  shareholder  value  which  may  include  a
resumption of funding new  investments or seeking  shareholder  approval to make
liquidating distributions.

     Total investment income includes income from interest,  dividends and fees.
Investment  expense,  net represents total investment income minus net operating
expenses  and  income tax  expense.  The main  objective  of  portfolio  company
investments  is to  achieve  capital  appreciation  and  realized  gains  in the
portfolio. These gains and losses are not included in investment expense, net.

Fiscal 2006 Compared to Fiscal 2005

                                                                       For the year ended
                                                                          September 30,
                                                               -------------------------------------
                                                                      2006               2005                 Change
                                                               ---------------- --- ----------------       --------------
Total investment income                                       $      1,190,044            2,491,927          (1,301,883)
Net operating expense                                              (2,211,196)          (4,277,829)            2,066,633
Income tax expense                                                   (150,000)             (70,000)             (80,000)
                                                                  -------------     ----------------       --------------
Investment expense, net                                            (1,171,152)          (1,855,902)              684,750
                                                                  -------------     ----------------       --------------

Net realized gain on investments                                         3,645            3,672,664          (3,669,019)

Net change in unrealized depreciation/
     appreciation on investments and other assets                    (879,234)              771,576          (1,650,810)
                                                                  -------------     ----------------       --------------
Net (loss) gain on investments                                       (875,589)            4,444,240          (5,319,829)
                                                                  -------------     ----------------       --------------

Net change in net assets from operations                      $    (2,046,741)            2,588,338          (4,635,079)
                                                              =================     ================       ==============
Net asset value per share:

         Beginning of period                                  $           5.54                 4.61
         End of period                                        $           4.71                 5.54
                                                              ================      ===============


                                       6`

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`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED...


Total Investment Income

     During the fiscal year ended September 30, 2006,  total  investment  income
was $1,190,044,  a decrease of 52% from fiscal year 2005 total investment income
of $2,491,927.  The decrease during the current year was primarily the result of
decreases  in  interest  income of  $792,901,  or 44%,  and  dividend  income of
$459,127,  or 73%. MACC attributes the decrease in interest income  primarily to
the repayments of principal on debt portfolio  securities.  Dividend  income for
fiscal  year  2006  represents  dividends  received  on six  existing  portfolio
companies,  two of which are distributions from limited liability companies,  as
compared to dividends received on eight portfolio companies, three of which were
distributions from limited liability companies during fiscal year 2005. Dividend
income  decreased in fiscal year 2006 because the  dividends  from the portfolio
companies during fiscal 2005 were larger that the dividends in fiscal year 2006.
The timing and amount of dividend income is difficult to predict.

Net Operating Expenses

     Net  operating  expenses  of MACC  decreased  by 48% in fiscal year 2006 to
$2,211,196  from  $4,277,829 in fiscal year 2005.  The relative  decrease in net
operating  expenses is the result of decreases of $876,409,  or 42%, in interest
expense,  $273,251,  or 39%, in management fees (net of management fees waived),
$498,026, or 97%, in incentive fees, $297,595, or 57%, in professional fees, and
$121,352,  or 27%, in other  expenses.  Interest  expense  decreased  due to the
repayment  in the second  quarter and the fourth  quarter in fiscal year 2006 of
$2,000,000 and $4,000,000,  respectively,  of borrowings from the Small Business
Administration. Management fees (net of management fees waived) decreased due to
the decrease in capital under management and a decrease in the management fee as
a  percentage  of  capital  under  management  from 2.5% to 1.5%,  which  became
effective April 30, 2005. Professional fees decreased primarily due to the legal
expenses incurred in fiscal year 2005 from the arbitration  proceedings  related
to the sale of a former portfolio company which has been settled, legal expenses
from a lawsuit related to another  portfolio  company which has been settled and
legal  expenses  incurred  in the  change of MACC's  investment  advisor.  Other
expenses  decreased  due to the  decrease in directors  and officers  insurance,
director's fees and board travel expense  resulting from a reduction in the size
of MACC's Board of Directors,  the settlement  during the prior fiscal year of a
claim in  litigation  related to a former  portfolio  company,  and decreases in
other miscellaneous expenses.

Investment Expense, Net

     MACC had  investment  expense,  net in fiscal  year 2006 of  $1,171,152,  a
decrease of 37% from investment expense, net of $1,855,902, in fiscal year 2005.
The  decrease  in  investment  expense,  net is the  result of the  decrease  in
operating expenses described above.

Net Realized Gain (Loss) on Investments

     MACC  recorded a net realized  gain on  investments  in fiscal year 2006 of
$3,645,  as compared to a net realized  gain of  $3,672,664 in fiscal year 2005.
The  fiscal  year 2006 net  realized  gain is the net  result of  $1,987,604  of
realized gains from the sale of one portfolio company, $667,803 from the sale of
warrant shares in two other portfolio companies,  $33,933 on two previously sold
portfolio  companies,  and a realized  loss of  $2,685,695  from the sale of two
portfolio  companies,  of which $2,753,799 was previously recorded as unrealized
depreciation.  Management  does not  attempt to maintain a  comparable  level of
realized gains year to year but instead  attempts to maximize  total  investment
portfolio appreciation through realizing gains in the disposition of securities.
MACC's  investment  advisor is entitled to be paid an  incentive  fee,  which is
calculated  as a  percentage  of  the  excess  of  MACC's  realized  gains  in a
particular  period,   over  the  sum  of  net  realized  losses  and  unrealized
depreciation  during the same period. As a result, the timing of realized gains,
realized losses and unrealized  depreciation can have an effect on the amount of
the incentive fee payable to the investment advisor.

                                       7`

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`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED...


Changes in Unrealized Depreciation/Appreciation of Investments and Other Assets

     MACC had  unrealized  depreciation  of $981,960 at  September  30,  2006, a
change of $885,531 from the $96,429 of unrealized  depreciation at September 30,
2005. This,  along with the net realized gain of $3,645,  resulted in a net loss
on  investments  for fiscal year 2006 of $881,886,  as compared to a net gain on
investments  of $4,362,382  for fiscal year 2005. The fiscal year 2006 change in
unrealized  depreciation/appreciation  is the net  effect of  increases  in fair
value of seven portfolio companies totaling $1,725,965,  decreases in fair value
of nine portfolio companies totaling $2,123,060, the reversal of appreciation of
$1,508,206 in one  portfolio  investment  from the sale  resulting in a realized
gain, the reversal of appreciation of $532,879 in two portfolio investments from
the sale of warrant  shares  resulting  in realized  gains,  and the reversal of
$1,552,649 of depreciation  resulting from the sale of two portfolio investments
resulting in realized losses..

     Net  change  in   unrealized   depreciation/appreciation   on   investments
represents  the  change  for the period in the  unrealized  appreciation  net of
unrealized  depreciation  on  MACC's  total  investment  portfolio.   When  MACC
increases  the  fair  value  of a  portfolio  investment  above  its  cost,  the
unrealized  appreciation for the portfolio as a whole  increases,  and when MACC
decreases the fair value of a portfolio  investment  below its cost,  unrealized
depreciation  for the  portfolio  as a  whole  increases.  When  MACC  sells  an
appreciated  portfolio  investment for a gain,  unrealized  appreciation for the
portfolio as a whole  decreases as the gain is  realized.  Similarly,  when MACC
sells or writes off a depreciated  portfolio  investment for a loss,  unrealized
depreciation for the portfolio as a whole decreases as the loss is realized.

     Net change in  unrealized  gain on other assets was $6,297 at September 30,
2006, a positive  change  recorded with respect to other  securities  which have
been  classified as other assets as compared to a net change in unrealized  gain
on others assets of $81,858 at September 30, 2005.

Net Change in Net Assets from Operations

     As a result of the items described  above,  MACC  experienced a decrease of
$2,046,741,  in net assets during fiscal year 2006,  and the resulting net asset
value per share was $4.71 at September  30, 2006,  as compared to an increase of
$2,588,388,  in net assets during fiscal year 2005,  and the resulting net asset
value per share was $5.54 at September  30, 2005.  Management  attributes  these
results  to the  operating  loss  and the  realized  and  unrealized  losses  on
portfolio investments that were incurred in fiscal year 2006.

     While the net asset  value  decreased  in fiscal year 2006,  the  continued
strong  economy  and the overall  performance  of MACC's  portfolio  investments
should  create  opportunities  for MACC to realize  gains on  several  portfolio
investments  in fiscal year 2007.  The current world tensions and the continuing
conflict in Iraq increase the uncertainty of future  performance;  however,  the
economy continues to grow and management  believes MACC's  investment  portfolio
may  benefit  from  improved  operating  performance  at a number  of  portfolio
companies and from an anticipated  robust market for corporate  acquisitions and
investments.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

     To date,  MACC has  relied  upon  several  sources  to fund its  investment
activities,  including  MACC's  cash and  money  market  accounts  and the Small
Business  Investment  Company  ("SBIC")  leverage  program operated by the Small
Business Administration (the "SBA").

     As an SBIC,  MorAmerica  Capital is required to comply with the regulations
of the SBA (the  "SBA  Regulations").  These  regulations  include  the  capital
impairment rules, as defined by Regulation  107.1830 of the SBA Regulations.  As
of September 30, 2006, the capital of MorAmerica  Capital was impaired less than
the  55%  maximum  impairment   percentage   permitted  under  SBA  Regulations.
MorAmerica  Capital's  impairment  percentage  was 47% at  September  30,  2006.
MorAmerica  Capital  is also  currently  limited by the SBA  Regulations  in the
amount of distributions it may make to MACC.

