UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549


**FORM
      10-K**





**x**
            ANNUAL
                REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934


**For
      the fiscal year ended March 31, 2006**


OR


**o**
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934


For
      the
      transition period from ___________ to
      ___________





Commission
      File Number 0-2762





**MAXCO,
      INC.**


*(Exact
      Name of Registrant as Specified in its Charter)*





Michigan
            38-1792842*(State
                or other Jurisdiction of Incorporation or
                Organization)*
            *(I.R.S.
                Employer Identification
                Number)*





1118
                Centennial Way, Lansing, Michigan
            48917*(Address
                of principal executive offices)*
            *(Zip
                Code)*





Registrant's
                Telephone Number, including area code:
            (517)
                321-3130





Securities
      registered pursuant to Section 12(b) of the Act:





Title
                of each class
            Name
                of each exchange on which registeredNONE
            NONE





Securities
      registered pursuant to Section 12(g) of the Act:




Common
                Stock
            Series
                Three Preferred Stock*(Title
                of Class)*
            *(Title
                of Class)*





Indicate
      by check mark whether the registrant is a well-known seasoned issuer, as defined
      in Rule 405 of the Securities Act.


Yes  ̈ No þ





Indicate
      by check mark whether the registrant is not required to file reports pursuant
      to
      Section 13 or Section 15(d) of the Exchange Act.


Yes  ̈ No þ





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.


Yes þ No  ̈





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of the registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K.


 ̈




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.


Large
                accelerated filer ̈
            
            Accelerated
                filer ̈
            
            Non-accelerated
                filerþ





Indicate
      by check mark whether the registrant is a shell company (as defined by
      Rule 12b-2 of the Act).


Yes  ̈ No þ





The
      aggregate market value of the registrant’s common stock, $1.00 par value per
      share, held by non-affiliates of the registrant on September 30, 2005, the
      last
      business day of the registrant’s most recently completed second fiscal quarter,
      was $4,392,865 (based on the closing sales price of the registrant’s common
      stock on that date). Shares of the registrant’s common stock held by each
      officer and director and each person who owns 5% or more of the outstanding
      common stock of the registrant have been excluded in that such persons may
      be
      deemed to be affiliates. This determination of affiliate status is not
      necessarily a conclusive determination for other purposes. At June 30, 2006,
      there were 3,454,039 outstanding shares of the Registrant's common
      stock.





Documents
      Incorporated By Reference





Portions
      of the annual proxy statement for the year ended March 31, 2006 are incorporated
      by reference into Part III.










**MAXCO,
      INC.**


**ANNUAL
      REPORT ON FORM 10-K**





**TABLE
      OF CONTENTS**











**ITEM**
            
            
            
            **PAGE**




Item
                1 - Business
            3Item
                2 - Properties
            5Item
                3 - Legal Proceedings
            5Item
                4 - Submission Of Matters To A Vote Of Security Holders
            5Item
                5 - Market For Registrant's Common Equity, Related Stockholder Matters
                And
                Issuer Purchases Of Equity Securities
            5Item
                6 - Selected Financial Data
            6Item
                7-Management's Discussion And Analysis Of Financial Condition And
                Results
                Of Operations
            7Item
                7a - Quantitative And Qualitative Disclosures About Market
                Risk
            14Item
                8 - Financial Statements And Supplemental Data
            14Item
                9 - Changes In And Disagreements With Accountants
            14Item
                9a - Controls And Procedures
            14Item
                9b - Other Information
            15Item
                10 - Directors And Executive Officers Of The Registrant
            15Item
                11 - Executive Compensation
            15Item
                12 - Security Ownership Of Certain Beneficial Owners And Management
                And
                Related Stockholder Matters
            15Item
                13 - Certain Relationships And Related Transactions
            15Item
                14. Principal Accountant Fees And Services
            15Item
                15 - Exhibits And Financial Statement Schedules
            15Signatures
            17Financial
                Statements Index
            19


2




**PART
      I**




**ITEM
      1 - BUSINESS**





Maxco,
      Inc. (Maxco) is a Michigan corporation incorporated in 1946. Maxco currently
      operates in the heat-treating business segment through Atmosphere Annealing
      Inc., a production metal heat-treating service company. Maxco also has
      investments in real estate and investments representing less than majority
      interests in the following businesses: a registered broker-dealer of securities
      that is primarily focused on the trading of fixed income investments; a
      developer, manufacturer and marketer of microprocessor-based process monitoring
      and inspection systems for use in industrial manufacturing environments; and
      an
      energy-related business. References to “the Company” are defined as Maxco, Inc.
      and its wholly owned subsidiary, Atmosphere Annealing, Inc.





**Heat
      Treating**





*Atmosphere
      Annealing, Inc.*





Atmosphere
      Annealing, Inc. (“Atmosphere”) provides metal heat treating, phosphate coating
      and bar shearing and sawing services to the cold forming, stamping, forging
      and
      casting industries. Its services are sold through Atmosphere’s own sales
      personnel and outside sales representatives, primarily to automotive companies
      and automotive suppliers. This unit’s facilities are located in Lansing,
      Michigan; Canton, Ohio; and North Vernon, Indiana.





In
      May
      2005, Atmosphere acquired the common stock of BCGW, Inc. (“BCGW”) for $200,000.
      BCGW owns the buildings that house Atmosphere’s operating facilities in Lansing,
      Michigan. The spouse of Maxco’s president, Max A. Coon, was a 25% owner of BCGW.
      At the acquisition date BCGW had $1.2 million in property and equipment and
      $1.0
      million in debt.





Since
      Atmosphere is a service business, inventory levels for this segment are
      traditionally small and consist mainly of steel inventory, various lubricants
      and other materials used in the heat treating, phosphate coating or bar shearing
      and sawing process. The majority of heat treating services are completed on
      customer owned parts shipped to Atmosphere’s plants for heat treating. Title to
      these parts does not transfer to Atmosphere and therefore customer owned parts
      heat treated by Atmosphere are not included in Atmosphere Annealing Inc.’s
      inventory. Inventories of this segment represent 100% of Maxco’s total
      inventories at March 31, 2006.





Atmosphere
      is a service provider, not a manufacturer. With one exception, the parts
      processed are customer owned parts and therefore the right to return is not
      a
      material issue. Extended payment terms are not provided to
      customers.





The
      heat-treating industry is competitive with over 250 heat treaters in Michigan,
      Ohio, and Indiana. Atmosphere specializes in high volume, ferrous heat-treating
      using large furnaces. In its market niche of this type of heat-treating,
      Atmosphere competes with only a limited number of competitors. Much of the
      commercial heat treating industry is comprised of smaller companies that
      specialize in batch heat-treating such as carburizing, nitriding, tool and
      die,
      brazing, salt bath or induction hardening.





This
      unit’s response time to its customer just-in-time requirements does not result
      in significant backlog for this segment. Growth is possible by this unit in
      the
      future due to its customers’ outsourcing of high volume heat-treating services.
      These services are usually outsourced by Atmosphere’s customers because of
      extensive storage requirements, costs, and other issues.





Sales
      for
      this unit are fairly consistent throughout the year with the exception of lower
      volume during model changeovers for its automotive customers in July, and during
      the winter holiday season. This operating segment accounted for 100% of
      consolidated net sales for the years ended March 31, 2006, 2005, and
      2004.





Subsequent
      to March 31, 2006, the Company engaged GBQ Consulting, LLC to locate an investor
      or purchaser of the Company including its subsidiary Atmosphere Annealing,
      Inc. Such
      sale
      is not expected to occur by March 31, 2007.





**Investment
      in Real Estate (Discontinued and Held For Sale)**





Maxco
      has
      effective ownership interests ranging from 31-50% in primarily two LLC’s that
      have been involved in the development and ownership of real estate in central
      Michigan. In 2003, the Company’s affiliated entity, L/M Associates II, sold
      substantially all of the properties in its real estate portfolio. Pursuant
      to
      the terms of the sale agreement, in July 2004, L/M Associates (L/M) exercised
      its option to require the managing member of the acquiring entity to repurchase
      L/M’s 16% interest in the acquiring entity. To date this requirement has not
      been satisfied and L/M Associates intends to pursue other collection remedies
      against the managing member of the acquiring entity. In addition, during the
      fourth quarter of fiscal 2006, the managing member of the acquiring entity
      listed the applicable properties for sale with a major real estate firm. Maxco
      accounts for its interest in L/M as real estate investment held for sale.





In
      May
      2005, Maxco acquired the common stock of Ledges Commerce Park (“Ledges”) for
      $200,000 plus the assumption of certain liabilities from L/M. As a result of
      this transaction, Maxco has recorded the assets acquired at their fair value,
      (all such assets are held for sale) and recorded the liabilities assumed at
      the
      amount at which they are expected to be settled. The financial reporting effect
      of this transaction essentially grosses up the assets and liabilities on Maxco’s
      balance sheet. This transaction effectively gives Maxco full control over the
      disposition of assets and the settlement of the liabilities as it relates to
      Ledges. The Company included the operations of Ledges since the date of
      acquisition in the consolidated financial statements. Such amounts are
      immaterial.





3


Any
      real
      risks on guarantees that Maxco has estimated would be required to be paid by
      Maxco have been recorded in the accompanying consolidated financial statements
      and Maxco’s investment in real estate has been adjusted to the net realizable
      value of the remaining assets. Impairment charges totaling $800,000 were
      recognized during the year ended March 31, 2006 to further reduce the carrying
      value of the Company’s investment in real estate to its estimated fair value
      less costs to sell.





**Other
      Investments**





In
      addition to its investments in real estate, the Company has other investments
      in
      50% or less owned affiliates.





Maxco’s
      equity interest is 20% or greater in the following companies and consequently
      is
      accounted for using the equity method: approximately a 36% interest in Phoenix
      Financial Group, LTD and its subsidiary Cambridge Group Investments, LTD (dba
      Bondpage.com), a registered broker-dealer of securities that is primarily
      focused on the trading of fixed income investments; and a 50% interest in
      Robinson Oil Company, LLC, which is in the business of acquiring and developing
      oil and gas interests. Impairment charges of $226,000 and $30,000 were
      recognized during the year ended March 31, 2006 to reduce the carrying value
      of
      the Company’s investments in Phoenix Financial Group and Robinson Oil Company,
      respectively, to their estimated fair values.





At
      March
      31, 2006, Maxco owned 2,410,183 shares or 8% of Integral Vision, Inc. common
      stock. Maxco’s ownership of Integral Vision had been greater than 20% but
      decreased as Integral Vision common stock warrants were exercised in March
      2004.
      However, Maxco continues to account for its investment in Integral Vision under
      the equity method because of its representation on Integral Vision’s Board of
      Directors. Integral Vision develops, manufactures, and markets flat panel
      display inspection systems to ensure product quality in the display
      manufacturing process.





**Research
      and Development**





Expenditures
      on research activities related to development or improvement of products were
      not significant.





**Major
      Customers**





The
      nature of the Company’s services may produce sales to one or a small number of
      customers in excess of 10% of total sales in any one year. It is possible that
      the specific customers reaching this threshold may change from year to year.
      Loss of any one of these customers could have a material impact on the Company’s
      results of operations. For the year ended March 31, 2006 sales to Honda of
      America Manufacturing, Inc. and GM Powertrain represented 33.2% and 10.4% of
      consolidated sales, respectively. Amounts due from these customers represented
      33% of the respective outstanding trade receivable balance at March 31, 2006.
      For the year ended March 31, 2005 sales to Honda of America Manufacturing,
      Inc.
      and GM Powertrain represented 33.3% and 10.7% of consolidated sales,
      respectively. Amounts due from these customers represented 31% of the respective
      outstanding trade receivable balance at March 31, 2005. For the year ended
      March
      31, 2004 sales to Honda of America Manufacturing, Inc. and GM Powertrain
      represented 38.3% and 14.3% of consolidated sales, respectively.





**Environmental
      Factors**





Compliance
      by Maxco and its operating subsidiaries with environmental protection laws
      had
      no material effect on capital expenditures, earnings, or competitive
      position.





**Employees**





At
      March
      31, 2006, Maxco and its wholly-owned operating subsidiary employed approximately
      260 full time employees.





**Export
      Sales and Foreign Operations**





The
      Company and its operating subsidiary had no foreign operations or material
      export sales during the years ended March 31, 2006, 2005, or 2004.





For
      additional information regarding industry segment information see Note 11 to
      “Notes to Consolidated Financial Statements”.





4


**ITEM
      2 - PROPERTIES**





The
      following table provides information relative to the principal properties owned
      or leased by the Company and its operating subsidiary as of March 31, 2006.
      The
      Company considers its facilities to be in good operating condition.





**LOCATION**
            **APPROXIMATE
                SIZE**
            **OWNED/LEASED**
            **USE*****HEAT
                TREATING****Atmosphere
                Annealing, Inc.*Lansing,
                MI
            145,000
                sq ft on 15 acres
            Owned(A)
            Plant
                and administrative officesLansing,
                MI
            58,000
                sq ft on 4 acres
            Owned(A)
            Heat
                treating plantCanton,
                OH
            160,000
                sq ft on 8 acres
            Owned(A)
            Heat
                treating plantN.
                Vernon, IN
            88,000
                sq ft on 6 acres
            Owned(A)
            Heat
                treating plant***CORPORATE****Maxco,
                Inc.**Lansing,
                MI*
            1,615
                sq ft
            Leased(B)
            Executive
                offices


(A) Subject
      to a mortgage


(B) In
      January 2006, Maxco sold this property to an outside party for $1.0 million
      and
      agreed to lease the space for approximately $3,700 per month for six months.





**ITEM
      3 - LEGAL PROCEEDINGS**





None





**ITEM
      4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS**





The
      annual meeting of shareholders was held on March 14, 2006. The matters voted
      upon were the election of directors and other business that may come before
      the
      meeting (of which there was none). The results of votes were as
      follows:




Election
                  of directors:For
              
              WithheldMax
                  A. Coon
              3,279,032
              
              5,499Sanjeev
                  Deshpande
              3,279,132
              
              5,399Joel
                  I. Ferguson
              3,268,133
              
              16,398David
                  R. Layton
              3,268,133
              
              16,398Samuel
                  O. Mallory
              3,268,033
              
              16,498





**PART
      II**





**ITEM
      5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
      ISSUER PURCHASES OF EQUITY SECURITIES**





Maxco's
      common stock trades on the Nasdaq SmallCap Market under the symbol MAXC. The
      approximate number of record holders of Maxco's common stock at June 30, 2006
      was 475.





The
      range
      of high and low sales prices for the last two fiscal years as reported by NASDAQ
      were:


**QUARTER
                  ENDED**
              **HIGH**
              **LOW**June
                  30, 2004
              3.50
              2.35September
                  30, 2004
              5.58
              2.50December
                  31, 2004
              5.02
              3.00March
                  31, 2005
              4.30
              3.20June
                  30, 2005
              5.00
              3.25September
                  30, 2005
              5.25
              3.52December
                  31, 2005
              5.79
              4.15March
                  31, 2006
              5.98
              5.45





No
      cash
      dividends on common stock have been paid during any period.





5


**ITEM
      6 - SELECTED FINANCIAL DATA**


**Year
                  Ended March 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002*****(in
                  thousands, except per share data)***Net
                  sales (3)
              
              $
              46,564
              
              $
              45,364
              
              $
              40,798
              
              $
              36,827
              
              $
              34,696Loss
                  on investments (1)
              
              
              (1,056
              )
              
              (610
              )
              
              (1,115
              )
              
              (9,320
              )
              
              (3,103
              )Income
                  (loss) before equity in net (loss) income of affiliates and discontinued
                  operations (3)
              
              
              114
              
              
              134
              
              
              (1,210
              )
              
              (10,474
              )
              
              (1,299
              )Equity
                  in net (loss) income of affiliates, net of tax
              
              
              (100
              )
              
              -
              
              
              (321
              )
              
              (614
              )
              
              (528
              )Loss
                  from discontinued operations (3)
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,737
              )
              
              (2,674
              )Net
                  income (loss)
              
              
              14
              
              
              134
              
              
              (1,531
              )
              
              (12,825
              )
              
              (4,501
              )Net
                  loss per share—dilutedContinuing
                  operations
              
              
              (0.13
              )
              
              (0.09
              )
              
              (0.63
              )
              
              (3.71
              )
              
              (0.72
              )Discontinued
                  operations (3)
              
              
              -
              
              
              -
              
              
              -
              
              
              (0.56
              )
              
              (0.86
              )Net
                  loss per share (2)
              
              $
              (0.13
              )
              $
              (0.09
              )
              $
              (0.63
              )
              $
              (4.27
              )
              $
              (1.58
              )**At
                  March 31:****2006**
              
              
              **2005**
              
              
              **2004**
              
              
              **2003**
              
              
              **2002*****(in
                  thousands)***Total
                  assets
              
              $
              34,125
              
              $
              32,871
              
              $
              35,481
              
              $
              38,375
              
              $
              87,038Working
                  capital (deficit)
              
              
              (7,697
              )
              
              (7,988
              )
              
              (7,736
              )
              
              (19,698
              )
              
              (16,846
              )Long-term
                  obligations (net of current obligations)
              
              
              7,131
              
              
              7,070
              
              
              11,480
              
              
              1,113
              
              
              11,380Assets
                  of discontinued operations (3)
              
              
              -
              
              
              -
              
              
              -
              
              
              474
              
              
              29,252




**NOTES**





(1)
            Includes
                the following charges for impairment of the Company’s
                investments:




**Year
                  Ended March 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002*****(in
                  thousands)***Robinson
                  Oil
              
              $
              30
              
              $
              260
              
              $
              -
              
              $
              -
              
              $
              -Phoenix
                  Financial
              
              
              226
              
              
              -
              
              
              -
              
              
              -
              
              
              -Real
                  estate
              
              
              800
              
              
              350
              
              
              749
              
              
              4,698
              
              
              -Provant
              
              
              -
              
              
              -
              
              
              366
              
              
              1,360
              
              
              3,103Foresight
                  Solutions
              
              
              -
              
              
              -
              
              
              -
              
              
              2,790
              
              
              -Integral
                  Vision
              
              
              -
              
              
              -
              
              
              -
              
              
              122
              
              
              -Vertical
                  VC
              
              
              -
              
              
              -
              
              
              -
              
              
              250
              
              
              -MYOEM.COM
              
              
              -
              
              
              -
              
              
              -
              
              
              100
              
              
              -$
              1,056
              
              $
              610
              
              $
              1,115
              
              $
              9,320
              
              $
              3,103





(2)
            Net
                loss per share amounts assume dilution for all years
                presented.





(3)
            In
                accordance with FASB Statement No. 144, the Company in fiscal 2003
                reclassified its results from operations for discontinued operations.





No
      cash
      dividends on common stock have been paid during any year.





The
      above
      selected financial data should be read in conjunction with the consolidated
      financial statements, which appear in Part II, Item 8 of this
      report.





6


**ITEM
      7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**





**Critical
      Accounting Policies**





The
      accompanying consolidated financial statements have been prepared in conformity
      with accounting principles generally accepted in the United States. When more
      than one accounting method or its application is generally accepted, management
      selects the principle or method that is appropriate in the specific
      circumstances. Application of these accounting principles requires the Company’s
      management to make estimates about the future resolution of existing
      uncertainties; as a result, actual results could differ from these estimates.
      In
      preparing these consolidated financial statements, management has made its
      best
      estimates and judgments of the amounts and disclosures included in the financial
      statements, giving due regard to materiality. The Company does not believe
      there
      is a great likelihood that materially different amounts would be reported under
      different conditions or using different assumptions pertaining to the accounting
      policies described below.





***Principles
      of Consolidation and Transactions With Affiliates***





The
      consolidated financial statements include the accounts of Maxco, Inc. and its
      majority owned subsidiaries. Upon consolidation, all intercompany accounts
      and
      transactions are eliminated. All significant investments are accounted for
      under
      the equity method. Transactions with equity affiliates are in the ordinary
      course of business and are generally conducted on an arm’s-length basis. Certain
      investments in equity affiliates and other activities may be between related
      parties and are generally conducted on an arm’s-length basis.





In
      June
      2003, the Company assumed a lease with CJC Leasing, a limited liability company
      in which Mr. Coon is a member, from Contractor Supply Incorporated, the
      purchaser of the Company’s formerly wholly owned subsidiary, Ersco Corporation.
      Contractor Supply Incorporated was required under the lease to pay CJC Leasing
      an aggregate of approximately $2.3 million in monthly installment payments
      over
      a period of approximately 4 years. In exchange for the Company assuming
      Contractors Supply Incorporated’s lease payments to CJC Leasing, Contractors
      Supply Incorporated and the Company agreed to reduce the amount then owed by
      the
      Company to Contractor Supply Incorporated by $2.3 million. The assumption of
      the
      lease obligations to CJC Leasing by the Company allowed the Company to retire
      a
      $2.3 million debt that was otherwise due and payable to Contractors Supply
      Incorporated, by making monthly payments of the approximate $2.3 million over
      four years. In June 2006, the Company paid off the obligation due CJC Leasing
      under this lease.





In
      February 2005, the Company issued 250,000 shares of restricted common stock
      of
      the Company to Contractor Supply Incorporated, and 95,800 shares of restricted
      common stock of the Company to Master Works Foundation, Inc. (a non-profit
      corporation in which the sole shareholder of Contractor Supply Incorporated
      is a
      one-third member) in exchange for further reduction of the amount owed by the
      Company to Contractor Supply Incorporated by $1.4 million. The remaining Company
      debt owed to Contractor Supply Incorporated was subsequently assigned by
      Contractor Supply Incorporated to Ambassador Steel Corporation, and then by
      Ambassador Steel Corporation to its President, Daryle E. Doden. On September
      30,
      2005, Mr. Doden assigned this Company debt, approximating $1.25 million, to
      EM
      Investors, LLC. EM Investors, LLC converted the Company payable, including
      all
      accrued interest, to 7,812.5 shares of the Company’s series six preferred stock.
      Messrs. Coon and Cross, are managers, and have indirect ownership interests,
      of
      39.08% and 8.35%, respectively, of EM Investors, LLC.





Maxco
      had
      provided the guarantee of certain debt obligations of certain real estate and
      other investments in an aggregate amount of approximately $2.0 million as of
      March 31, 2005. The Company’s real estate affiliates continue to operate under a
      forbearance agreement with a lender. In order to avoid foreclosure of the real
      estate assets that secure these loans, Maxco, as guarantor, in May 2005 agreed
      to purchase, through a subsidiary, the real estate secured by the Ledges land
      and buildings. As a result of this purchase a $1.8 million liability, which
      had
      been guaranteed by the Company, was assumed directly by the Company and is
      now
      included in short term debt in the accompanying March 31, 2006 balance sheet.
      At
      March 31, 2006, this debt balance approximated $1.2 million as proceeds from
      the
      sale of three condominium units were used to reduce the outstanding debt balance
      accordingly. In February 2006, the remaining guarantee of $125,000 was repaid
      as
      a result of the sale of the underlying asset. Consequently, no guarantees remain
      as of March 31, 2006. The Company is in the process of refinancing its Ledges
      land and building and has received a commitment from a lender. Upon closing,
      the
      Company’s real estate affiliate will no longer be operating under forbearance
      agreements.





The
      Company has recorded in the accompanying consolidated financial statements
      additional amounts that had been identified as guarantees prior to March 31,
      2005. The amounts so recorded aggregated approximately $85,000 and $249,000
      as
      of March 31, 2006 and March 31, 2005, respectively.





***Investments
      and Marketable Securities***





The
      Company accounts for certain of its investments under Statement of Financial
      Accounting Standards (SFAS) 115 as securities available-for-sale.
      Available-for-sale securities are carried at fair value, with the unrealized
      gains and losses, net of tax, reported as a separate component of stockholders’
equity. The amortized cost of securities in this category is adjusted for
      amortization of premiums and accretion of discounts to maturity. Such
      amortization is included in investment income. Realized gains and losses and
      declines in value judged to be other than temporary on available-for-sale
      securities are included in investment income or loss. The cost of securities
      sold is based on the specific identification method. Interest and dividends
      on
      securities classified as available-for-sale are included in investment income.
      The fair value of marketable securities is based on quoted market
      value.





7


The
      Company reviews its investments to determine if the value shows a decline that
      has been deemed other than temporary. Maxco’s investment in real estate was
      reduced by $800,000, $350,000, and $749,000 in 2006, 2005, and 2004,
      respectively, related to other than temporary impairments. Maxco’s investment in
      Provant was impaired by $366,000 in 2004.