     As of September  30, 2006,  MACC's cash and money market  accounts  totaled
$2,132,350.  MACC has commitments for an additional $6,500,000 in SBA guaranteed
debentures,  which expires on September 30, 2007.  MorAmerica  Capital and three
other SBICs have entered into an agreement  with the SBA in  connection  with an
arbitration settlement. As a result of the terms of this

                                       8`

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`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED...


agreement, MACC does not believe that MorAmerica Capital will have access to the
SBIC  capital  program  in fiscal  year  2007.  Subject  to the other  risks and
uncertainties  described in this annual report,  MACC believes that its existing
cash and money  market  accounts and other  anticipated  cash flows will provide
adequate funds for MACC's anticipated cash requirements during fiscal year 2007,
including  follow-on  investment  activities,   if  any,  interest  payments  on
outstanding   debentures   payable,   prepayment  of  principal  on  outstanding
debentures  payable,  and  administrative  expenses.  In  light  of the  present
agreement with SBA, at the present time MACC is not making new  investments,  is
prudently  selling  portfolio  companies and is using the resulting  proceeds to
reduce debt by paying SBA debentures.

     Debentures  payable are  composed of  $10,790,000  in  principal  amount of
SBA-guaranteed debentures issued by MACC's subsidiary, MorAmerica Capital, which
mature as follows: $5,835,000 in fiscal year 2011, and $4,955,000 in fiscal year
2012. MACC  anticipates  that  MorAmerica  Capital will not be able to refinance
these  debentures  through  the SBIC  capital  program  when  they  mature.  The
following table shows our significant  contractual obligations for the repayment
of debt and other contractual obligations as of September 30, 2006:


                                               Payments due by period
                                               ----------------------

Contractual Obligations
                                                                Less
                                                               than 1         1-3                        More than
                                                 Total          Year         Years       3-5 Years        5 Years
                                             --------------    --------     --------    ------------    ------------

SBA Debentures                            $     10,790,000         ---          ---       5,835,000       4,955,000

Incentive Fees Payable(1)                 $        108,399         ---          ---             ---         108,399

(1) Under the terms of the Incentive Fee  Subordination  Agreement  described in
Note 5 to the Consolidated Financial Statements,  accrued incentive fees payable
to the investment  advisor are subordinated to all amounts payable by MorAmerica
Capital to the SBA, including  outstanding  SBA-guaranteed  debentures,  and any
losses  the SBA may  incur in  connection  with the  settlement  of  arbitration
proceedings occurring in late 2004.

     MACC currently  anticipates that it will rely primarily on its current cash
and  money  market  accounts  and its cash  flows  from  operations  to fund its
investment  activities  and other cash  requirements  during  fiscal  year 2007.
Although  management  believes these sources will provide  sufficient  funds for
MACC to  meet  its  fiscal  year  2007  investment  level  objective  and  other
anticipated cash requirements, there can be no assurances that MACC's cash flows
from operations or cash requirements will be as projected.

PORTFOLIO ACTIVITY

     MACC's primary  business is investing in and lending to businesses  through
investments in subordinated  debt (generally with detachable  equity  warrants),
preferred stock and common stock. As noted above, however, MACC is not currently
making new investments. The total portfolio value of investments in publicly and
non-publicly  traded securities was $18,939,501 and $25,845,548 at September 30,
2006 and  September  30,  2005,  respectively.  During  fiscal  year 2006,  MACC
invested $333,325 in follow-on  investments in six existing portfolio companies.
Management  views  investment  objectives  for any given  year as  secondary  in
importance  to MACC's  overriding  concern of investing in only those  portfolio
companies which satisfy MACC's investment criteria.

     MACC frequently  co-invests  with other funds managed by MACC's  investment
advisor.  When it makes any co-investment with these related funds, MACC follows
certain  procedures  consistent  with  orders  of the  Securities  and  Exchange
Commission for related party  co-investments to reduce or eliminate  conflict of
interest  issues.   All  of  the  $333,325  invested  during  fiscal  year  2006
represented co-investments with funds managed by MACC's investment advisor.

                                       9`

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`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED...

VALUATION CHANGES

         The following table presents those portfolio investments held at
September 30, 2006 with respect to which the valuation changed from September
30, 2005:

                                       F A I R V A L U E
       ----------------------------------------------------------------------------------------
       PORTFOLIO COMPANY                           SEPTEMBER 30, 2006       SEPTEMBER 30, 2005

       Feed Management Systems, Inc.             $          2,115,691             1,475,836  *
       FreightPro, Inc.                                       125,002               175,002
       Handy Industries, LLC                                  835,855             1,338,033
       Hicklin Engineering, L.C.                              740,127             1,267,127
       Kwik-Way Products, Inc.                                384,305               768,610
       Linton Truss Corporation                               840,015               450,015
       M.A. Gedney Company                                    292,000               492,342  *
       MainStream Data, Inc.                                  180,044               200,049
       Magnum Systems, Inc.                                 1,207,278             1,137,278
       Metal Tooling Holdings, Inc.                           476,741               126,741
       Portrait Displays, Inc.                                394,118               607,917  *
       Pratt-Read Corporation                               1,327,800             1,444,467
       SMWC Acquisition Co., Inc.                             906,000               850,240
       SnapNames.com, Inc.                                    125,000                 4,650  *
       Spectrum Products, LLC                               1,293,826             1,402,590  *
       Warren Family Funeral Homes, Inc.                      200,012               100,012  *

*    September 30, 2005  valuations  have been adjusted for  additional  amounts
     invested or partial disposition of the portfolio investment for purposes of
     comparison.

CRITICAL ACCOUNTING POLICY

     Investments  in  securities  traded on a national  securities  exchange (or
reported  on the NASDAQ  national  market)  are stated at the average of the bid
price on the three  final  trading  days of the  valuation  period  which is not
materially  different  from  the  bid  price  on the  final  day of the  period.
Restricted and other securities for which  quotations are not readily  available
are  valued at fair value as  determined  by the Board of  Directors.  Among the
factors  considered in determining the fair value of investments are the cost of
the investment; developments, including recent financing transactions, since the
acquisition of the investment;  the financial condition and operating results of
the investee;  the long-term  potential of the business of the investee;  market
interest rates for similar debt securities and other factors generally pertinent
to the valuation of investments. However, because of the inherent uncertainty of
valuation,  those estimated values may differ significantly from the values that
would have been used had a ready  market  for the  securities  existed,  and the
differences could be material.

     In the valuation  process,  MorAmerica  Capital uses financial  information
received  monthly,  quarterly,  and annually from its portfolio  companies which
includes both audited and unaudited  financial  statements.  This information is
used  to  determine  financial  condition,  performance,  and  valuation  of the
portfolio investments.

     Realization  of the  carrying  value of  investments  is  subject to future
developments.  Investment  transactions  are  recorded  on the  trade  date  and
identified  cost is used to  determine  realized  gains  and  losses.  Under the
provisions  of SOP 90-7,  the fair value of loans and  investments  in portfolio
securities on February 15, 1995,  the  fresh-start  date, is considered the cost
basis for financial statement purposes.


                                       10`

---

`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED...

DETERMINATION OF NET ASSET VALUE

     The net  asset  value  per  share of  MACC's  outstanding  common  stock is
determined  quarterly,  as soon as  practicable  after and as of the end of each
calendar quarter,  by dividing the value of total assets minus total liabilities
by  the  total  number  of  shares  outstanding  at the  date  as of  which  the
determination is made.

     In calculating the value of total assets, securities that are traded in the
over-the-counter market or on a stock exchange are valued in accordance with the
current  valuation  policies of the SBA. Under SBA regulations,  publicly traded
equity securities are valued by taking the average of the close (or bid price in
the case of  over-the-counter  equity securities) for the valuation date and the
preceding  two days.  This  policy  differs  from the  Securities  and  Exchange
Commission's guidelines which utilize only a one day price measurement. MACC did
not have any publicly traded equity  securities in its  consolidated  investment
portfolio as of September 30, 2006.

     All other  investments are valued at fair value as determined in good faith
by the Board of Directors.  The Board of Directors has determined that all other
investments will be valued initially at cost, but such valuation will be subject
to quarterly  adjustments  and on such other interim periods as are justified by
material  portfolio company events if the Board of Directors  determines in good
faith that cost no longer represents fair value.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     MACC is subject to market  risk from  changes in market  prices of publicly
traded  equity  securities  held  from  time to time  in the  MACC  consolidated
investment portfolio.  At September 30, 2006, MACC had no publicly traded equity
securities in the MACC consolidated investment portfolio.

     MACC is also subject to market risk from changes in market  interest  rates
that affect the fair value of MorAmerica Capital's debentures payable determined
in  accordance  with  Statement  of  Financial  Accounting  Standards  No.  107,
Disclosures About Fair Value of Financial Instruments.  The estimated fair value
of MorAmerica  Capital's  outstanding  debentures payable at September 30, 2006,
was $10,992,000,  with a cost of $10,790,000. Fair value of MorAmerica Capital's
outstanding  debentures  payable is calculated by discounting cash flows through
estimated  maturity using the borrowing  rate currently  available to MorAmerica
Capital  for  debt of  similar  original  maturity  (6.4%).  None of  MorAmerica
Capital's  outstanding  debentures  payable are publicly traded.  Market risk is
estimated as the potential  increase in fair value resulting from a hypothetical
0.5% decrease in interest rates. Actual results may differ.


-----------------------------------------------------------------------------------------
                                   September 30, 2006
-----------------------------------------------------------------------------------------

Fair Value of Debentures Payable                                    $         10,992,000

Amount Above Cost                                                   $            202,000

Additional Market Risk                                              $            207,000

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

PORTFOLIO RISKS

     Pursuant to Section  64(b)(1)  of the  Investment  Company  Act of 1940,  a
business  development  company is required to describe the risk factors involved
in an investment  in the  securities of such company due to the nature of MACC's
investment portfolio. Accordingly, MACC states that:

                                       11`

---

`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED...