***Revenue
      Recognition***





The
      Company recognizes service revenue and revenue from product sales upon transfer
      of title, which is upon shipment. An estimate of reserves is recorded, if
      material, for anticipated reworks and credit memos which will be issued on
      sales
      recognized to date. The SEC’s Staff Accounting Bulletin (“SAB”) No. 101,
“Revenue Recognition,” provides guidance on the application of generally
      accepted accounting principles to selected revenue recognition issues. The
      Company has concluded its revenue recognition policy is appropriate and in
      accordance with generally accepted accounting principles and SAB No.
      101.





***Goodwill,
      Intangible and Other Long-Lived Assets***





Property,
      plant, and equipment, and certain other definite-lived assets are amortized
      over
      their useful lives. Useful lives are based on management's estimates of the
      period that the asset will be useful to the Company.





Goodwill,
      intangible, and other long-lived assets are reviewed by management for
      impairment whenever events or changes in circumstances indicate the carrying
      amounts may not be recoverable. If management believes impairment may exist,
      an
      assessment is performed. This assessment consists of comparing the estimated
      undiscounted future cash flows with the carrying amount of the long-lived
      assets. If the undiscounted future cash flows are less than the carrying amounts
      of the long-lived assets, the Company adjusts the carrying amount of the
      long-lived assets to their estimated fair value. Fair value is determined by
      anticipated future cash flows discounted at a rate commensurate with the risk
      involved. All of the Company’s goodwill is related to the heat treating segment.
      Goodwill totaled approximately $1.4 million at March 31, 2006 and represented
      4%
      of total assets.





During
      2006, the Company performed the impairment tests of its goodwill,
      indefinite-long-lived intangible and other long-lived assets required by SFAS
      No. 142 and No. 144. The Company's tests indicated that the fair value of its
      heat treating segment, which was determined by using discounted cash flows
      and
      market multiples, exceeded the carrying value. As a result, the Company did
      not
      record an impairment charge for this segment in the accompanying financial
      statements. The Company will continue to perform an impairment review on an
      annual basis (or more frequently if impairment indicators arise).





***Derivative
      Financial Instruments***





The
      Company applies hedge accounting pursuant to SFAS 133, as amended, with respect
      to interest rate swap agreements. Accordingly, changes in the fair value of
      the
      swap are reported as a component of other comprehensive income and are not
      included in operating results.





***Material
      Trends and Uncertainties***





**Caution
      Concerning Forward Looking Statements and Certain Risks Related to Our Business
      and Our Company — Safe Harbor Statements**





This
      report contains statements reflecting the Company's views about its future
      performance, its financial condition, its markets and many other matters that
      constitute "forward-looking statements." These views involve risks and
      uncertainties that are difficult to predict and may cause the Company's actual
      results and/or expectations about various matters to differ significantly from
      those discussed in such forward-looking statements. All statements, other than
      statements of historical fact included in this annual report, regarding our
      strategy, future operations, financial condition, expected results and costs,
      new business, estimated revenues and losses, prospects and plans are
      forward-looking statements. When used in this annual report, the words "will,"
      "believe," "anticipate," "intend," "estimate," "expect," "project" and similar
      expressions are intended to identify forward-looking statements, although not
      all forward-looking statements contain such identifying words. You should not
      place undue reliance on these forward-looking statements. All forward-looking
      statements speak only as of the date of this annual report and we undertake
      no
      obligation to update such information. Readers should consider that various
      factors may affect whether actual results and experience correspond with our
      forward-looking statements and that many of these factors also represent risks
      attendant to owning securities in the Company, including the
      following:





·
            ***Dependence
                on Automotive Industry and Industry Cyclicality***—
                The industries in which we operate depend upon general economic conditions
                and are highly cyclical. Our performance is affected particularly
                by new
                vehicle sales, which can be highly sensitive to changes in interest
                rates,
                consumer confidence and fuel costs. We experience sales declines
                during
                the third and fourth calendar quarter as a result of scheduled OEM
                shutdowns.





·
            ***Customer
                Concentration***—
                Our base of customers is concentrated among original equipment
                manufacturers as well as Tier I and Tier II suppliers in North America.
                The loss of business from a major customer, the discontinuance of
                particular vehicle models or a change in regulations or auto consumer
                preferences could materially adversely affect us. In addition, certain
                of
                our customers have suffered financial distress, which may materially
                adversely impact us as well in terms of the potential for lost revenue
                and/or uncollectible accounts
                receivable.





8


·
            ***Ability
                to Finance Capital Requirements***—
                Our business is capital intensive. We have made substantial capital
                investments to improve capacity and productivity and to meet customer
                requirements. More investment is required to maintain and expand
                our
                future business awards. If we are unable to meet future capital
                requirements, our business may be materially adversely
                affected.





·
            ***Increases
                in Energy Costs***—
                Increases in energy costs could negatively affect our financial health
                and
                results. To the extent feasible, in light of competitive factors,
                we have
                managed these fluctuations through selective price adjustments.





·
            ***Increases
                in Healthcare Costs***—
                Increases in our healthcare costs could negatively affect our financial
                health and results.





·
            ***Our
                Industries are Highly Competitive***—
                Continuing trends among our customers will increase competitive pressures
                in our businesses. The continuing trend towards limiting outside
                suppliers
                involves significant risks, as well as opportunities, and has increased
                competition. We have experienced and may continue to experience adverse
                pricing pressures as a result.





·
            ***Changing
                Technology***—
                Our processes are subject to changing technology, which could place
                us at
                a competitive disadvantage relative to alternative processes introduced
                by
                competitors. We may require significant ongoing and recurring additional
                capital expenditures to remain
                competitive.





·
            ***Changing
                Processes***—
A
                change in a foundry’smold line may eliminate the need for heat treating by controlled
                cooling
                in mold which would have a materially adverse affect on our
                business.





·
            ***Dependence
                on Key Personnel and Relationships***—
                We depend on the services of key individuals, particularly our executive
                officers and senior managers. The loss of any key individual could
                materially and adversely harm us.





·
            ***Labor
                Stoppages***—
                Our customers or suppliers may be subject to work stoppages at their
                facilities, which could materially and adversely harm
                us.





·
            ***Outsourcing
                Trend***—
                Our strategies may not succeed if anticipated outsourcing fails to
                materialize to the extent we have assumed. Principal risks to continued
                outsourcing are union/labor considerations and
                objections.





·
            ***Offshoring
                Trend***—
                Our customers could relocate their manufacturing facilities out of
                the
                United States which could materially and adversely harm
                us.





·
            ***Environmental
                Matters***—
                Our business may be materially and adversely affected by compliance
                obligations and liabilities under environmental laws and
                regulations.





We
      undertake no obligation to update publicly any forward-looking statements,
      whether as a result of new information, future events or otherwise.





**Market
      Opportunities and Growth Strategies**





We
      believe that the following favorable market factors will present opportunities
      for future growth:





·
            Companies
                are focusing on core competencies and outsourcing non-core processes
                such
                as heat treating and coating.





·
            In
                some cases, our customers are consolidating their supply
                base.





·
            Foreign
                automakers are locating manufacturing facilities in the United
                States.





Our
      strategy is to leverage our technical capabilities along with our solid
      reputation in the industry to (i) expand our relationship with our current
      customers through superior quality and customer service, and (ii) become a
      preferred supplier to the foreign automakers locating in the United States.
      Key
      elements of our strategy include the following:





·
            ***Expand
                Capabilities***.    By
                adding new capabilities in our existing plants we believe that we
                could
                secure new business from our existing customer base. By offering
                a
                “one-stop" shop we could significantly reduce logistical costs for
                our
                customers.





·
            ***Provide
                Technical Expertise To Support Our Customers*****.**We
                believe that our technical expertise is one of our competitive advantages.
                We partner with our customers to find ways to improve quality and
                reduce
                cost.





·
            ***Cost
                Savings Opportunities And Efficiency
                Improvements***.    We
                have pursued, and will continue to pursue, cost savings that enhance
                our
                competitive position in serving our customers. We have made significant
                investments in material handling equipment in order to improve efficiency
                and to provide a safer environment for our
                employees.





9


·
            ***Pursue
                Strategic Acquisitions***.    We
                plan to pursue acquisitions that strategically expand our process
                capabilities and contribute to our geographic diversity and market
                share.
                Our ability to execute this element of our strategy may be limited
                by our
                capital resources.





**Results
      Of Operations**





The
      following is a discussion of the major elements relating to Maxco's financial
      and operating results for 2006 compared with 2005, and 2005 compared with 2004.
      The comments that follow should be read in conjunction with Maxco's Consolidated
      Financial Statements and related notes thereto, contained in Part II, Item
      8 of
      this report.





Except
      for the historical information contained herein, the matters discussed in this
      report are forward-looking statements made pursuant to the safe harbor
      provisions of Section 27A of the securities Act of 1933 and Section 21 E of
      the
      Securities Act of 1934. Such statements are based on management’s current
      expectations and are subject to a number of factors and uncertainties, which
      could cause actual results to differ materially from those described in the
      forward-looking statements. These forward-looking statements represent the
      Company’s best estimates as of the date of this report. The Company assumes no
      obligation to update such estimates except as required by the rules and
      regulations of the Securities and Exchange Commission.





**2006
      v** **ersus
      2005**





Net
      sales
      increased to $46.6 million in 2006 compared to $45.4 million in 2005. Operating
      earnings were $2.2 million in 2006 compared to $2.0 million in 2005. Net income
      in 2006 was $14,000, a loss of $456,000 after preferred dividends, or a loss
      of
      $0.13 per share assuming dilution compared to last year’s net income of
      $134,000, a loss of $274,000 after preferred dividends, or a loss of $0.09
      per
      share assuming dilution.





Sales
      and
      operating earnings for the years ending March 31, 2006 and 2005 by the Company’s
      heat treating and corporate and other segments were as follows:


**Year
                  Ended**
              
              **Year
                  Ended****March
                  31, 2006**
              
              **March
                  31, 2005****Net
                  Sales**
              
              **Operating
                  Earnings (Loss)**
              
              **Net
                  Sales**
              
              **Operating
                  Earnings (Loss)*****(in
                  thousands)***Heat
                  treating
              
              $
              46,564
              
              $
              5,515
              
              $
              45,364
              
              $
              4,202Corporate
                  and other
              
              
              -
              
              
              (3,343
              )
              
              -
              
              
              (2,199
              )





The
      increase in net sales at the heat treating segment (Atmosphere Annealing) was
      due to increased volume from an expanded customer base. New customers generated
      an additional $1.6 million over the prior year, while sales from existing
      customers decreased by $360,000.





Consolidated
      gross profit (net sales less cost of sales and operating expenses) increased
      $1.1 million to $17.5 million (37.5% of net sales) from $16.3 million (36.0%
      of
      net sales). The increase in Atmosphere Annealing’s sales accounted for $430,000
      of the increase in gross profit while the improvement in margin accounted for
      $700,000.





Selling,
      general, and administrative (“SG&A”) expenses increased to $12.2 million in
      2006 from $11.4 million in 2005 as a result of the following factors: At the
      corporate level, the Company recorded $1.4 million in expense related to an
      incentive agreement, an increase of $726,000 over the $650,000 recorded in
      2005.
      Corporate also recorded $130,000 and $70,000 in expense in 2006 and 2005,
      respectively, related to a retention agreement. On a consolidated basis,
      employee related expenses increased by $450,000. Atmosphere experienced
      reductions in building rental of $234,000, general insurances of $117,000,
      state
      and local income taxes of $93,000, and property taxes of $27,000.





Depreciation
      and amortization expense was comparable to the prior year.





Interest
      expense decreased 9.7% to $1.4 million from $1.5 million primarily due to
      reduced borrowing levels.





10


The
      Company recorded the following charges to recognize declines in the value of
      its
      investments that were deemed other than temporary:


**Year
                  Ended March 31,****2006**
              
              **2005*****(in
                  thousands)***Robinson
                  Oil
              
              $
              30
              
              $
              260Phoenix
                  Financial
              
              
              226
              
              
              -Real
                  estate
              
              
              800
              
              
              350$
              1,056
              
              $
              610


Equity
      in
      net loss of affiliates consists of Maxco’s share of the operating results of 50%
      or less owned entities accounted for under the equity method. On a consolidated
      basis, equity in net loss of affiliates was $100,000, net of tax, in fiscal
      2006.