     The portfolio  securities of MACC consist primarily of securities issued by
small, privately held companies.  Generally,  little or no public information is
available  concerning the companies in which MACC invests, and MACC must rely on
the diligence of its investment advisor to obtain the information  necessary for
MACC's  investment  decisions.  In order to  maintain  their  status as business
development companies, MACC and MorAmerica Capital both must invest at least 50%
of their  total  assets  in the  types of  portfolio  investments  described  by
Sections  55(a)(1)  though  55(a)(3) of the  Investment  Company Act of 1940, as
amended.  These  investments  generally  are  securities  purchased  in  private
placement  transactions  from small  privately held  companies.  Typically,  the
success or failure of such  companies  depends  on the  management  talents  and
efforts of one person or a small group of persons, so that the death, disability
or resignation of such person or persons could have a materially  adverse impact
on such companies.  Moreover,  smaller companies frequently have smaller product
lines and smaller market shares than larger companies and may be more vulnerable
to economic  downturns.  Because  these  companies  will  generally  have highly
leveraged  capital  structures,  reduced cash flows  resulting  from an economic
downturn  may  adversely  affect  the  return  on, or the  recovery  of,  MACC's
investments.  Investment in these companies  therefore involves a high degree of
business and financial risk,  which can result in substantial  losses and should
be considered speculative.

     MACC's  investments  primarily  consist  of  securities  acquired  from the
issuers in private  transactions,  which are usually  subject to restrictions on
resale and are generally  illiquid.  No  established  trading  market  generally
exists  with  regard to such  securities,  and most of such  securities  are not
available for sale to the public without  registration  under the Securities Act
of 1933, as amended, which involves significant delay and expense.

     The  investments of MACC are generally  long-term in nature.  Some existing
investments do not bear a current yield and a return on such investments will be
earned  only after the  investment  matures  or is sold.  Most  investments  are
structured  so as to  return a  current  yield  throughout  most of their  term.
However,  these  investments will typically produce gains only when sold in five
to  seven  years.  There  can be no  assurance,  however,  that  any  of  MACC's
investments will produce current yields or gains.

OPERATIONS RISKS

     MACC generally  relies on portfolio  investment  divestitures and liquidity
events, as well as increases in fair value of portfolio investments,  to provide
for  increases in net asset value in any period.  MACC  typically  relies on the
sale of portfolio companies in negotiated transactions and on the initial public
offering of portfolio  company  securities to provide for  portfolio  investment
divestitures and liquidity  events.  Accordingly,  a general  contraction in the
markets  for  corporate  acquisitions  and/or  initial  public  offerings  could
adversely  affect MACC's ability to realize capital gains, if any, from the sale
of its portfolio company securities.  The SBIC guidelines under which MorAmerica
Capital  operates permit the MorAmerica  Capital Board of Directors to determine
increases  in fair  value of  unliquidated  portfolio  investments  based upon a
number  of  factors,  including  subsequent  financings  provided  to  portfolio
companies. Accordingly,  decreases in the supply of additional capital to MACC's
portfolio  companies  could adversely  affect  MorAmerica  Capital's  ability to
achieve increases, if any, in fair value of its portfolio investments.

INTEREST RATE RISKS

     MACC faces  several  risks in  relation  to changes  in  prevailing  market
interest rates.  First, at September 30, 2006, MACC had outstanding  $10,790,000
in principal amount of SBA-guaranteed  debentures  issued by MACC's  subsidiary,
MorAmerica Capital, which mature as follows:  $5,835,000 in 2011, and $4,955,000
in 2012. These debentures provide for a fixed rate of interest, and accordingly,
changes in market  interest  rates will have no effect on the amount of interest
paid by MACC with respect to the  SBA-guaranteed  debentures which are presently
outstanding.  However,  if  MorAmerica  Capital  were to  re-finance  any of the
maturing  SBA-guaranteed  debentures at a time when market  interest  rates have
increased relative to the rates paid on the maturing  debentures,  then MACC may
incur higher interest  expenses during  subsequent  periods,  and MACC's ability
during  such  periods  to  achieve  a net  operating  profit,  if any,  could be
adversely affected.

                                       12`

---

`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED...


     Second,  MACC  generally  structures  portfolio  investments  to  provide a
current  yield  in  order  to  provide  MACC  with  earnings  stability.   These
investments  typically provide for a fixed preferred  dividend or interest rate.
Although MACC is not currently making new  investments,  to the extent that MACC
makes portfolio investments over the next several years, MACC's total investment
income may be adversely affected if there is a decrease in market interest rates
over the next several years.

     Third, many of MACC's portfolio  companies have or may issue debt senior to
MACC's  investment.  The  payment  of  principal  and  interest  due  on  MACC's
investment, therefore, will generally be subordinate to payments due on any such
senior debt. Moreover,  senior debt typically bears interest at a floating rate,
whereas  MACC's  investments  generally do not. Any increase in market  interest
rates may put significant  economic  pressure on those portfolio  companies that
have issued senior debt which bears  interest at a floating  rate.  Accordingly,
MACC's  ability to achieve net  operating  income and generally to realize gains
from its  portfolio  investments  may be  adversely  affected  by an increase in
market interest rates.

                                       13`

---

`REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



THE BOARD OF DIRECTORS AND SHAREHOLDERS
MACC PRIVATE EQUITIES INC.:


     We have audited the accompanying consolidated balance sheet of MACC Private
Equities Inc. and subsidiary (the Company),  including the consolidated schedule
of investments, as of September 30, 2006, and the related consolidated statement
of  operations  and  cash  flows  for the  year  then  ended,  the  consolidated
statements of changes in net assets for each of the years in the two-year period
then ended, and the financial  highlights for each of the years in the five-year
period  then  ended.  These  consolidated  financial  statements  and  financial
highlights   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to  express  an opinion  on these  financial  statements  and
financial highlights based on our audits.

     We  conducted  our audits in  accordance  with the  standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial statements and financial highlights are free of material misstatement.
An audit includes  examining,  on a test basis,  evidence supporting the amounts
and   disclosures  in  the  financial   statements.   Our  procedures   included
confirmation  or  examination  of  securities  owned as of September 30, 2006 or
other  procedures where  confirmation or examination was not possible.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

     In  our  opinion,  the  consolidated  financial  statements  and  financial
highlights  referred to above  present  fairly,  in all material  respects,  the
financial  position of MACC Private Equities Inc. and subsidiary as of September
30, 2006, the results of their operations and their cash flows for the year then
ended,  the  changes in their net  assets for each of the years in the  two-year
period then ended,  and the  financial  highlights  for each of the years in the
five-year  period  then  ended,  in  conformity  with U. S.  generally  accepted
accounting principles.`

`14`

---

`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2006


Assets

Loans and investments in portfolio securities, at market or fair value (note 2):
   Unaffiliated companies (cost of $2,920,073)                                            $       2,909,703
   Affiliated companies (cost of $13,841,969)                                                    13,143,159
   Controlled companies (cost of $3,159,419)                                                      2,886,639
Cash and money market accounts                                                                    2,132,350
Interest receivable                                                                                 358,717
Other assets (note 1)                                                                             1,399,487
                                                                                          ------------------

         Total assets                                                                     $      22,830,055
                                                                                          ==================

Liabilities and net assets

Liabilities:
     Debentures payable (note 3)                                                          $      10,790,000
     Incentive fees payable (note 5)                                                                108,399
     Accrued interest                                                                                61,173
     Accounts payable and other liabilities                                                         252,249
                                                                                          ------------------
         Total liabilities                                                                       11,211,821
                                                                                          ------------------

Net assets (note 3):
     Common stock, $.01 par value per share; authorized 10,000,000 shares;
           issued and outstanding 2,464,621 shares                                                   24,646
     Additional paid-in-capital                                                                  12,575,548
     Unrealized depreciation on investments (note 2)                                              (981,960)
                                                                                          ------------------
         Total net assets                                                                        11,618,234
                                                                                          ------------------
Commitments and contingency (note 5)

         Total liabilities and net assets                                                 $      22,830,055
                                                                                          ==================
Net assets per share                                                                      $            4.71
                                                                                          ==================


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       15`

---

`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2006



Investment income:
     Interest
         Unaffiliated companies                                                                     180,434                                                 $
         Affiliated companies                                                                       582,042
         Controlled companies                                                                        73,850
         Other                                                                                      184,621
     Dividends
         Unaffiliated companies                                                                       2,187
         Affiliated companies                                                                       166,910
                                                                                           ----------------

             Total investment income                                                              1,190,044
                                                                                           ----------------

Operating expenses:
     Interest expenses (note 3)                                                                   1,217,651
     Management fees (note 5)                                                                       427,760
     Incentive fees (note 5)                                                                         13,517
     Professional fees                                                                              227,319
     Other                                                                                          324,949
                                                                                           ----------------

               Total operating expenses                                                           2,211,196

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

               Investment expense, net before tax expense                                       (1,021,152)


Income tax expense (note 4)                                                                         150,000
                                                                                           ----------------

             Investment expense, net                                                            (1,171,152)
                                                                                           ----------------

Realized and unrealized loss on investments and other assets (note 2): Net
     realized gain (loss) on investments:
         Unaffiliated companies                                                                    (34,490)
         Affiliated companies                                                                         7,135
         Controlled companies                                                                        31,000
        Net change in unrealized depreciation/appreciation investments                            (885,531)
        Net change in unrealized gain on other assets                                                 6,297
                                                                                           ----------------

              Net loss on investments and other assets
                                                                                                  (875,589)
                                                                                           ----------------
                    Net change in net assets from operations
                                                                                           $    (2,046,741)
                                                                                           ================


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       16`

---

`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED SEPTEMBER 30, 2006 AND 2005



                                                                                                  2006                      2005
---------------------------------------------------------------------------------------------------------------------------------

Operations:
       Investment expense, net                                                         $   (1,171,152)               (1,855,902)
       Net realized gain on investments                                                          3,645                 3,672,664
       Net change in unrealized depreciation/appreciation
           on investments and other assets                                                   (879,234)                   771,576
                                                                                          -------------           ---------------