Due
      to
      the uncertainty of future realization of deferred tax assets, the Company
      recorded a valuation allowance in prior fiscal years. During fiscal 2006, as
      a
      result of the utilization of net operating loss (NOL) carryforwards of $912,000,
      along with other temporary differences, the valuation allowance was reduced
      by
      $685,000 resulting in a variation from the federal income tax statutory rate
      of
      34%.





**2005
      versus 2004**





Net
      sales
      increased to $45.4 million in 2005 compared to $40.8 million in 2004. Operating
      earnings were $2.0 million in 2005 compared to $169,000 in 2004. Net income
      in
      2005 was $134,000, a loss of $274,000 after preferred dividends, or a loss
      of
      $0.09 per share assuming dilution compared to the prior year’s net loss of $1.5
      million, a loss of $1.9 million after preferred dividends, or a loss of $0.63
      per share assuming dilution.





Sales
      and
      operating earnings for the years ending March 31, 2005 and 2004 by the Company’s
      heat treating and corporate and other segments were as follows:


**Year
                  Ended**
              
              **Year
                  Ended****March
                  31, 2005**
              
              **March
                  31, 2004****Net
                  Sales**
              
              **Operating
                  Earnings (Loss)**
              
              **Net
                  Sales**
              
              **Operating
                  Earnings (Loss)*****(in
                  thousands)***Heat
                  treating
              
              $
              45,364
              
              $
              4,202
              
              $
              40,754
              
              $
              2,137Corporate
                  and other
              
              
              -
              
              
              (2,199
              )
              
              44
              
              
              (1,968
              )





The
      increase in net sales at the heat treating segment (Atmosphere Annealing) was
      due to increased volume from existing customers as well as an expanded customer
      base. Existing customers generated an additional $3.3 million over the prior
      year and new customers added $1.3 million. The decrease in revenue at corporate
      was due to a reduction in rental income from the prior year as a result of
      the
      sale of a building in the prior year.





Consolidated
      gross profit (net sales less cost of sales and operating expenses) increased
      $2.3 million to $16.3 million (36.0% of net sales) from $14.0 million (34.4%
      of
      net sales). The increase in Atmosphere Annealing’s sales accounted for $1.6
      million of the increase in gross profit while the improvement in margin
      accounted for $700,000.





Selling,
      general, and administrative (“SG&A”) expenses increased to $11.4 million in
      2005 from $11.0 million in 2004 as a result of the following factors: Atmosphere
      increased its provision for state and local income taxes by $273,000 and charged
      $186,000 to write off receivables that were deemed uncollectible. At the
      corporate level, the Company recorded a $650,000 expense in 2005 related to
      an
      incentive agreement. Corporate employee related costs and legal expenses were
      reduced by $376,000 and $173,000, respectively. The Company incurred fees to
      secure financing totaling $76,000 in 2005.





Depreciation
      and amortization expense was comparable to the prior year.





The
      Company recognized no gains or losses on the sale of investments in 2005. In
      2004, the Company recognized gains of $910,000 on the sale of land, $180,000
      on
      the sale of Integral Vision, Inc. common stock, and $250,000 to adjust a note
      receivable to its realizable value, collected subsequent to March 31, 2004.





Interest
      expense decreased 9.8% to $1.5 million from $1.7 million primarily due to
      reduced borrowing levels.





11


The
      Company recorded the following charges to recognize declines in the value of
      its
      investments that were deemed other than temporary:


**Year
                  Ended March 31,****2005**
              
              **2004*****(in
                  thousands)***Robinson
                  Oil
              
              $
              260
              
              $
              -Real
                  estate
              
              
              350
              
              
              749Provant
              
              
              -
              
              
              366$
              610
              
              $
              1,115





Equity
      in
      net loss of affiliates consists of Maxco’s share of the operating results of 50%
      or less owned entities accounted for under the equity method. On a consolidated
      basis, equity in net loss of affiliates was $321,000, net of tax, in fiscal
      2004.





Due
      to
      the uncertainty of future realization of deferred tax assets, the Company
      recorded a valuation allowance in prior fiscal years. During 2005, primarily
      as
      a result of the utilization of net operating loss (NOL) carryforwards of $1.5
      million, the valuation allowance was reduced by $169,000 resulting in a
      variation from the federal income tax statutory rate of 34%.





**Liquidity
      And Sources Of Capital**





Operating
      activities for 2006 generated $3.5 million in cash. Earnings, after non-cash
      adjustments, generated $3.9 million of that amount. Changes in net working
      capital used approximately $415,000.





Overall,
      the Company’s working capital deficit (defined as current assets less current
      liabilities) decreased from $8.0 million at March 31, 2005 to $7.7 million
      at
      March 31, 2006.





The
      aggregate principal maturities of long-term debt are approximately $4.4 million
      in 2007, $3.1 million in 2008, and $4.1 million thereafter.





The
      Company used approximately $635,000 in cash from investing activities in 2006.
      Specifically, during the year, Atmosphere Annealing purchased approximately
      $1.7
      million of equipment. Maxco received approximately $1.1 million from the sale
      of
      land buildings. The Company purchased two subsidiaries for approximately
      $342,000. The Company received $192,000 in cash from the receipt of payments
      on
      notes receivable.





Net
      cash
      used in financing activities during 2006 amounted to $3.1 million. The Company
      repaid obligations of approximately $4.7 million during the year. Atmosphere
      Annealing borrowed an additional $1.6 million from its primary lender to
      purchase equipment.





Maxco’s
      heat treating segment occupies facilities and uses equipment under operating
      lease agreements requiring annual rental payments approximating $258,000 in
      2007, $241,000 in 2008, $197,000 in 2009, and $139,000 in 2010 for a total
      commitment aggregating $835,000.





At
      March
      31, 2006, the 2,410,183 shares of Integral Vision common stock that Maxco owns
      had an aggregate market value of approximately $4.3 million. Maxco’s investment
      in Integral Vision is reflected in Maxco’s financial statements under the equity
      method for all periods presented as the Company maintains representation on
      Integral Vision’s Board of Directors. In April 2005, Maxco converted $95,684 of
      notes receivable from Integral Vision into 127,578 restricted shares of Integral
      Vision common stock. Also in April 2005, Maxco received 42,000 restricted shares
      of Integral Vision common stock for payment of consulting services.





At
      March
      31, 2006, the 2,837,089 shares of Provant common stock that Maxco owns had
      an
      aggregate fair value of approximately $43,000. Maxco’s investment in Provant is
      reflected in Maxco’s financial statements as an available-for-sale security. On
      March 11, 2004 Provant completed the sale of substantially all of its remaining
      assets and is in the process of final liquidation.





The
      Company’s ability to meet its short term and long term debt service and other
      obligations (including compliance with financial covenants) will continue to
      be
      dependent upon its future operating performance. This dependency will be subject
      to financial, business and other factors, certain of which, such as prevailing
      economic conditions, are beyond the Company’s control. The Company believes that
      funds generated by its operations, funds available under its credit facilities,
      and funds that could be available under other credit facilities will be
      sufficient to finance near term capital needs, as well as to fund existing
      operations for the reasonably foreseeable future. Additionally the Company
      has
      long term equity investments that could be liquidated to meet its debt service
      requirements.





On
      April
      3, 2006 the Board of Directors abandoned its decision to propose to the
      Company’s common and voting preferred shareholders a transaction that would call
      for a 1-for-1,000 reverse stock split followed immediately by a 1,000-for-1
      forward stock split of Maxco’s common stock. The previously proposed
      transaction, if implemented, was expected to enable the Company to terminate
      the
      registration of its common stock.





The
      Board
      of Directors also decided to engage GBQ Consulting, LLC to locate an investor
      or
      purchaser of the Company including its subsidiary Atmosphere Annealing, Inc.
       Such sale is not expected to occur by March 31, 2007.





12


**Seasonal
      And Quarterly Fluctuations**





The
      following table sets forth consolidated operating data for each of the eight
      quarters ended March 31, 2006. The unaudited quarterly information has been
      prepared on the same basis as the annual information and, in management’s
      opinion, includes all adjustments, consisting of, with the exception of
      impairment charges, only normal recurring entries, necessary for a fair
      presentation of the information for the quarters presented. The operating
      results for any quarter are not necessarily indicative of results for any future
      period.


**Quarter
                  Ended****Fiscal
                  2005**
              
              **Fiscal
                  2006****6/30/04**
              
              **9/30/04**
              
              **12/31/04**
              
              **3/31/05**
              
              **6/30/05**
              
              **9/30/05**
              
              **12/31/05**
              
              **3/31/06*****(in
                  thousands, except per share data)***Net
                  sales
              
              $
              11,367
              
              $
              11,156
              
              $
              11,414
              
              $
              11,427
              
              $
              11,448
              
              $
              11,396
              
              $
              11,144
              
              $
              12,576Gross
                  profit
              
              
              3,997
              
              
              3,811
              
              
              3,977
              
              
              4,540
              
              
              4,334
              
              
              4,084
              
              
              3,757
              
              
              5,279Loss
                  on investments(1)
              
              
              -
              
              
              -
              
              
              -
              
              
              (610
              )
              
              (30
              )
              
              -
              
              
              -
              
              
              (1,026
              )Equity
                  in net income (loss)
                of
                  affiliates, net of tax
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (100
              )Net
                  income (loss)
              
              
              204
              
              
              50
              
              
              212
              
              
              (332
              )
              
              329
              
              
              64
              
              
              (240
              )
              
              (139
              )Net
                  income (loss) per common share—diluted:
              
              $
              0.03
              
              $
              (0.02
              )
              $
              0.04
              
              $
              (0.14
              )
              $
              0.07
              
              $
              (0.01
              )
              $
              (0.10
              )
              $
              (0.07
              )





(1)  Represents
      the following charges to recognize declines in the value of the Company’s
      investments that were deemed other than temporary:


**Quarter
                  Ended****Fiscal
                  2005**
              
              **Fiscal
                  2006****6/30/04**
              
              **9/30/04**
              
              **12/31/04**
              
              **3/31/05**
              
              **6/30/05**
              
              **9/30/05**
              
              **12/31/05**
              
              **3/31/06*****(in
                  thousands)***Robinson
                  Oil
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              (260
              )
              $
              (30
              )
              $
              -
              
              $
              -
              
              $
              -Phoenix
                  Financial
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (226
              )Real
                  estate
              
              
              -
              
              
              -
              
              
              -
              
              
              (350
              )
              
              -
              
              
              -
              
              
              -
              
              
              (800
              )$
              -
              
              $
              -
              
              $
              -
              
              $
              (610
              )
              $
              (30
              )
              $
              -
              
              $
              -
              
              $
              (1,026
              )




The
      sum
      of the quarterly net income per share amounts may not equal the annual amounts
      reported. Net income per share is computed independently for each quarter and
      the full year and is based on the respective weighted average common shares
      outstanding.





Maxco’s
      sales and operating results have varied from quarter to quarter. Net sales
      are
      typically lower in the second and third quarters. The most significant factors
      affecting these fluctuations are the seasonal buying patterns of the Company’s
      customers due to customer model changeovers and the reduced number of business
      days during the holiday season. In addition, the timing of acquisitions or
      the
      occasional sale of corporate investments may cause substantial fluctuations
      of
      operating results from quarter to quarter. Maxco expects its net sales and
      operating results to continue to fluctuate from quarter to quarter.





**Impact
      Of Inflation**





Inflation
      impacts the Company’s costs for materials, labor and related costs of
      manufacturing. Specifically, the Company’s heat treating segment experiences
      fluctuations in the price of natural gas used in the heat treating process.
      To
      the extent feasible in light of competitive factors, the Company has offset
      these fluctuations through selective price adjustments.