                           Net change in net assets from operations                        (2,046,741)                 2,588,338

Conversion of note payable and accrued interest to
     shares of common stock                                                                        ---                   338,416
                                                                                          -------------           ---------------

                           Net change in net assets                                        (2,046,741)                 2,926,754

Net assets:
       Beginning of period                                                                  13,664,975                10,738,221
                                                                                          -------------           ---------------

       End of period                                                                  $     11,618,234                13,664,975
                                                                                          =============           ===============




SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       17`

---

`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 2006



            Cash flows from operating activities:
                  Decrease in net assets from operations                                 $      (2,046,741)
                                                                                         -----------------

                  Adjustments to reconcile decrease in net assets from
                     operations to net cash provided by operating activities:
                       Net realized and unrealized loss on investments                             881,886
                       Net realized and unrealized gain on other assets                            (6,297)
                       Proceeds from disposition of and payments on
                            loans and investments in portfolio securities                        6,357,486
                       Purchases of loans and investments in portfolio securities                (333,325)
                       Change in interest receivable                                             (186,447)
                       Change in other assets                                                    1,532,057
                       Change in accrued interest, deferred incentive fees payable,
                            accounts payable and other liabilities                               (459,418)
                                                                                         -----------------
                            Total adjustments                                                    7,785,942
                                                                                         -----------------

                                Net cash provided by operating activities                        5,739,201
                                                                                         -----------------
            Cash flows from financing activities:
                  Debt repayment                                                               (6,000,000)
                                                                                         -----------------

                                Net cash used in financing activities                          (6,000,000)
                                                                                         -----------------

                                Net decrease in cash and cash equivalents                        (260,799)
            Cash and cash equivalents at beginning of period                                     2,393,149

            Cash and cash equivalents at end of period                                   $       2,132,350
                                                                                         =================

            Supplemental disclosure of cash flow information -
                 Cash paid during the period for interest                                $       1,136,047
                                                                                         =================

            Supplemental disclosure of noncash investing and financing information -
                 Assets received in exchange of securities                               $         511,184
                                                                                         =================




SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       18`

---

`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006


     (1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICES AND RELATED MATTERS

          (a) Basis of Presentation

          The  consolidated  financial  statements  include the accounts of MACC
          Private  Equities  Inc.  (MACC)  and  its  wholly  owned   subsidiary,
          MorAmerica  Capital  Corporation   (MorAmerica   Capital).   MACC  and
          MorAmerica Capital (the Company) are qualified as business development
          companies  under the  Investment  Company  Act of 1940.  All  material
          intercompany  accounts  and  transactions  have been  eliminated.  The
          consolidated  financial  statements  have been  prepared in accordance
          with U. S.  generally  accepted  accounting  principles for investment
          companies.

          On February 15, 1995, the Company consummated a plan of reorganization
          as confirmed by the United  States  Bankruptcy  Court for the Northern
          District of Iowa on December  28, 1993.  As of February 15, 1995,  the
          Company  adopted  fresh-start  reporting in  accordance  with American
          Institute  of  Certified  Public  Accountants   (AICPA)  Statement  of
          Position (SOP) 90-7, Financial Reporting by Entities in Reorganization
          Under the  Bankruptcy  Code,  resulting  in the  Company's  assets and
          liabilities being adjusted to fair values.

          (b) Use of Estimates

          The  preparation of  consolidated  financial  statements in conformity
          with  U.  S.  generally  accepted   accounting   principles   requires
          management to make estimates and assumptions  that affect the reported
          amounts of assets and liabilities and disclosure of contingent  assets
          and liabilities at the date of the consolidated  financial statements,
          and the reported amounts of revenues and expenses during the reporting
          period. Actual results could differ from those estimates.

          (c) Cash Equivalents

          For  purposes  of  reporting   cash  flows,   the  Company   considers
          certificates  of deposit and U. S. treasury  bills with  maturities of
          three  months  or less  from the date of  purchase  and  money  market
          accounts  to  be  cash  equivalents.   At  September  30,  2006,  cash
          equivalents consisted of $2,014,104 of money market funds.

          (d) Loans and Investments in Portfolio Securities

          Investments in securities traded on a national securities exchange (or
          reported on the NASDAQ  national  market) are stated at the average of
          the bid price on the three final trading days of the valuation  period
          which is not materially  different from the bid price on the final day
          of the period.  Restricted and other  securities for which  quotations
          are not readily  available  are valued at fair value as  determined by
          the  Board  of  Directors.   Realization  of  the  carrying  value  of
          investments is subject to future developments (see note 2). Investment
          transactions  are recorded on the trade date.  Identified cost is used
          to determine  realized  gains and losses.  Under the provisions of SOP
          90-7, the fair value of loans and investments in portfolio  securities
          on February 15, 1995,  the  fresh-start  date, is considered  the cost
          basis for financial statement purposes.

          (e) Other Assets, Net

          Other assets  include notes and  securities  received from the sale of
          portfolio  investments  with a value of  $1,062,365  at September  30,
          2006, deferred fees on SBA debentures of $147,919, which are amortized
          over the life of the  debenture,  sale proceeds  receivable of $9,874,
          and other receivables of $179,329.

          (f) Revenue Recognition

          Dividend  income is  recognized on the  ex-dividend  date and interest
          income is accrued on a daily basis.

          Debt  obligations  may be placed on  non-accrual  status  and  related
          interest income may be reduced by ceasing current accruals and writing
          off interest  receivables  when the  collection of all or a portion of
          interest has become doubtful based on consistently applied procedures.
          A debt obligation is removed from  non-accrual  status when the issuer
          resumes  interest  payments  or when  collectibility  of  interest  is
          reasonably assured.

                                       19`

---

`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED...
SEPTEMBER 30, 2006

          In conjunction  with the investment  process,  the Company  negotiates
          non-refundable  processing  fees with many  companies it evaluates for
          investment.  These fees are  compensation  for time and efforts of the
          investment  advisory  personnel  and  for  reimbursement  of  expenses
          related  to the due  diligence,  and are  recognized  as  income  when
          received.

          In-kind  interest income is recorded in connection with debt to equity
          conversions or in the case of certain debt security reorganizations.

          (g) Income Taxes

          MACC and MorAmerica  Capital are members of a  consolidated  group for
          income tax purposes.

          Deferred tax assets and  liabilities are recognized for the future tax
          consequences  attributable  to  differences  between the  consolidated
          financial   statement   carrying   amounts  of  existing   assets  and
          liabilities  and their  respective  tax basis  and net  operating  and
          capital loss  carryforwards.  Deferred tax assets and  liabilities are
          measured  using enacted tax rates  expected to apply to taxable income
          in the years in which those  temporary  differences are expected to be
          recovered or settled.  The effect of a change in tax rates on deferred
          tax assets and  liabilities  is recognized in the period that includes
          the enactment date.

          (h) Disclosures About Fair Value of Financial Instruments

          Statement  of   Financial   Accounting   Standards   (SFAS)  No.  107,
          Disclosures About Fair Value of Financial  Instruments,  requires that
          disclosures  be made  regarding the estimated  fair value of financial
          instruments,  which  are  generally  described  as  cash,  contractual
          obligations,  or rights to pay or receive  cash.  The carrying  amount
          approximates fair value for certain financial  instruments  because of
          the short-term maturity of these instruments, including cash and money
          market,  deferred incentive fees payable,  accrued interest,  accounts
          payable and other liabilities.

          Portfolio  investments  are recorded at fair value.  The  consolidated
          schedule of investments  discloses the applicable  fair value and cost
          for each  security  investment,  which  aggregated  to  $18,939,501and
          $19,921,461, respectively, at September 30, 2006.

          The estimated fair value of long-term debt is $10,992,000  with a cost
          of  $10,790,000,  at September  30,  2006.  This fair value amount was
          calculated by discounting future cash flows through estimated maturity
          using the borrowing rate  currently  available to the Company for debt
          of similar original maturity (6.4%).

         (i)      Regulations

          As an  SBIC,  MorAmerica  Capital  is  required  to  comply  with  the
          regulations  of the SBA (the  "SBA  Regulations").  These  regulations
          include  the  capital  impairment  rules,  as  defined  by  Regulation
          107.1830 of the SBA Regulations. As of September 30, 2006, the capital
          of  MorAmerica   Capital  was  impaired  less  than  the  55%  maximum
          impairment  percentage  permitted  under SBA  Regulations.  MorAmerica
          Capital's  impairment  percentage  was  47%  at  September  30,  2006.
          MorAmerica Capital is also currently limited by the SBA Regulations in
          the amount of distributions is may make to MACC.

          (j) Recent Accounting Pronouncements

          In July 2006, the FASB issued FASB  Interpretation  No. 48 ("FIN 48"),
          "Accounting for Uncertainty in Income Taxes-an  Interpretation of FASB
          Statement  No.  109." This  interpretation  prescribes  a  recognition
          threshold  and  measurement  process for  recording  in the  financial
          statements  uncertain tax positions taken or expected to be taken in a
          tax return. Additionally, this interpretation provides guidance on the
          derecognition,  classification,  accounting  in interim  periods,  and
          disclosure requirements for uncertain tax positions. The provisions of
          FIN 48 will be  effective  at the  beginning  of the first fiscal year
          that begins after December 15, 2006. We are evaluating the effect,  if
          any, the adoption of FIN 48 will have on our financial statements.

          In  September  2006,  the  FASB  issued  SFAS  No.  157,  "Fair  Value
          Measurements."  This  statement  defines  fair  value,  establishes  a
          framework for measuring  fair value in generally  accepted  accounting
          principles   (GAAP),   and  expands   disclosures   about  fair  value
          measurements.  The  provisions of SFAS No. 157 are effective as of the
          beginning  of the first  fiscal year that begins  after  November  15,
          2007. We are evaluating  the effect,  if any, the adoption of SFAS No.
          157 will have on our financial statements.