**New
      Financial Accounting Pronouncements**





In
      July
      2005, the *Financial
      Accounting Standards Board* (“FASB”)
      published an Exposure Draft of a proposed Interpretation, “Accounting for
      Uncertain Tax Positions.” The Exposure Draft seeks to reduce the significant
      diversity in practice associated with recognition and measurement in the
      accounting for income taxes. It would apply to all tax positions accounted
      for
      in accordance with *Statement
      of Financial Accounting Standards* (“SFAS”)
      109, “Accounting for Income Taxes.” The Exposure Draft requires that a tax
      position meet a “probable recognition threshold” for the benefit of the
      uncertain tax position to be recognized in the financial statements. This
      threshold is to be met assuming that the tax authorities will examine the
      uncertain tax position. The Exposure Draft contains guidance with respect to
      the
      measurement of the benefit that is recognized for an uncertain tax position,
      when that benefit should be derecognized, and other matters. This proposed
      Interpretation would clarify the accounting for uncertain tax positions in
      accordance with SFAS 109. This Interpretation, once approved, is expected to
      be
      effective as of the end of the fiscal year ending after December 15, 2005.
      The
      Company does not expect that the exposure draft will have a significant impact
      on its operating results.





13


In
      May
      2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections,”
which replaces APB Opinion No. 20, “Accounting Changes,” and supersedes
      FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial
      Statements—an amendment of APB Opinion No. 28.” SFAS 154 requires
      retrospective application to prior periods’ financial statements of changes in
      accounting principle, unless it is impracticable to determine either the
      period-specific effects or the cumulative effect of the change. When it is
      impracticable to determine the period-specific effects of an accounting change
      on one or more individual prior periods presented, SFAS 154 requires that the
      new accounting principle be applied to the balances of assets and liabilities
      as
      of the beginning of the earliest period for which retrospective application
      is
      practicable and that a corresponding adjustment be made to the opening balance
      of retained earnings for that period rather than being reported in an income
      statement. When it is impracticable to determine the cumulative effect of
      applying a change in accounting principle to all prior periods, SFAS 154
      requires that the new accounting principle be applied as if it were adopted
      prospectively from the earliest date practicable. SFAS 154 shall be effective
      for accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. The Company does not expect that the provisions of
      the SFAS 154 will have a significant impact on its operating
      results.





The
      FASB
      has proposed amending SFAS 128, “Earnings per Share,” to make it consistent with
      International Accounting Standard 33, “Earnings per Share”, and make earning per
      share, or EPS, computations comparable on a global basis. Under the proposed
      amendment, the year-to-date EPS computation would be performed independently
      from the quarterly computations. Additionally, for all contracts that may be
      settled in either cash or shares of stock, companies must assume that settlement
      will occur by the issuance of shares for purposes of computing diluted EPS,
      even
      if they intend to settle by paying cash or have a history of cash-only
      settlements, regardless of who controls the means of settlement. Lastly, under
      the proposed amendment, shares that will be issued upon conversion of a
      mandatory convertible security must be included in the weighted-average number
      of shares outstanding used in computing basic EPS from the date that conversion
      becomes mandatory, using the if-converted method, regardless of whether the
      result is anti-dilutive. The proposed amended standard was expected to be issued
      during the first quarter of 2005. However, the FASB has not yet finalized the
      revised effective date of the proposed amendment or its transition provisions.
      Retrospective application in all periods presented would be required and could
      require the restatement of previously reported EPS. The Company does not expect
      that the provisions of the amended SFAS 128 will have a significant impact
      on
      its operating results.





**ITEM
      7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





The
      Company’s variable interest expense is sensitive to changes in the general level
      of United States interest rates. Approximately $3.8 million of Maxco’s debt
      carries a fixed rate of interest. The Company had total outstanding variable
      rate short and long term borrowings of $9.3 million at March 31, 2006. A 1%
      increase from the prevailing interest rates at March 31, 2006 on the unhedged
      variable rate portion of the Company’s short and long-term borrowings would
      increase interest expense on an annualized basis by approximately $93,000 based
      on principal balances at March 31, 2006.





The
      Company’s heat treating segment experiences fluctuations in the price of natural
      gas used in the heat treating process. To the extent feasible in light of
      competitive factors, the Company has offset these fluctuations through selective
      price adjustments.





**ITEM
      8 - FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA** ****





The
      response to this item is submitted in a separate section of this report.





**ITEM
      9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS**





None


**ITEM
      9A - CONTROLS AND PROCEDURES**





a)  Evaluation
      of disclosure controls and procedures





The
      Company’s chief executive officer and chief financial officer have each reviewed
      and evaluated the effectiveness of our disclosure controls and procedures (as
      defined in Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e))
      as of the end of the period covered by this report. Based on that evaluation,
      the chief executive officer and chief financial officer have each concluded
      that
      the Company’s current disclosure controls and procedures are effective to ensure
      that information required to be disclosed in its periodic reports filed under
      the Exchange Act is recorded, processed, summarized, and reported, in each
      case,
      within the time period specified by the SEC’s rules and
      regulations.





b)  Changes
      in internal controls





There
      have been no changes in the Company’s internal controls over financial reporting
      that occurred during the Company’s fourth quarter of the fiscal year that
      materially affected, or are reasonably likely to materially affect, the
      Company’s internal controls over financial reporting.





14





**ITEM
      9B - OTHER INFORMATION**





None





**PART
      III**





**ITEM
      10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE
      REGISTRANT**





Item
      10
      is hereby incorporated by reference from the Registrant’s definitive proxy
      statement expected to be filed within 120 days of March 31, 2006.





**ITEM
      11 - EXECUTIVE COMPENSATION** ****





Item
      11
      is hereby incorporated by reference from the Registrant’s definitive proxy
      statement expected to be filed within 120 days of March 31, 2006.





**ITEM
      12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS**





Item
      12
      is hereby incorporated by reference from the Registrant’s definitive proxy
      statement expected to be filed within 120 days of March 31, 2006.





**ITEM
      13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS** ****





Item
      13
      is hereby incorporated by reference from the Registrant’s definitive proxy
      statement expected to be filed within 120 days of March 31, 2006.





**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**





Item
      14
      is hereby incorporated by reference from the Registrant’s definitive proxy
      statement expected to be filed within 120 days of March 31, 2006.





**PART
      IV**





**ITEM
      15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES** ****





(a)(1)
      and (2)--The response to this portion of Item 15 is submitted as a separate
      section of this report.





(3)  Listing
      of Exhibits





Exhibit
      Number





3
            Restated
                Articles of Incorporation are hereby incorporated by reference from
                Form
                10-Q dated February 13, 1998.





3.1
            By-laws
                are hereby incorporated by reference from Form S-4 dated November 4, 1991
                (File No. 33-43855).





4.2
            Resolution
                establishing Series Three Preferred Shares is hereby incorporated
                by
                reference from Form S-4 dated November 4, 1991 (File No.
                33-43855).





4.3
            Resolution
                authorizing the redemption of Series Two Preferred Stock, establishing
                Series Four Preferred Stock and the terms of the subordinated notes
                is
                hereby incorporated by reference from Form 10-Q dated February 14,
                1997.





4.4
            Resolution
                establishing Series Five Preferred Shares is hereby incorporated
                by
                reference from Form 10-K dated June 5,
                1997.





4.5
            Resolution
                establishing Series Six Preferred Shares is hereby incorporated by
                reference from Form 10-K dated June 23,
                1999.





10.1
            Incentive
                stock option plan adopted August 15, 1983, including the amendment
                (approved by shareholders August 25, 1987) to increase the authorized
                shares on which options may be granted by two hundred fifty thousand
                (250,000), up to five hundred thousand (500,000) shares of the common
                stock of the company is hereby incorporated by reference from the
                annual
                report on Form 10-K for the fiscal year ended March 31,
                1988.





15


10.11
            Asset
                purchase agreement for the purchase of Atmosphere Annealing, Inc.
                is
                hereby incorporated by reference from registrants Form 8-K dated
                January
                17, 1997.





10.18
            Maxco,
                Inc. 1998 Employee Stock Option Plan is hereby incorporated by reference
                from Form 10-Q dated November 12,
                1998.





10.29
            Obligor
                assignment agreement among Contractor Supply Incorporated, Maxco,
                Inc.,
                and Ersco Corporation dated November 14, 2002 is hereby incorporated
                by
                reference from Form 10-Q dated November 25,
                2002.





10.30
            Stock
                purchase agreement between Ersco Corporation, Maxco, Inc., and Contractor
                Supply Incorporated dated November 14, 2002 is hereby incorporated
                by
                reference from Form 10-Q dated November 25,
                2002.





10.31
            Asset
                Purchase Agreement between Pak Sak Industries, Inc., Maxco, Inc.,
                P-S
                Business Acquisition, Inc., and P&D Real Estate, LLC and Packaging
                Personified, Inc. dated September 27, 2002 is hereby incorporated
                by
                reference from Form 10-Q dated February 14,
                2003.





10.32
            First
                Amendment to Asset Purchase Agreement between Pak Sak Industries,
                Inc.,
                Maxco, Inc., P-S Business Acquisition, Inc., and P&D Real Estate, LLC
                and Packaging Personified, Inc. dated October 30, 2002 is hereby
                incorporated by reference from Form 10-Q dated February 14,
                2003.





10.33
            Second
                Amendment to Asset Purchase Agreement between Pak Sak Industries,
                Inc.,
                Maxco, Inc., P-S Business Acquisition, Inc., and P&D Real Estate, LLC
                and Packaging Personified, Inc. dated November 25, 2002 is hereby
                incorporated by reference from Form 10-Q dated February 14,
                2003.





10.34
            Credit
                Agreement between Atmosphere Annealing, Inc. and Huntington National
                Bank
                dated November 18, 2003 is hereby incorporated by reference from
                Form 10-Q
                dated November 19, 2003.





10.36
            Incentive
                agreement between Sanjeev Deshpande and Maxco, Inc. dated April 20,
                2004
                is hereby incorporated by reference from Form 10-K dated July 13,
                2004.





10.37
            Business
                Loan Agreement between Capitol National Bank and Maxco, Inc. dated
                May 28,
                2004 is hereby incorporated by reference from Form 10-K dated July
                13,
                2004.





21
            Subsidiaries
                of the Registrant





23
            Consent
                of Independent Registered Public Accounting Firm—Rehmann Robson (Form S-8
                filed June 2, 1992 - File No. 33-48351 and Form S-8 filed November
                19,
                1998 - File No. 333-67539).





31.1
            Certification
                of Chief Executive Officer of periodic report pursuant to Rule 13a-15(e)
                or Rule 15d-15(e).





31.2
            Certification
                of Chief Financial Officer of periodic report pursuant to Rule 13a-15(e)
                or Rule 15d-15(e).





32.1
            Certification
                of Chief Executive Officer of periodic report pursuant to 18 U.S.C.
                §1350.





32.2
            Certification
                of Chief Financial Officer of periodic report pursuant to 18 U.S.C.
                §1350.





(b)  Exhibits





-  Subsidiaries
      of the Registrant


-  Consent
      of Independent Registered Public Accounting Firm


-  Certification
      of Chief Executive Officer of periodic report pursuant to Rule 13a-15(e) or
      Rule
      15d-15(e)


-  Certification
      of Chief Financial Officer of periodic report pursuant to Rule 13a-15(e) or
      Rule
      15d-15(e)


-  Certification
      of Chief Executive Officer of periodic report pursuant to 18 U.S.C.
§1350


-  Certification
      of Chief Financial Officer of periodic report pursuant to 18 U.S.C.
§1350





(c)  Financial
      Statement Schedules





None





16


**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.




Date July
              14,
              2006
            MAXCO,
                INC.
              
              
              By/S/ LAWRENCE O.
                FIELDS
              Lawrence
                O. Fields, Chief Financial Officer and Treasurer
              (Principal
                Financial and Accounting Officer)





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the Registrant and in the
      capacities and on the dates indicated.





/S/
                MAX A. COON
            July
                14, 2006
            
            President
                (Principal Executive Officer) and DirectorMax
                A. Coon
            Date/S/
                JOEL I. FERGUSON
            July
                14, 2006
            
            DirectorJoel
                I. Ferguson
            Date/S/
                DAVID R. LAYTON
            July
                14, 2006
            
            DirectorDavid
                R. Layton
            Date/S/
                SANJEEV DESHPANDE
            July
                14, 2006
            
            DirectorSanjeev
                Deshpande
            Date/S/
                SAMUEL O. MALLORY
            July
                14, 2006
            
            DirectorSamuel
                O. Mallory
            Date





17







ANNUAL
      REPORT ON FORM 10-K





ITEM
      15(a)(1) AND (2), (c), AND (d)





CONSOLIDATED
      FINANCIAL STATEMENTS





CERTAIN
      EXHIBITS





YEAR
      ENDED MARCH 31, 2006





MAXCO,
      INC.





LANSING,
      MICHIGAN











18


FORM
      10-K--ITEM 15(a)(1) AND (2)





MAXCO,
      INC. AND SUBSIDIARIES





CONSOLIDATED
      FINANCIAL STATEMENTS





The following
              consolidated financial statements of Maxco, Inc. and subsidiaries are
              included in Item 8:
            Page(s)Report
                of Independent Registered Public Accounting Firm
            20Consolidated
                balance sheets—March 31, 2006 and 2005
            21Consolidated
                statements of operations—Years ended March 31, 2006, 2005, and
                2004
            22Consolidated
                statements of stockholders’ equity—Years ended March 31, 2006, 2005, and
                2004
            23Consolidated
                statements of cash flows—Years ended March 31, 2006, 2005, and
                2004
            24Notes
                to consolidated financial statements—Years ended March 31, 2006, 2005, and
                2004
            25-37





All
      schedules for which provision is made in the applicable accounting regulations
      of the Securities and Exchange Commission are included in Notes to Consolidated
      Financial Statements, are not required under the related instructions or are
      inapplicable and, therefore, have been omitted.





Financial
      statements of the Registrant’s significant unconsolidated affiliate (Integral
      Vision, Inc.) are hereby incorporated by reference from the Integral Vision,
      Inc. Form 10-K for the year ended December 31, 2005, as filed with the
      Securities and Exchange Commission (SEC File Number 0-12728).





19





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





Board
      of
      Directors and Stockholders


Maxco,
      Inc.


Lansing,
      Michigan





We
      have
      audited the accompanying consolidated balance sheets of Maxco, Inc. and
      subsidiaries as of March 31, 2006 and 2005, and the related consolidated
      statements of operations, stockholders' equity, and cash flows for each of
      the
      three years in the period ended March 31, 2006. These consolidated financial
      statements are the responsibility of the Company's management. Our
      responsibility is to express an opinion on these consolidated financial
      statements 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
      consolidated financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated financial statements. 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 referred to above present fairly,
      in all material respects, the consolidated financial position of Maxco, Inc.
      and
      subsidiaries as of March 31, 2006 and 2005, and the consolidated results of
      their operations and their cash flows for each of the three years in the period
      ended March 31, 2006 in conformity with accounting principles generally accepted
      in the United States of America.





/S/
                Rehmann
                Robson





Troy,
      Michigan


July
      13,
      2006





20





**CONSOLIDATED
      BALANCE SHEETS**





**MAXCO,
      INC. AND SUBSIDIARIES**


**March
                  31,****2006**
              
              **2005*****(in
                  thousands)*****ASSETS****Current
                  Assets**Cash
                  and cash equivalents
              
              $
              817
              
              $
              1,781Restricted
                  cash
              
              
              750
              
              
              -Accounts
                  receivable, less allowance of $169,000 in 2006 and $128,000 in
                  2005
              
              
              6,212
              
              
              6,061Inventories
              
              
              1,048
              
              
              783Prepaid
                  expenses and other
              
              
              673
              
              
              223**Total
                  Current Assets**
              
              
              9,500
              
              
              8,848**Marketable
                  Securities**
              
              
              2
              
              
              2**Property
                  and Equipment**Land
              
              
              389
              
              
              437Buildings
              
              
              7,522
              
              
              5,997Machinery,
                  equipment, and fixtures
              
              
              31,550
              
              
              30,05239,461
              
              
              36,486Allowances
                  for depreciation
              
              
              (21,675
              )
              
              (18,018
              )17,786
              
              
              18,468**Other
                  Assets**Investments
              
              
              688
              
              
              878Notes
                  and contracts receivable and other
              
              
              791
              
              
              994Real
                  estate investments held for sale
              
              
              627
              
              
              1,850Real
                  estate held for sale
              
              
              2,900
              
              
              -Accounts
                  receivable, related parties
              
              
              407
              
              
              407Intangibles
              
              
              1,424
              
              
              1,4246,837
              
              
              5,553$
              34,125
              
              $
              32,871**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****Current
                  Liabilities**Notes
                  payable
              
              $
              1,414
              
              $
              2,091Accounts
                  payable
              
              
              2,141
              
              
              3,575Employee
                  compensation
              
              
              2,258
              
              
              1,711Incentive
                  compensation
              
              
              2,026
              
              
              650Taxes,
                  interest, and other liabilities
              
              
              4,922
              
              
              3,850Current
                  maturities of long-term obligations
              
              
              4,436
              
              
              4,959**Total
                  Current Liabilities**
              
              
              17,197
              
              
              16,836**Long-Term
                  Obligations, Less Current Maturities**
              
              
              7,131
              
              
              7,070**Total
                  Liabilities**
              
              
              24,328
              
              
              23,906**Contingencies
                  and Commitments—Notes 4 and 10****Stockholders'
                  Equity**Preferred
                  stock:Series
                  Three: 10% cumulative callable, $60 face value; 14,784 shares issued
                  and
                  outstanding
              
              
              678
              
              
              678Series
                  Four: 10% cumulative callable, $51.50 face value; 46,414 shares
                  issued and
                  outstanding
              
              
              2,390
              
              
              2,390Series
                  Five: 10% cumulative callable, $120 face value; 6,648 shares issued
                  and
                  outstanding
              
              
              798
              
              
              798Series
                  Six: 10% cumulative callable, $160 face value; 20,000 shares authorized,
                  7,812.5 issuedand
                  outstanding
              
              
              1,250
              
              
              -5,116
              
              
              3,866Common
                  stock, $1 par value; 10,000,000 shares authorized, 3,454,039 shares
                  issued
                  and outstanding
              
              
              3,454
              
              
              3,454Accumulated
                  other comprehensive loss
              
              
              -
              
              
              (38
              )Retained
                  earnings
              
              
              1,227
              
              
              1,683**Total
                  Stockholders' Equity**
              
              
              9,797
              
              
              8,965$
              34,125
              
              $
              32,871




See
      notes
      to consolidated financial statements.





21


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





**MAXCO,
      INC. AND SUBSIDIARIES**


**Year
                  Ended March 31,****2006**
              
              **2005**
              
              **2004*****(in
                  thousands, except per share data)*****Net
                  Sales**
              
              $
              46,564
              
              $
              45,364
              
              $
              40,798**Costs
                  and Expenses:**Cost
                  of sales and operating expenses
              
              
              29,110
              
              
              29,039
              
              
              26,774Selling,
                  general, and administrative
              
              
              12,194
              
              
              11,396
              
              
              10,956Depreciation
                  and amortization
              
              
              3,088
              
              
              2,926
              
              
              2,89944,392
              
              
              43,361
              
              
              40,629**Operating
                  Earnings**
              
              
              2,172
              
              
              2,003
              
              
              169**Other
                  Income (Expense):**Interest
                  expense
              
              
              (1,370
              )
              
              (1,517
              )
              
              (1,682
              )Loss
                  on investments
              
              
              (1,056
              )
              
              (610
              )
              
              (1,115
              )Gain
                  (loss) on sale of property and equipment
              
              
              348
              
              
              (8
              )
              
              (72
              )Investment,
                  interest, and other income
              
              
              20
              
              
              266
              
              
              150Gain
                  on sale of investments
              
              
              -
              
              
              -
              
              
              1,340(2,058
              )
              
              (1,869
              )
              
              (1,379
              )**Income
                  (Loss) Before Federal Income Taxes and Equity in Net Loss of
                  Affiliates**
              
              
              114
              
              
              134
              
              
              (1,210
              )Federal
                  income taxes
              
              
              -
              
              
              -
              
              
              -**Income
                  (Loss) Before Equity in Net Loss of Affiliates**
              
              
              114
              
              
              134
              
              
              (1,210
              )Equity
                  in net loss of affiliates, net of tax
              
              
              (100
              )
              
              -
              
              
              (321
              )**Net
                  Income (Loss)**
              
              
              14
              
              
              134
              
              
              (1,531
              )Less
                  preferred stock dividends
              
              
              (470
              )
              
              (408
              )
              
              (408
              )**Net
                  Loss Applicable to Common Stock**
              
              $
              (456
              )
              $
              (274
              )
              $
              (1,939
              )**Net
                  Loss Per Share—Basic and Diluted**
              
              $
              (0.13
              )
              $
              (0.09
              )
              $
              (0.63
              )
  See
      notes
      to consolidated financial statements.





22


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**





**MAXCO,
      INC. AND SUBSIDIARIES**


**Number
                  of Common Shares Outstanding**
              
              **Preferred
                  Stock**
              
              **Common
                  Stock**
              
              **Accumulated
                  Other Comprehensive Loss**
              
              **Retained
                  Earnings**
              
              **Totals*****(in
                  thousands)*****Balances
                  at April 1, 2003**
              
              
              3,108
              
              $
              3,866
              
              $
              3,108
              
              $
              (298
              )
              $
              2,858
              
              $
              9,534Net
                  loss for the year
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,531
              )
              
              (1,531
              )Net
                  unrealized gain on marketablesecurities
              
              
              
              
              
              
              
              
              
              
              
              56
              
              
              
              
              
              56Unrealized
                  gain on swap agreement
              
              
              
              
              
              
              
              
              
              
              
              70
              
              
              
              
              
              70Comprehensive
                  Loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,405
              )Preferred
                  stock dividends
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (408
              )
              
              (408
              )**Balances
                  at March 31, 2004**
              
              
              3,108
              
              
              3,866
              
              
              3,108
              
              
              (172
              )
              
              919
              
              
              7,721Net
                  income for the year
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              134
              
              
              134Unrealized
                  gain on swap agreement
              
              
              
              
              
              
              
              
              
              
              
              134
              
              
              
              
              
              134Comprehensive
                  Loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              268Conversion
                  of debt to common stock
              
              
              346
              
              
              
              
              
              346
              
              
              
              
              
              1,038
              
              
              1,384Preferred
                  stock dividends
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (408
              )
              
              (408
              )**Balances
                  at March 31, 2005**
              
              
              3,454
              
              
              3,866
              
              
              3,454
              
              
              (38
              )
              
              1,683
              
              
              8,965Net
                  income for the year
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              14
              
              
              14Unrealized
                  gain on swap agreement
              
              
              
              
              
              
              
              
              
              
              
              38
              
              
              
              
              
              38Comprehensive
                  Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              52Conversion
                  of debt to preferred stock
              
              
              
              
              
              1,250
              
              
              
              
              
              
              
              
              
              
              
              1,250Preferred
                  stock dividends
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (470
              )
              
              (470
              )**Balances
                  at March 31, 2006**
              
              
              3,454
              
              $
              5,116
              
              $
              3,454
              
              $
              -
              
              $
              1,227
              
              $
              9,797
  See
      notes
      to consolidated financial statements.