                                       20`

---

`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED...
SEPTEMBER 30, 2006

          In September  2006, the Securities and Exchange  Commission  published
          Staff Accounting Bulletin ("SAB") No. 108 (Topic 1N), "Considering the
          Effects of Prior Year Misstatements when Quantifying  Misstatements in
          Current Year Financial  Statements." SAB No. 108 requires  registrants
          to   quantify   misstatements   using  both  the   balance-sheet   and
          income-statement approaches, with adjustment required if either method
          results  in a  material  error.  The  provisions  of SAB  No.  108 are
          effective as of the beginning of the first fiscal year that ends after
          November 15, 2006. We are evaluating the effect,  if any, the adoption
          of SAB No. 108 will have on our financial statements.

     (2)  LOANS AND INVESTMENTS IN PORTFOLIO SECURITIES

          Loans and investments in portfolio  securities include debt and equity
          securities  in  small  business   concerns   located   throughout  the
          continental  United States,  with a concentration in the Midwest.  The
          Company determined that the fair value of its portfolio securities was
          $18,939,501 at September 30, 2006. Among the factors considered by the
          Company in determining the fair value of investments  were the cost of
          the investment; developments, including recent financing transactions,
          since the acquisition of the investment;  the financial  condition and
          operating  results of the  investee;  the  long-term  potential of the
          business of the  investee;  market  interest  rates for  similar  debt
          securities and other factors  generally  pertinent to the valuation of
          investments.   However,   because  of  the  inherent   uncertainty  of
          valuation,  those estimated values may differ  significantly  from the
          values that would have been used had a ready market for the securities
          existed, and the differences could be material.

          The Company acquired its portfolio  securities by direct purchase from
          the issuers under investment  representation and values the securities
          on the premise that, in most  instances,  they may not be sold without
          registration under the Securities Act of 1933. The price of securities
          purchased was determined by direct negotiation between the Company and
          the seller.  All portfolio  securities are considered to be restricted
          in their disposition and illiquid at September 30, 2006.

     (3)  DEBENTURES PAYABLE

          Debentures of  MorAmerica  Capital  guaranteed  by the Small  Business
          Administration   (SBA)  of  $10,790,000  at  September  30,  2006  are
          unsecured. Stated maturities of the debentures are as follows:



                                                                               Fixed
         Year ending September 30:                 Debentures              Interest Rate
                                               -------------------      --------------------
              2011                         $            5,835,000                    6.89 %
              2012                                      4,955,000                    6.91
                                               -------------------          ==============
                                           $           10,790,000
                                               ===================


          The debentures  contain  restrictions on the acquisition or repurchase
          of MorAmerica  Capital's  capital stock,  distributions  to MorAmerica
          Capital's  shareholders  other than out of undistributed  net realized
          earnings,  officers' salaries, and certain other matters. At September
          30, 2006,  MorAmerica Capital does not have accumulated  undistributed
          net realized  earnings  (computed under SBA guidelines)  available for
          distribution to MACC.

          As an  SBIC,  MorAmerica  Capital  is  required  to  comply  with  the
          regulations  of the SBA (the  "SBA  Regulations").  These  regulations
          include  the  capital  impairment  rules,  as  defined  by  Regulation
          107.1830 of the SBA Regulations. As of September 30, 2006, the capital
          of  MorAmerica  Capital was impaired  47%,  which is less than the 55%
          maximum impairment percentage permitted under the SBA Regulations.

          MorAmerica Capital has a commitment letter for $6,500,000 with the SBA
          to issue debentures, which expires on September 30, 2007. At September
          30, 2006,  $6,500,000 of this  commitment  remained  unused.  However,
          under MorAmerica  Capital's current agreement with the SBA, MorAmerica
          Capital cannot draw new leverage.

                                       21`

---

`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED...
SEPTEMBER 30, 2006



     (4)  INCOME TAXES

          Income tax expense  differed from the amounts computed by applying the
          United States federal income tax rate of 34% to pretax loss due to the
          following:



         Computed "expected" tax expense                                             $        (645,000)
         Increase (reduction) in income taxes resulting from:
               Nontaxable dividend income                                                      (12,000)
               Change in the beginning of the period valuation allowance for
                    deferred tax assets                                                         642,000
               State tax                                                                        150,000
               Other                                                                             15,000
                                                                                        ----------------
                          Income tax expense                                         $          150,000
                                                                                        ================


          The tax effects of temporary differences that give rise to significant
          portions  of the  deferred  tax assets at  September  30,  2006 are as
          follows:


         Deferred tax assets:
               Net operating and capital loss carryforwards                          $        7,932,000
               Unrealized depreciation on investments                                           805,000
               Other                                                                            399,000
                                                                                        ----------------

                         Total gross deferred tax assets                                      9,136,000

         Less valuation allowance                                                           (8,808,000)
                                                                                        ----------------

                         Net deferred tax assets                                                328,000

         Deferred tax liabilities:
               Equity investments                                                              (21,000)
               Other assets received in lieu of cash                                          (307,000)
                                                                                        ----------------
                         Net deferred tax assets                                     $              ---
                                                                                        ================


          The net  change in the total  valuation  allowance  for the year ended
          September  30, 2006 was an  increase of  $833,000.  In  assessing  the
          realizability of deferred tax assets,  management considers whether it
          is more likely than not that some  portion or all of the  deferred tax
          assets will not be realized.  The ultimate realization of deferred tax
          assets is  dependent  upon the  generation  of future  taxable  income
          during  the  periods  in  which  those  temporary  differences  become
          deductible.  Management  considers projected future taxable income and
          tax planning  strategies in making this assessment.  In order to fully
          realize  the gross  deferred  tax  assets,  the  Company  will need to
          generate future taxable income of  approximately  $28 million prior to
          the expiration of the loss carryforwards in 2008-2025.

          At September 30, 2006,  the Company has net operating and capital loss
          carryforwards  for federal  income tax purposes of  approximately  $20
          million,  which are available to offset future federal taxable income,
          if any, through 2025. Approximately $17.5 million of the carryforwards
          are   available  for  the  year  ending   September  30,  2007,   with
          approximately $1 million  additionally  available annually  thereafter
          until 2008.

                                       22`

---

`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED...
SEPTEMBER 30, 2006


     (5)  MANAGEMENT AGREEMENTS


          (a) MACC

          MACC  has  an  investment  advisory  agreement  (the  Agreement)  with
          InvestAmerica  Investment  Advisors,  Inc.  (IAIA).  Three  of  MACC's
          officers are officers and  stockholders of IAIA. The management fee is
          equal to an annual rate of 1.5% of assets under management (as defined
          in  the  Agreement),   payable  in  arrears.  The  management  fee  is
          calculated   excluding  assets  managed  for  MorAmerica  Capital.  In
          addition to the  management  fee, MACC  contracted to pay an incentive
          fee of 13.4% of MACC net capital gains (as defined in the  Agreement),
          before  taxes.  The  Agreement  may be terminated by either party upon
          sixty days' written notice.  Total management fees under the Agreement
          amounted to $726 for the year ended September 30, 2006.  There were no
          incentive fees accrued or paid under the Agreement in 2006.

          (b) MorAmerica Capital

          MorAmerica Capital has a separate  investment  advisory agreement (the
          MorAmerica  Capital  Agreement)  with  IAIA.  The  MorAmerica  Capital
          Agreement  may be  terminated  by either party upon sixty days written
          notice. Under the MorAmerica Capital Agreement,  the management fee is
          equal to 1.5% of the  Capital  Under  Management  (as  defined  in the
          MorAmerica Capital Agreement) on an annual basis, but in no event more
          than 1.5% per annum of the Assets Under  Management (as defined in the
          MorAmerica Capital Agreement),  payable in arrears. In addition to the
          management fee, MorAmerica Capital contracted to pay IAIA 13.4% of the
          net capital gains (as defined in the  MorAmerica  Capital  Agreement),
          before taxes, on investments in the form of an incentive fee.  Capital
          losses  and  realized  capital  gains  are not  cumulative  under  the
          incentive fee computation.  Payments for incentive fees resulting from
          noncash gains are deferred until the assets are sold. Total management
          fees under the MorAmerica  Capital Agreement  amounted to $427,034 for
          the year ended  September  30,  2006.  Incentive  fees earned and paid
          under  the  MorAmerica   Capital   Agreement  were  $108,399  and  $0,
          respectively,  for the year ended  September  30,  2006.  Included  in
          incentive  fees  earned  of  $108,399  are  approximately  $99,429  of
          incentive  fees related to noncash  gains which are being  deferred as
          described above.

          As a condition  to the approval by the SBA of the  MorAmerica  Capital
          Agreement,  the SBA required, and MorAmerica Capital has entered into,
          a   subordination   agreement   among  it,   the  SBA  and  IAIA  (the
          "Subordination  Agreement")  effective  July 21, 2005  providing  that
          MorAmerica Capital's payment to IAIA, and IAIA's receipt of, incentive
          fees  be  subordinated  to  MorAmerica   Capital's  repayment  of  all
          obligations owing to the SBA. Those obligations  include the repayment
          of all outstanding SBA debentures and MorAmerica  Capital's agreement,
          along with certain other SBA  licensees,  to reimburse the SBA for any
          losses  the SBA may  incur in  connection  with the  settlement  of an
          arbitration proceeding which was concluded in late 2004 (collectively,
          the  "Obligations").  The Subordination  Agreement  provides that: (i)
          MorAmerica  Capital may not pay IAIA  incentive  fees unless and until
          MorAmerica Capital's Obligations to the SBA are satisfied, and (ii) to
          the  extent  (A) the  incentive  fees  have  been  escrowed  under the
          MorAmerica Capital Agreement because MorAmerica  Capital's capital has
          been  impaired  as provided in Section  5.2(c)(ii)  of the  MorAmerica
          Capital  Agreement,  and  (B)  MorAmerica  Capital  is  delinquent  in
          repaying the SBA any amounts  respecting SBA  debentures,  the SBA may
          require  MorAmerica Capital to pay any so escrowed funds to the SBA to
          satisfy any arrearage  respecting SBA  debentures.  The  Subordination
          Agreement does not,  however,  affect:  (i) IAIA's ability to earn the
          incentive  fees,  (ii)  MorAmerica   Capital's   payment  to  IAIA  of
          management fees under the MorAmerica Capital  Agreement,  or (iii) any
          other terms of the MorAmerica Capital Agreement.

                                       23`

---

`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED...
SEPTEMBER 30, 2006

          (6)  FINANCIAL HIGHLIGHTS

          The Company has  presented  the  following  disclosures  pertaining to
          common  stockholders,  as required  by the AICPA Audit and  Accounting
          Guide for Investment Companies, for the years ended September 30:

                                                                     2006            2005          2004          2003          2002
                                                                ------------    ------------    ----------    ----------    -----------

     Per Share Operating Performance
       (For a share of capital stock outstanding
          throughout the period):
          Net asset value, beginning of period               $         5.54            4.61          5.47          6.72           8.60
                                                                ------------    ------------    ----------    ----------    -----------

       Income from investment operations:
           Investment expense, net                                   (0.48)          (0.75)        (1.30)        (0.82)         (0.40)
           Net realized and unrealized (loss)
               gain on investment transactions                       (0.35)            1.80          0.44        (0.43)         (1.48)
           Conversion of note payable and accrued
               interest to shares of common stock                       ---          (0.12)           ---           ---            ---
                                                                ------------    ------------    ----------    ----------    -----------
                     Total from investment operations                (0.83)            0.93        (0.86)        (1.25)         (1.88)
                                                                ------------    ------------    ----------    ----------    -----------

          Net asset value, end of period                     $         4.71            5.54          4.61          5.47           6.72
                                                                ============    ============    ==========    ==========    ===========
          Closing market price                               $         1.78            2.57          3.45          2.52           3.40
                                                                ============    ============    ==========    ==========    ===========


                                                                       2006            2005          2004          2003           2002
                                                                ------------    ------------    ----------    ----------    -----------

          Total return
            Net asset value basis (1) (2)                           (14.98)  %        27.26        (15.75)       (18.59)        (21.89)
            Market price basis                                      (30.74)  %      (25.51)          36.90       (25.88)        (43.89)

          Net asset value, end of period
             (in thousands)                                  $       11,618        13,665          10,738        12,746         15,657

         Ratio to average net assets:
            Investment expense, net (1) (2)                           (8.53)  %     (15.81)        (23.36)       (13.43)         (4.85)
            Operating and income tax expense (1) (2)                   18.46  %       37.86          43.53         31.24          20.52

     (1)  As  discussed  in  note  5 of  the  September  30,  2005  consolidated
          financial  statements,  MACC's  investment  advisor  agreed  to  waive
          management fees during March and April 2005. Due to the agreement, the
          investment  advisor  voluntarily  waived  $103,867 as of September 30,
          2005.  Excluding  the effects of the waiver as of September  30, 2005,
          total  return  on a net  assets  value  basis  would  be  26.29%;  the
          investment expense, net ratio would be (16.80)%; and the operating and
          income expense ratio would be 38.96%.
     (2)  MACC's investment advisor agreed to a voluntary,  temporary  reduction
          in management fees from January 1, 2003 through February 29, 2004. Due
          to the agreement, the investment advisor voluntarily waived $87,092 of
          management fees as of September 30, 2004. Excluding the effects of the
          waiver as of September  30,  2004,  total return on a net assets value
          basis would be (16.43)%;  the investment  expense,  net ratio would be
          (24.11)%; and the operating and income expense ratio would be 44.36%.

          The ratios of  investment  expense,  net to  average  net  assets,  of
          operating  and income  tax  expenses  to average  net assets and total
          return  are  calculated  for  common  stockholders  as a class.  Total
          return, which reflects the annual change in net assets, was calculated
          using the change in net assets  between the  beginning  and end of the
          year. An individual  common  stockholders'  return may vary from these
          returns.


                                       24`

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`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED...
SEPTEMBER 30, 2006

    (7) PORTFOLIO CHANGES DURING THE YEAR


NEW INVESTMENTS AND ADDITIONS
TO PREVIOUS INVESTMENTS                                                         DISPOSITIONS
--------------------------------------------------------------------------------------------------------------------------------------
                                                      Amount                                                                    Amount
                                                     Invested                                                  Cost            Received
                                                   --------------                                          -------------      ------------
AAMI, Inc.                                     $          39,000     Central Fiber Corporation        $               1    $      213,333
Aviation Manufacturing Group, LLC                         89,320     Concentrix Corporation                   2,699,469           509,930
Concentrix Corporation                                    77,000     JHT Holdings, Inc.                         975,024           246,394
M.A. Gedney Company                                       76,000     Lee Mathews Equipment                           30           454,500
SnapNames.com, Inc.                                        4,650     Penn Wheeling Acquisition                1,119,500         2,742,443
Spectrum Products, LLC                                    47,355
                                                -----------------                                     ------------------      ------------
                                               $         333,325                                      $       4,794,024    $    4,166,600
                                                =================                                     ==================      ============
                                                                     REPAYMENTS RECEIVED                                   $    1,590,815
                                                                                                                              ============
                                       25`

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`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS
SCHEDULE 1 - SEPTEMBER 30, 2006

Manufacturing:
                                                                                            Percent
                                                                                             of Net
Company                                    Security                                          assets         Value          Cost (d)
----------------------------------------------------------------------------------------------------------------------------------------
AAMI, Inc. (a)                             6% debt security, due April 1, 2010 (c)                    $         504,577         780,000
   Wichita, Kansas                         Warrant to purchase 11,143 common shares (c)                               1               1
     Manufacturer of industrial and        6% debt security, due April 1, 2010 (c)                              221,000         221,000
     commercial boilers and shower doors,  121,457 common shares (c)                                                ---         121,457
     frames and enclosures                 6% debt security, due April 1, 2010 (c)                              191,880         191,880
                                           312,000 common shares (c)                                                ---           3,120
                                                                                                          -------------    -------------


                                                                                                                917,458       1,317,458
                                                                                                          -------------    -------------
Aviation Manufacturing Group, LLC (a)      14% debt security, due October 1, 2008 (c)                           616,000         616,000
  Yankton, South Dakota                    154,000 units preferred                                              154,000         154,000
     Manufacturer of flight critical       Membership interest                                                       39              39
     parts for aircraft                    14% note, due October 1, 2008                                         89,320          89,320
                                                                                                          -------------    -------------
                                                                                                                859,359         859,359
                                                                                                          -------------    -------------

Central Fiber Corporation                  12% debt security, due March 31, 2009                                236,924         236,924
  Wellsville, Kansas                       12% debt security, due March 31, 2009                                 61,292          61,292
     Recycles and manufactures cellulose                                                                  -------------    -------------
     fiber products                                                                                             298,216         298,216
                                                                                                          -------------    -------------

Detroit Tool Metal Products Co. (a)        14% debt security, due February 29, 2008                           1,128,793       1,128,793
  Lebanon, Missouri                        19,853.94 shares Series A preferred (c)                              195,231         195,231
     Metal stamping                                                                                       -------------    -------------
                                                                                                              1,324,024       1,324,024
                                                                                                          -------------    -------------


Handy Industries, LLC (a)                  12.5% debt security, due January 8, 2007                             667,327         667,327
  Marshalltown, Iowa                       167,171 units Class B preferred (c)                                  167,171         167,171
     Manufacturer of lifts for             Membership interest                                                    1,357           1,357
     motorcycles, trucks and                                                                              -------------    -------------
     industrial metal products                                                                                  835,855         835,855
                                                                                                          -------------    -------------

Hicklin Engineering, L.C. (a)              10% debt security, due June 30, 2007                                 740,000         740,000
  Des Moines, Iowa                         Membership interest                                                      127             127
     Manufacturer of auto and truck                                                                       -------------    -------------
     transmission and brake dynamometers                                                                        740,127         740,127
                                                                                                          -------------    -------------

Industrial Tooling & Fabrication, LLC (a)  10% debt security, due November 18, 2009                             157,715         157,715
  Fort Madison, Iowa                       12% debt security, due November 18, 2009                             343,267         343,267
     Metal stamping                        12% debt security, due November 18, 2009                             208,728         208,728
                                                                                                          -------------    -------------
                                                                                                                709,710         709,710
                                                                                                          -------------    -------------

Kwik-Way Products, Inc. (a)                2% debt security, due January 31, 2008 (c)                           186,529         267,254
  Marion, Iowa                             2% debt security, due January 31, 2008 (c)                           197,776         281,795
     Manufacturer of automobile            38,008 common shares (c)                                                ----         126,651
     machinery                             29,340 common shares (c)                                                ----          92,910
                                                                                                          -------------    -------------

                                                                                                                384,305         768,610
                                                                                                          -------------    -------------

Linton Truss Corporation                   542.8 common shares (c)                                                 ----            ----
  Delray Beach, Florida                    400 shares Series 1 preferred (c)                                    840,000          40,000
     Manufacturer of residential roof and  Warrants to purchase common shares (c)                                    15              15
     floor truss systems                                                                                  -------------    -------------
                                                                                                                840,015          40,015
                                                                                                          -------------    -------------



                                       26`

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`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED...
SCHEDULE 1 - SEPTEMBER 30, 2006

Manufacturing Continued:                                                                    Percent
                                                                                            of Net
Company                                    Security                                          assets         Value           Cost (d)

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

M.A. Gedney Company (a)                    648,783 shares preferred (c)                               $          140,000      1,450,601
  Chaska, Minnesota                        12% debt security, due June 30, 2009                                  152,000         76,000
     Pickle Processor                      Warrant to purchase 83,573 preferred shares (c)                          ----           ----
                                                                                                          --------------    ------------
                                                                                                                 292,000      1,526,601
                                                                                                          --------------    ------------