23


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**MAXCO,
      INC. AND SUBSIDIARIES**


**Year
                  Ended March 31,****2006**
              
              **2005**
              
              **2004*****(in
                  thousands)*****Operating
                  Activities**Net
                  income (loss)
              
              $
              14
              
              $
              134
              
              $
              (1,531
              )Adjustments
                  to reconcile net income (loss) to net cash provided by operating
                  activities:Depreciation
              
              
              3,088
              
              
              2,926
              
              
              2,879(Gain)
                  loss on sale of property and equipment
              
              
              (348
              )
              
              8
              
              
              72Loss
                  on investments
              
              
              1,056
              
              
              610
              
              
              1,115Amortization
                  of deferred financing costs
              
              
              -
              
              
              -
              
              
              20Equity
                  in net loss of affiliates
              
              
              100
              
              
              -
              
              
              321Gain
                  on sale of investments
              
              
              -
              
              
              -
              
              
              (1,340
              )Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (221
              )
              
              315
              
              
              (370
              )Inventories
              
              
              (265
              )
              
              (126
              )
              
              (232
              )Prepaid
                  expenses and other
              
              
              (437
              )
              
              206
              
              
              (202
              )Accounts
                  payable and other current liabilities
              
              
              508
              
              
              725
              
              
              1,576**Net
                  Cash Provided by Operating Activities**
              
              
              3,495
              
              
              4,798
              
              
              2,308**Investing
                  Activities**Sale
                  of property and equipment
              
              
              1,113
              
              
              57
              
              
              400Purchases
                  of property and equipment
              
              
              (1,714
              )
              
              (1,042
              )
              
              (698
              )Purchases
                  of subsidiaries
              
              
              (342
              )
              
              -
              
              
              -Collections
                  of notes receivable
              
              
              192
              
              
              1,013
              
              
              99Sale
                  of investments
              
              
              -
              
              
              -
              
              
              1,179Other
              
              
              97
              
              
              51
              
              
              119**Net
                  Cash (Used in) Provided by Investing Activities**
              
              
              (654
              )
              
              79
              
              
              1,099**Financing
                  Activities**Net
                  proceeds from (repayments on) lines of credit
              
              
              985
              
              
              (2,015
              )
              
              (1,419
              )Proceeds
                  from other debt obligations
              
              
              613
              
              
              5,513
              
              
              6,881Repayments
                  on other debt obligations
              
              
              (4,653
              )
              
              (6,672
              )
              
              (9,182
              )**Net
                  Cash Used in Financing Activities**
              
              
              (3,055
              )
              
              (3,174
              )
              
              (3,720
              )(Decrease)
                  Increase in Cash and Cash Equivalents
              
              
              (214
              )
              
              1,703
              
              
              (313
              )Cash
                  and Cash Equivalents at Beginning of Year
              
              
              1,781
              
              
              78
              
              
              391Cash
                  and Cash Equivalents at End of Year
              
              $
              1,567
              
              $
              1,781
              
              $
              78Supplemental
                  cash flows disclosure:Interest
                  paid
              
              $
              1,395
              
              $
              1,655
              
              $
              1,601




See
      notes
      to consolidated financial statements.





24


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**MAXCO,
      INC. AND SUBSIDIARIES**




**Year
      Ended March 31, 2006**





**NOTE
      1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES**





**Nature
      of Business** **:** Maxco,
      Inc. (Maxco) is a Michigan corporation incorporated in 1946. Maxco currently
      operates in the heat-treating business segment through Atmosphere Annealing
      Inc., a production metal heat-treating service company. Maxco also has
      investments in real estate and investments representing less than majority
      interests in the following businesses: a registered broker-dealer of securities
      that is primarily focused on the trading of fixed income investments; a
      developer, manufacturer and marketer of microprocessor-based process monitoring
      and inspection systems for use in industrial manufacturing environments; and
      an
      energy-related business.





**Operating
      Matters** **:** During the past two fiscal years, debt previously in default has been refinanced
      and management believes that the Company’s exposures relative to outstanding
      guarantees have been significantly reduced. The Company’s ability to meet its
      short term and long term debt service and other obligations (including
      compliance with financial covenants) will continue to be dependent upon its
      future operating performance. This dependency will be subject to financial,
      business and other factors, certain of which, such as prevailing economic
      conditions, are beyond the Company’s control. The Company believes that funds
      generated by its operations, funds available under its credit facilities, and
      funds that could be available under other credit facilities will be sufficient
      to finance near term capital needs, as well as to fund existing operations
      for
      the reasonably foreseeable future. Additionally the Company has long term equity
      investments that could be liquidated to meet its debt service
      requirements.





**Principles
      of Consolidation** **:** The
      consolidated financial statements include the accounts of Maxco, Inc. and its
      majority owned subsidiaries. Upon consolidation, all intercompany accounts
      and
      transactions are eliminated. All significant investments are accounted for
      under
      the equity method.





**Use
      of Estimates** **:** The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States requires management to make
      estimates and assumptions that affect the amounts reported in the consolidated
      financial statements and accompanying notes. Actual results could differ from
      those estimates. Significant estimates include the allowance for doubtful
      accounts receivable, the valuation of equity method investments, and the fair
      value less costs to sell of real estate investments held-for-sale.





**Reclassifications** **:** Certain
      items in the prior year consolidated financial statements have been reclassified
      to conform with the presentation used in 2006.





**Cash
      and Cash Equivalents** **:** The
      Company considers cash and other highly liquid investments, including
      investments in interest bearing repurchase agreements with less than 90-day
      maturities, as cash and cash equivalents. Approximately $1.0 million of the
      Company’s cash balance at March 31, 2006 exceeded insured FDIC
      limits.





**Restricted
      Cash** **:** At March
      31, 2006 the Company had restricted cash of $750,000 held as collateral under
      its $2.0 million debt facility. As of June 30, 2006, the Company has
      renegotiated this debt facility to a $1.75 million line of credit with no
      restricted cash.





**Allowance
      for Uncollectible Accounts Receivable** **:** Accounts
      receivable have been reduced by an allowance for amounts that may become
      uncollectible in the future. This estimated allowance is based primarily on
      management’s evaluation of the financial condition of the customer and
      historical experience. The following table summarizes changes in the allowance
      for uncollectible accounts receivable:


**Year
                  Ended March 31,****2006**
              
              **2005**
              
              **2004***(in
                  thousands)*Beginning
                  balance
              
              $
              128
              
              $
              134
              
              $
              150Charged
                  to costs and expenses
              
              
              112
              
              
              186
              
              
              12Deductions
                  (A)
              
              
              (71
              )
              
              (192
              )
              
              (28
              )Ending
                  balance
              
              $
              169
              
              $
              128
              
              $
              134(A)
                  Represents uncollectible accounts written off, less recoveries
 25


**Inventories** **:** Inventories are stated at the lower of first-in, first-out cost or market and
      at
      March 31 consisted of the following:




**2006**
              
              **2005***(in
                  thousands)*Raw
                  materials
              
              $
              314
              
              $
              329Work
                  in progress
              
              
              700
              
              
              406Finished
                  goods
              
              
              34
              
              
              48$
              1,048
              
              $
              783





The
      Company ordinarily does not take title to the customer parts received for
      processing; accordingly, such parts are not included in these consolidated
      financial statements.





**Marketable
      Securities** **:** Marketable securities are classified in accordance with Statement of Financial
      Accounting Standards No. 115 (“SFAS 115’) as securities available-for-sale.
      Available-for-sale securities are carried at fair value, with the unrealized
      gains and losses, net of tax, reported as a separate component of stockholders’
equity. The amortized cost of securities in this category is adjusted for
      amortization of premiums and accretion of discounts to maturity. Such
      amortization is included in investment income. Realized gains and losses and
      declines in value judged to be other than temporary on available-for-sale
      securities are included in investment income or loss. The cost of securities
      sold is based on the specific identification method. Interest and dividends
      on
      securities classified as available-for-sale are included in investment income.
      The fair value of marketable securities is based on quoted market
      value.





Maxco
      accounts for its investment in Provant, Inc. common stock as securities
      available for sale as defined by SFAS 115. Consequently, the securities are
      carried at fair value with the unrealized gains and losses net of tax, reported
      as a separate component of stockholders’ equity. In 2004, the Company recognized
      a loss on its investment in Provant common stock as an other than temporary
      impairment in the statements of operations of $366,000.





**Real
      Estate Investments Held For Sale** **:** The
      Company has ownership interests in affiliated entities that hold commercial
      real
      estate. In addition, the Company has made cash advances, which are unsecured
      and
      bear interest, to these affiliates. The Company has implemented a plan to
      liquidate these investments and their underlying real estate holdings. The
      Company accounts for these real estate investments as held-for-sale in these
      consolidated financial statements. The carrying amount of $627,000 and $1.9
      million at March 31, 2006 and 2005, respectively, represents the Company’s
      portion of the fair value, net of estimated costs to sell, of these real estate
      interests.





**Real
      Estate Held for Sale:** In May
      2005, Maxco acquired the common stock of Ledges Commerce Park and as such,
      has
      recorded the assets acquired at their fair value and the liabilities assumed
      at
      the amount at which they are expected to be settled as of March 31,
      2006.





**Properties
      and Depreciation** **:** Property
      and equipment are stated on the basis of cost and include expenditures for
      new
      facilities, equipment, and those, which materially extend the useful lives
      of
      existing facilities and equipment. Equipment capitalized under lease agreements
      is not significant.





Expenditures
      for normal repairs and maintenance are charged to operations as incurred.
      Depreciation for financial reporting purposes, including amortization of
      capitalized leases, is computed by the straight-line method based on the useful
      lives or lease terms of the assets (10 to 40 years for buildings and 3 to 10
      years for equipment).





**Federal
      Income Taxes** **:** The
      Company accounts for income taxes in accordance with Statement of Financial
      Accounting Standards No. 109, *Accounting
      for Income Taxes* (“SFAS
      109”), which requires the use of the liability method in accounting for income
      taxes. Under SFAS 109, deferred tax assets and liabilities are measured based
      on
      differences between the financial reporting and tax bases of assets and
      liabilities using enacted tax rates and laws that will be in effect when
      differences are expected to reverse. The effect on deferred tax assets and
      liabilities of a change in tax rates is recognized in income in the period
      that
      includes the enactment date. A valuation allowance is provided for net deferred
      tax assets if it is more likely than not that these items will either expire
      before the Company is able to realize their benefit, or future deductibility
      is
      uncertain.





26


**Allowance
      for Uncollectible Notes Receivable** **:** Notes
      receivable have been reduced by an allowance for amounts that may become
      uncollectible in the future. This estimated allowance is based primarily on
      management’s evaluation of the financial condition of the debtor and historical
      experience. The following table summarizes changes in the allowance for
      uncollectible notes receivable:


**Year
                  Ended March 31,****2006**
              
              **2005**
              
              **2004***(in
                  thousands)*Beginning
                  balance
              
              $
              -
              
              $
              350
              
              $
              600Charged
                  to costs and expenses
              
              
              -
              
              
              -
              
              
              -Deductions
                  (A)
              
              
              -
              
              
              (350
              )
              
              (250
              )Ending
                  balance
              
              $
              -
              
              $
              -
              
              $
              350(A)Represents uncollectible accounts written off, less
                  recoveries





**Intangibles** **:** Goodwill
      and other long-lived assets are reviewed by management for impairment whenever
      events or changes in circumstances indicate the carrying amounts may not be
      recoverable. If management believes impairment may exist, an assessment is
      performed. This assessment consists of comparing the estimated undiscounted
      future cash flows with the carrying amount of the long-lived assets. If the
      undiscounted future cash flows are less than the carrying amounts of the
      long-lived assets, the Company adjusts the carrying amount of the long-lived
      assets to their estimated fair value. Fair value is determined by anticipated
      future cash flows discounted at a rate commensurate with the risk involved.
      All
      of the Company’s goodwill is related to the heat treating segment. Goodwill
      totaled approximately $1.4 million at March 31, 2006 and 2005.





During
      2006, the Company performed impairment tests of its goodwill and
      indefinite-lived intangible assets. The Company's tests indicated that the
      fair
      value of its heat treating segment, which was determined by using discounted
      cash flows and market multiples, exceeded the carrying value. As a result,
      the
      Company did not record an impairment charge for this segment in the accompanying
      financial statements. The Company will continue to perform an impairment review
      on an annual basis (or more frequently if impairment indicators arise).





**Revenue
      Recognition** **:** The
      Company recognizes service revenue and revenue from product sales upon transfer
      of title, which is upon shipment. An estimate of reserves is recorded, if
      material, for anticipated reworks and credit memos which will be issued on
      sales
      recognized to date.





**Advertising** **:** Advertising
      costs are expensed as incurred. The amounts were not material for all years
      presented.





**Shipping
      and Handling Costs** **:** The
      Company recognizes shipping and handling costs as a component of cost of sales
      and operating expenses in the statement of operations.





**Interest
      Rate Swap** **:** The
      Company enters into interest rate swap agreements to modify the interest
      characteristics of its outstanding debt. Since the Company applies hedge
      accounting pursuant to SFAS 133, as amended, changes in the fair value of the
      swap are reported as a component of other comprehensive loss. There were no
      interest rate swap agreements open at March 31, 2006.





**Fair
      Value Disclosure** **:** The
      carrying amounts of certain financial instruments such as cash and cash
      equivalents, accounts receivable, marketable securities, and accounts payable
      approximate their fair values.





**Comprehensive
      Loss** **:** The
      Company displays comprehensive loss in the Consolidated Statements of
      Stockholders’ Equity.