Magnum Systems, Inc. (a)                   12% debt security, due November 1, 2008                               574,163        574,163
  Parsons, Kansas                          48,038 common shares (c)                                               48,038         48,038
     Manufacturer of industrial bagging    292,800 shares preferred (c)                                          304,512        304,512
     equipment                             Warrant to purchase 56,529 common shares (c)                          280,565            565
                                                                                                          --------------    ------------
                                                                                                               1,207,278        927,278
                                                                                                          --------------    ------------
Metal Tooling Holdings, Inc. (a)           7,887.17 common shares (c)                                            476,741        126,741
    Lebanon, Missouri                                                                                     --------------    ------------
     Metal stamping

Pratt-Read Corporation (a)                 13,889 shares Series A Preferred (c)                                  750,000        750,000
  Bridgeport, Connecticut                  7,718 shares Services A preferred (c)                                 300,000        416,667
     Manufacturer of screwdriver shafts    13% debt security, due July 26, 2007 (c)                              277,800        277,800
     and handles and other hand tools      Warrants to purchase common shares (c)                                  ----           ----
                                                                                                          --------------    ------------                                                                                                          --------------    ------------
                                                                                                               1,327,800      1,444,467
                                                                                                          --------------    ------------
Simoniz USA, Inc.                          12% debt security, due April 1, 2008                                  199,306        199,306
  Bolton, Connecticut                                                                                     --------------    ------------
    Producer of cleaning and wax products
    under both the Simoniz brand and
    private label brand names


Spectrum Products, LLC (b)                 13% debt security, due January 1, 2008 (c)                          1,077,649      1,077,649
  Missoula, Montana                        385,000 units Series A preferred (c)                                  192,500        385,000
     Manufacturer of equipment for the     Membership interest (c)                                                  ----            351
     swimming pool industry                17,536.75 units Class B preferred (c)                                  23,677         47,355
                                                                                                          --------------    ------------
                                                                                                               1,293,826      1,510,355
                                                                                                          --------------    ------------
         Total manufacturing                                                                100.76%           11,706,020     12,628,122
                                                                                            =========     --------------    ------------

Service:

FreightPro, Inc                            18% debt security, due February 21, 2007 (c)                          93,750         262,500
  Overland Park, Kansas                    18% debt security, due February 15, 2007 (c)                          31,250          87,500
     Internet based outsource provider     Warrant to purchase 366,177.80 common shares                               2               2
     of freight logistics                  (c)
                                                                                                          --------------    ------------
                                                                                                                125,002         350,002
                                                                                                          --------------    ------------
Monitronics International, Inc.            73,214 common shares (c)                                             439,284          54,703
  Dallas, Texas                                                                                           --------------    ------------
     Provides home security systems
     monitoring services

                                       27`

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`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED...
SCHEDULE 1 - SEPTEMBER 30, 2006

Service Continued:
                                                                                              Percent
                                                                                               of Net                          Cost
Company                                   Security                                             assets        Value             (d)
----------------------------------------------------------------------------------------------------------------------------------------

Morgan Ohare, Inc. (b)                    0% debt security, due January 1, 2007 (c)                         $ 1,068,750       1,125,000
  Addison, Illinois                       10% debt security, due January 1, 2007                                375,000         375,000
      Fastener plating and heat treating  57 common shares (c)                                                        1               1
                                          10% debt security, due January 1, 2007                                 31,250          31,250
                                          10% debt security, due January 1, 2007                                 93,750          93,750
                                          10% debt security, due January 1, 2007                                 23,437          23,437
                                          10% debt security, due January 1, 2007                                    625             625
                                                                                                           -------------     -----------
                                                                                                              1,592,813       1,649,063
                                                                                                           -------------     -----------

SMWC Acquisition Co., Inc. (a)            13% debt security due May 19, 2007                                    110,000         110,000
  Kansas City, Missouri                   1,320 shares common (c)                                               442,900          42,900
     Steel warehouse distribution and     Warrant to purchase 2,200 common shares (c)                              ----            ----
     processing                           176,550 shares Series A preferred                                     353,100         353,100
                                                                                                           -------------     -----------
                                                                                                                906,000         506,000
                                                                                                           -------------     -----------
Warren Family Funeral Homes, Inc.         Warrant to purchase 346.5 common shares (c)                           200,012              12
  Topeka, Kansas                                                                                           -------------     -----------
     Provider of value priced funeral
     services

         Total Service                                                                         28.09%         3,263,111       2,559,780
                                                                                            ============   -------------     -----------

Technology and Communications:

Feed Management Systems, Inc. (a)         540,551 common shares (c)                                           1,327,186       1,327,186
  Brooklyn Center, Minnesota              674,309 shares Series A preferred (c)                                 674,309         674,309
     Batch feed software and systems      12% debt security, due May 20, 2008                                    58,363          58,363
     and B2B internet services            12% debt security, due August 21, 2008                                 55,833          55,833
                                          Warrants to purchase 166,500 Series A
                                          preferred (c)                                                             ---             ---
                                                                                                           -------------     -----------
                                                                                                              2,115,691       2,115,691
                                                                                                           -------------     -----------
MainStream Data, Inc. (a)                 322,763 shares Series A preferred (c)                                 180,044         200,049
  Salt Lake City, Utah                                                                                     -------------     -----------
     Content delivery solutions
     provider


Miles Media Group, Inc. (a)               1,000 common shares (c)                                               866,767         440,000
  Sarasota, Florida                       100 common options (c)                                                    ---             ---
  Tourist magazine publisher                                                                               -------------     -----------
                                                                                                                866,767         440,000
                                                                                                           -------------     -----------
Phonex Broadband Corporation              1,855,302 shares Series A preferred (c)                               288,750       1,155,000
  Midvale, Utah                                                                                            -------------     -----------
     Power line communications


Portrait Displays, Inc.                   8% debt security, due April 1, 2009                                    68,168          68,168
  Pleasanton, California                  8% debt security, due April 1, 2012 (c)                               325,950         750,001
    Designs and markets pivot enabling    Warrant to purchase 39,400 common shares (c)                              ---             ---
    software for LCD computer monitors                                                                     -------------     -----------
                                                                                                                394,118         818,169
                                                                                                           -------------     -----------

                                       28`

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`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED...
SCHEDULE 1 - SEPTEMBER 30, 2006

Service Continued:
                                                                                              Percent
                                                                                               of Net
Company                                   Security                                             assets         Value             Cost(d)
----------------------------------------------------------------------------------------------------------------------------------------

SnapNames.com, Inc.                       511,500 common shares (c)                                         $   125,000           4,650
  Portland, Oregon                                                                                          -------------    ------------
     Domain name management


Total technology and communications                                                            34.17%         3,970,370       4,733,559
                                                                                            ============   -------------    ------------



                                                                                                            $ 18,939,501     19,921,461
                                                                                                           =============    ============


SEE ACCOMPANYING NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS.

                                       29`

---

`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED...
SCHEDULE 1 - SEPTEMBER 30, 2006

(a) Affiliated  company.  Represents  ownership of greater than 5% to 25% of the
outstanding  voting securities of the issuer, and is or was an affiliate of MACC
Private  Equities  Inc. as defined in the  Investment  Company Act of 1940 at or
during the period ended  September 30, 2006.  Transactions  during the period in
which the issuers were affiliated companies are as follows:

                                           Beginning     Purchase   Sales      Ending      Dividend  Interest   Net Realized
Description                                Cost          Cost       Cost       Cost        Income    Income     Gains/Losses
-----------------------------------------------------------------------------------------------------------------------------

AAMI, Inc.                               $    1,278,458     39,000        ---   1,317,458       ---        ---            ---
Aviation Manufacturing Group, LLC               770,039     89,320        ---     859,359     9,240    (3,081)            ---
Concentrix Corporation                        2,622,469     77,000  2,699,469         ---       ---        479    (1,980,469)
Detroit Tool Metal Products Co.               1,324,024        ---        ---   1,324,024       ---    160,226            ---
Feed Management Systems, Inc.                 2,142,229        ---     26,539   2,115,690       ---     15,322            ---
Handy Industries, LLC                           835,855        ---        ---     835,855     3,533     84,574            ---
Hicklin Engineering, L.C.                       740,127        ---        ---     740,127       ---     74,000            ---
Industrial Tooling & Fabrication, LLC           709,710        ---        ---     709,710       ---     82,663            ---
Kwik-Way Products, Inc.                         768,610        ---        ---     768,610       ---      2,768            ---
M.A. Gedney Company                           1,450,601     76,000        ---   1,526,601       ---      3,091            ---
Magnum Systems, Inc.                            927,278        ---        ---     927,278       ---     68,900            ---
MainStream Data, Inc.                           200,049        ---        ---     200,049       ---        ---            ---
Metal Tooling Holdings, Inc.                    126,741        ---        ---     126,741       ---        ---            ---
Miles Media Group, Inc.                         440,000        ---        ---     440,000       ---        ---            ---
Penn Wheeling Acquisition Company, LLC        1,119,500        ---  1,119,500         ---   113,149     66,431      1,987,604
Pratt-Read Corporation                        1,444,467        ---        ---   1,444,467    23,333     12,170            ---
SMWC Acquisition Co., Inc                       506,000        ---        ---     506,000    17,655     14,499            ---
                                           ------------- ---------- ---------- ----------- --------- ---------- --------------
Total                                    $   17,406,157    281,320  3,845,508  13,841,969   166,910    582,042          7,135
                                           ============= ========== ========== =========== ========= ========== ==============


(b)  Controlled  company.  Represents  ownership  of  greater  than  25%  of the
outstanding  voting  securities  of  the  issuer,  and  is or  was a  controlled
affiliate of MACC Private Equities Inc. as defined in the Investment Company Act
of 1940 at or during the period ended  September 30, 2006.  Transactions  during
the period in which the issuers were controlled affiliates are as follows:

                                           Beginning     Purchase   Sales     Ending       Dividend   Interest  Net Realized
Description                                Cost          Cost       Cost      Cost         Income     Income    Gains/Losses
--------------------------------------------------------------------------------------------------------------------------
Morgan Ohare, Inc.                       $    1,784,064        ---   135,001    1,649,063        ---    59,235            ---
Spectrum Products, LLC                        1,463,001     47,355       ---    1,510,356        ---    12,064            ---
                                           ------------- ---------- --------- ------------ ---------- --------- --------------
Total                                    $    3,247,065     47,355   135,001    3,159,419        ---    71,299            ---
                                           ============= ========== ========= ============ ========== ========= ==============

(c) Presently nonincome producing.
(d) For all debt securities presented, the cost is equal to the principal
balance.


SEE ACCOMPANYING NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS

                                       30`

---

`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2006


(A) For investments held at the February 15, 1995  fresh-start  date, the stated
cost represents the fair value at the fresh-start date.

(B) At September 30, 2006,  all  securities  are  considered to be restricted in
their disposition and are stated at what the Board of Directors  considers to be
fair market value.

(C) At  September  30,  2006,  the cost of  securities  for  federal  income tax
purposes was $21,154,619, and the aggregate unrealized appreciation/depreciation
(including other basis differences) based on that cost was:


     Unrealized appreciation                                          $   3,601,269
     Unrealized depreciation                                            (5,816,385)
                                                                     ---------------
                    Net unrealized depreciation                       $ (2,215,116)
                                                                     ===============

(D) The Company  owns a  portfolio  which  includes  investments  in  restricted
securities  of small  businesses.  Within  this  portfolio,  seventeen  of these
restricted  securities include registration rights and seven of these restricted
securities do not include registration  rights.  Within the seventeen securities
that  include  registration  rights,  the actual  rights  include the  following
general characteristics:

     1.   The securities generally provide for demand rights as follows:

          a.   The demand  rights may only be required  from a low of 25% of the
               security holders to a high of a majority of the security holders.

          b.   The  security   holders  may  require  from  one  to  two  demand
               registrations.

          c.   The small  businesses  are  generally  only required to use "best
               efforts" to comply with the demands.

     2.   The  securities  generally  allow the  security  holders  to  register
          securities  if the  small  business  registers  its  securities,  i.e.
          "piggyback rights."

          a.   Piggyback rights generally may be accessed by individual security
               holders.

          b.   Under  piggyback  rights,  the small  business and its investment
               bankers are only  required to use best efforts to comply with the
               right.

     3.   The Company  expects that, in general,  the securities  that they will
          acquire in the future will include demand and piggyback rights.

                                       31`

---

`MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
SHAREHOLDER INFORMATION (UNAUDITED)


     * Stock Transfer Agent

Mellon Investor Services LLC, 480 Washington Blvd, 27th Floor,  Jersey City, New
Jersey   07310   (telephone   (800)   288-9541   and   (800)   231-5469   (TDD),
www.melloninvestor.com,  and  shrrelations@mellon.com)  serves as transfer agent
and registrar for MACC's common stock.  Certificates to be transferred should be
mailed directly to the transfer agent, preferably by registered mail.

     * Shareholders

MACC had approximately  1,910 record holders of its common stock at November 30,
2006.

     * Annual Meeting

The Annual Meeting of Shareholders of MACC will be held on Tuesday, February 27,
2007,  at  10:00  a.m.  Mountain  Standard  Time at the HMS Host  Meeting  Room,
Terminal 3, Phoenix Sky Harbor International  Airport, 3400 E. Sky Harbor Blvd.,
Phoenix, Arizona 85034.

     * Dividends

MACC has no history of paying cash  dividends  and during  fiscal year 2006 MACC
did not declare a dividend  payment.  The payment of  dividends,  if any, in the
future is within the  discretion  of the Board of Directors and will depend upon
MACC's earnings,  capital  requirements,  financial condition and other relevant
factors.  MACC does not presently have any type of dividend  reinvestment  plan.
Additionally,  MorAmerica  Capital's  ability to make  distributions  to MACC is
limited by the SBA in two ways. First, MorAmerica Capital's SBA debentures limit
such  distributions to undistributed net realized  earnings  (computed under SBA
guidelines).  At September 30, 2006, MorAmerica Capital did not have accumulated
undistributed net realized earnings  available for distribution to MACC. Second,
under the agreement MorAmerica entered into with the SBA respecting the December
2004  arbitration  settlement,  MorAmerica  may only make tax and certain  other
distributions  to MACC; at this time,  MorAmerica  Capital is unable to make any
such distributions to MACC under the terms of that agreement.

     * Market Prices

The common stock of MACC is traded on the  over-the-counter  market  through the
National  Association  of  Securities  Dealers  Automated  Quotation  ("NASDAQ")
Capital  Market under the symbol "MACC." At the close of business on October 31,
2006,  the bid price for shares of MACC's common stock was $1.68.  The following
high and low bid quotations for the shares during each quarterly period ended on
the date  shown  below of MACC's  fiscal  years  2006 and 2005 were  taken  from
quotations provided to MACC by the NASDAQ:

     --------------------------------------------------------------
                                        High             Low
     --------------------------------------------------------------
     December 31, 2004              $   4.10             1.55
     March 31, 2005                     3.13             2.26
     June 30, 2005                      2.72             2.06
     September 30, 2005                 2.85             2.18
     December 31, 2005                  2.76             2.52
     March 31, 2006                     3.99             2.52
     June 30, 2006                      3.04             2.06
     September 30, 2006                 2.21             1.75
     --------------------------------------------------------------

Such  over-the-counter  market quotations  reflect  inter-dealer  prices without
retail markup, markdown or commission and may not represent actual transactions.

                                       32`

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`MANAGERS, OFFICERS AND DIRECTORS
........................................................
FUND MANAGER

InvestAmerica Investment Advisors, Inc.

OFFICERS

DAVID R. SCHRODER
President and Secretary

ROBERT A. COMEY
Executive Vice President, Chief Financial Officer, Treasurer,
Chief Compliance Officer

KEVIN F. MULLANE
Senior Vice President

MICHAEL H. REYNOLDSON
Vice President



BOARD OF DIRECTORS

MICHAEL W. DUNN - CEDAR RAPIDS, IOWA
President, Farmers and Merchants Savings Bank and
Vice President, Security Savings Bank

BENJAMIN JIARAVANON - JAKARTA, INDONESIA
Chairman-CEO, Central Proteinaprima
Aguaculture Business

JASJA KOTTERMAN - HONG KONG, CHINA
Executive Director, Business Development and Corporate
Strategy Avon Products

GORDON J. ROTH - NEWPORT BEACH, CALIFORNIA
Chief Operating Officer and Chief Financial Officer,
Roth Capital Partners, LLC

GEOFFREY T. WOOLLEY - BOSTON, MASSACHUSETTS
Chairman of the Company, Chairman, European Venture Partners
and Founding Partner, Dominion Ventures Inc.






                                       33`

---

`OFFICE LOCATIONS
............................................


     * HEADQUARTERS

         MACC Private Equities Inc.
         InvestAmerica Investment Advisors, Inc.
         101 Second Street SE, Suite 800
         Cedar Rapids, Iowa  52401
         (319) 363-8249


     * REGIONAL OFFICES

         MACC Private Equities Inc.
         InvestAmerica Investment Advisors, Inc.
         911 Main Street, Suite 2424
         Kansas City, Missouri  64105
         (816) 842-0114

         MACC Private Equities Inc.
         InvestAmerica Investment Advisors, Inc.
         H.H. Hall Building
         10000 NE 7th Avenue, Suite 345
         Vancouver, Washington  98685
         (360) 573-5067


STOCK TRANSFER AGENT
..............................................

         Mellon Investor Services LLC
         P.O. Box 3315  o  South Hackensack o NJ  07606
         OR  480 Washington Blvd, 27th Floor o Jersey City o NJ  07310
         Phone:  (800) 288-9541
         Hearing Impaired Shareholder Number: (800) 231-5469 or (201) 680-6610
         Foreign Shareholder Number:  (201) 680-6578
         Website:  www.melloninvestor.com
         Email Contact:  shrrelations@mellon.com


                                       34`

---

`MACC PRIVATE EQUITIES INC. PRIVACY NOTICE

     As a result of Federal  legislation,  we are required to notify each of our
individual  shareholders of record of our policies with regard to privacy of our
shareholders'  personal financial  information.  Accordingly,  we wanted to take
this  opportunity  to  show  our  dedication  to the  privacy  of  the  personal
information  of our  shareholders  and to provide a  description  of our privacy
policies and the procedures we take in order to protect your personal  financial
information.

                TYPES OF NONPUBLIC PERSONAL INFORMATION COLLECTED

     The only types of  nonpublic  personal  information  that we  collect  with
respect to our  shareholders are the name of each  shareholder,  the address and
telephone  number  of each  shareholder,  the  social  security  number  of each
shareholder,  and the total  number of shares held by each of our  shareholders.
This  information  is  gathered  only for those  shareholders  whose  shares are
registered  in their own names (as opposed to being  registered in your broker's
or other "street" name).

                TYPES OF NONPUBLIC PERSONAL INFORMATION DISCLOSED

     As we place the privacy of our current  and former  shareholders'  personal
financial  information at a premium,  we do not disclose any nonpublic  personal
information about our current or former shareholders to anyone, except as may be
permitted by law.

                 SECURITY OF YOUR NONPUBLIC PERSONAL INFORMATION

     In our efforts to protect your personal financial information,  we restrict
access to nonpublic  personal  information  about you those  parties  within our
company  who  need to know the  information  in order  to  provide  products  or
services to you. We maintain physical and procedural safeguards that comply with
federal regulations to guard your nonpublic personal information.

                                       35`