**Common
      Stock Options** **:** The
      Company adopted SFAS No. 123 (Revised 2004), “ *Share
      Based Payment”* (“SFAS
      No. 123R”), under the modified prospective transition method on January 1, 2006.
      SFAS No. 123R requires companies to measure and recognize the cost of employee
      services received in exchange for an award of equity instruments based on the
      grant-date fair value. Share-based compensation recognized under the
      modified-prospective transition method of SFAS No. 123R includes share-based
      compensation based on the grant-date fair value determined in accordance with
      the original provisions of SFAS No. 123, “ *Accounting
      for Stock-Based Compensation”,* for
      all
      share-based payments granted prior to and not yet vested as of January 1, 2006
      and share-based compensation based on the grant-date fair-value determined
      in
      accordance with SFAS No. 123R for all share-based payments granted after January
      1, 2006. SFAS No. 123R eliminates the ability to account for the award of these
      instruments under the intrinsic value method proscribed by Accounting Principles
      Board (“APB) Opinion No. 25, *Accounting
      for Stock Issued to Employees,* and
      allowed under the original provisions of SFAS No. 123. Prior to the adoption
      of
      SFAS No. 123R, the Company accounted for its stock option plans using the
      intrinsic value method in accordance with the provisions of APB Opinion No.
      25
      and related interpretations.





**New
      Financial Accounting Pronouncements** **:** In
      July
      2005, the *Financial
      Accounting Standards Board* (“FASB”)
      published an Exposure Draft of a proposed Interpretation, “Accounting for
      Uncertain Tax Positions.” The Exposure Draft seeks to reduce the significant
      diversity in practice associated with recognition and measurement in the
      accounting for income taxes. It would apply to all tax positions accounted
      for
      in accordance with *Statement
      of Financial Accounting Standards* (“SFAS”)
      109, “Accounting for Income Taxes.” The Exposure Draft requires that a tax
      position meet a “probable recognition threshold” for the benefit of the
      uncertain tax position to be recognized in the financial statements. This
      threshold is to be met assuming that the tax authorities will examine the
      uncertain tax position. The Exposure Draft contains guidance with respect to
      the
      measurement of the benefit that is recognized for an uncertain tax position,
      when that benefit should be derecognized, and other matters. This proposed
      Interpretation would clarify the accounting for uncertain tax positions in
      accordance with SFAS 109. This Interpretation, once approved, is expected to
      be
      effective as of the end of the fiscal year ending after December 15, 2005.
      The
      Company does not expect that the exposure draft will have a significant impact
      on its operating results.





27


In
      May
      2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections,”
which replaces APB Opinion No. 20, “Accounting Changes,” and supersedes
      FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial
      Statements—an amendment of APB Opinion No. 28.” SFAS 154 requires
      retrospective application to prior periods’ financial statements of changes in
      accounting principle, unless it is impracticable to determine either the
      period-specific effects or the cumulative effect of the change. When it is
      impracticable to determine the period-specific effects of an accounting change
      on one or more individual prior periods presented, SFAS 154 requires that the
      new accounting principle be applied to the balances of assets and liabilities
      as
      of the beginning of the earliest period for which retrospective application
      is
      practicable and that a corresponding adjustment be made to the opening balance
      of retained earnings for that period rather than being reported in an income
      statement. When it is impracticable to determine the cumulative effect of
      applying a change in accounting principle to all prior periods, SFAS 154
      requires that the new accounting principle be applied as if it were adopted
      prospectively from the earliest date practicable. SFAS 154 shall be effective
      for accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. The Company does not expect that the provisions of
      the SFAS 154 will have a significant impact on its operating
      results.





The
      FASB
      has proposed amending SFAS 128, “Earnings per Share,” to make it consistent with
      International Accounting Standard 33, “Earnings per Share”, and make earning per
      share, or EPS, computations comparable on a global basis. Under the proposed
      amendment, the year-to-date EPS computation would be performed independently
      from the quarterly computations. Additionally, for all contracts that may be
      settled in either cash or shares of stock, companies must assume that settlement
      will occur by the issuance of shares for purposes of computing diluted EPS,
      even
      if they intend to settle by paying cash or have a history of cash-only
      settlements, regardless of who controls the means of settlement. Lastly, under
      the proposed amendment, shares that will be issued upon conversion of a
      mandatory convertible security must be included in the weighted-average number
      of shares outstanding used in computing basic EPS from the date that conversion
      becomes mandatory, using the if-converted method, regardless of whether the
      result is anti-dilutive. The proposed amended standard was expected to be issued
      during the first quarter of 2005. However, the FASB has not yet finalized the
      revised effective date of the proposed amendment or its transition provisions.
      Retrospective application in all periods presented would be required and could
      require the restatement of previously reported EPS. The Company does not expect
      that the provisions of the amended SFAS 128 will have a significant impact
      on
      its operating results.





**NOTE
      2 - ACCOUNTS RECEIVABLE AND PAYABLE—RELATED PARTIES******





Accounts
      receivable, related parties consist primarily of unsecured cash advances to
      officers, stockholders, and affiliates. Certain of the amounts are non-interest
      bearing. The ultimate settlement of the balances is generally expected to be
      made in cash, although not necessarily within the next year.





Vincent
      Shunsky, former Vice President, Chief Financial Officer and Treasurer of the
      Company, is indebted to the Company in the amount of approximately $188,000,
      including accrued interest, as of March 31, 2006. The indebtedness was incurred
      at various times prior to April 2002 for the purchase of affiliate company
      stock
      and personal use. The Company has recently begun discussing a payment plan
      for
      the repayment of the indebtedness by Mr. Shunsky.





In
      October 2004, the Company entered into a Retention Agreement with Mr. Shunsky
      to
      provide him with a bonus of $200,000 to retain his services until at least
      March
      31, 2006. The Retention Agreement provided that should he leave the employ
      of
      the Company prior to that date, the bonus must be repaid. Mr. Shunsky resigned
      from his positions as Vice-President, Chief Financial Officer and Treasurer,
      effective November 29, 2005, and is no longer employed by the Company. However,
      through March 31, 2006, Mr. Shunsky served as a consultant to the Company in
      exchange for retaining the bonus. The Company expensed the retention bonus
      ratably through March 31, 2006. The Company expensed $130,000 and $70,000
      related to this bonus during the years ended March 31, 2006 and 2005,
      respectively. The Company paid this retention bonus.





In
      April
      2004 the Company entered into an incentive agreement with the President of
      its
      wholly-owned subsidiary Atmosphere Annealing, Inc. The agreement provides for
      compensation to the officer based on the increased value, as defined, of the
      subsidiary by March 31, 2006. The incentive is equal to 1% of the first $25
      million in value plus 10% above that base amount. At the option of Maxco the
      incentive is payable in cash or its equivalent in stock of Atmosphere Annealing,
      Inc. held by Maxco. As party to the agreement, Maxco, Inc. is recognizing
      incentive compensation expense on a pro-rata basis under the terms of the
      agreement. As of March 31, 2006, the amount accrued was $2.0 million, including
      $1.4 million charged to operations during the year then ended. The Company
      charged approximately $600,000 related to this compensation during the year
      ended March 31, 2005.





28


In
      June
      2003, the Company assumed a lease with CJC Leasing, a limited liability company
      in which Mr. Coon is a member, from Contractor Supply Incorporated, the
      purchaser of the Company’s formerly wholly owned subsidiary, Ersco Corporation.
      Contractor Supply Incorporated was required under the lease to pay CJC Leasing
      an aggregate of approximately $2.3 million in monthly installment payments
      over
      a period of approximately 4 years. In exchange for the Company assuming
      Contractors Supply Incorporated’s lease payments to CJC Leasing, Contractors
      Supply Incorporated and the Company agreed to reduce the amount then owed by
      the
      Company to Contractor Supply Incorporated by $2.3 million. The assumption of
      the
      lease obligations to CJC Leasing by the Company allowed the Company to retire
      a
      $2.3 million debt that was otherwise due and payable to Contractors Supply
      Incorporated, by making monthly payments of the approximate $2.3 million over
      four years. In June 2006, the Company paid off the obligation due CJC Leasing
      under this lease.





In
      February 2005, the Company issued 250,000 shares of restricted common stock
      of
      the Company to Contractor Supply Incorporated, and 95,800 shares of restricted
      common stock of the Company to Master Works Foundation, Inc. (a non-profit
      corporation in which the sole shareholder of Contractor Supply Incorporated
      is a
      one-third member) in exchange for further reduction of the amount owed by the
      Company to Contractor Supply Incorporated by $1.4 million. The remaining Company
      debt owed to Contractor Supply Incorporated was subsequently assigned by
      Contractor Supply Incorporated to Ambassador Steel Corporation, and then by
      Ambassador Steel Corporation to its President, Daryle E. Doden. On September
      30,
      2005, Mr. Doden assigned this Company debt, approximating $1.25 million, to
      EM
      Investors, LLC. EM Investors, LLC converted the Company payable, including
      all
      accrued interest, to 7,812.5 shares of the Company’s series six preferred stock.
      Messrs. Coon and Cross, are managers, and have indirect ownership interests,
      of
      39.08% and 8.35%, respectively, of EM Investors, LLC.





Included
      in accrued wages is $517,000 and $567,000 at March 31, 2006 and 2005,
      respectively, that is due Mr. Coon. Included in accounts payable is $86,000
      and
      $108,000 at March 31, 2006 and 2005, respectively, that is due to entities
      in
      which Mr. Coon has an interest.





**NOTE
      3 - INVESTMENT IN INTEGRAL VISION, INC.** ****





At
      March
      31, 2006, Maxco owned 2,410,183 shares of Integral Vision’s common stock
      (aggregate market value of $4.3 million as of March 31, 2006), representing
      approximately 8% of Integral Vision’s total common stock
      outstanding.





In
      1997
      Maxco received warrants to purchase 150,000 shares of Integral Vision stock
      with
      a then conversion price of $6.86. Pursuant to the 1997 Note and Warrant Purchase
      agreement, these warrants have been re-priced based on subsequent warrant
      issues. As a result, through June 30, 2005, Maxco had the right to purchase
      up
      to 551,133 shares of the Integral Vision’s common stock at $1.86 per share.
      Maxco did not exercise any of these warrants which then expired on that date.
      In
      April 2005, Maxco converted $95,684 of notes receivable from Integral Vision
      into 127,578 restricted shares of Integral Vision common stock. Maxco’s
      investment in Integral Vision is accounted for under the equity method for
      all
      years presented.





Maxco
      had
      advanced Integral Vision $138,855 in 2001 to permit Integral Vision to meet
      its
      obligations. This loan was evidenced by a written document and provided for
      interest at the rate of prime plus 0.5%. Integral Vision repaid this obligation
      to Maxco in April 2005.





Additionally,
      Maxco provides consulting services to Integral Vision. These services include
      assistance with financial statement preparation, compliance with governmental
      filing requirements, and assistance with certain financing arrangements.
      Integral Vision and Maxco have agreed on terms for payment to Maxco for these
      services. Prior to October 1, 2004, no charges were made by Maxco for the
      services to Integral Vision. The services for the six months ended March 31,
      2005 were satisfied by the issuance of 42,000 shares of unregistered common
      stock in the Integral Vision which represented $70,000 of service income
      recorded in fiscal 2005 which is based on the average closing price of the
      Integral Vision’s common stock over that period. Effective April 1, 2005 and
      through November 30, 2005, the Integral Vision began paying Maxco $8,750 per
      month for each month such services were rendered. The amount received in fiscal
      2006 for such administrative services amounted to $70,000. Integral Vision’s
      dependence on Maxco’s services has decreased and therefore on December 1, 2005,
      Integral Vision began compensating Maxco on an hourly basis.





Integral
      Vision had net losses of approximately $3.0 million, $2.3 million, and $2.2
      million for the twelve months ended March 31, 2006, 2005, and 2004.





At
      September 30, 2003, the Company adjusted the carrying value of its investment
      in
      Integral Vision, Inc. to its estimated fair value as the Company determined
      that
      the investment was impaired. Since management’s estimate of the fair value of
      this investment at March 31, 2006 has not changed, the Company has not
      recognized any further gain or loss on the investment since September 30, 2003.
      For the twelve months ended March 31, 2006, 2005, and 2004, Integral Vision's
      sales were $232,000, $2.0 million and $322,000, respectively.





29


**NOTE
      4 - DEBT**





At
      March
      31, 2006 the Company’s heat treating segment, Atmosphere Annealing, Inc.
      (Atmosphere), had a $6 million line of credit facility. This facility is secured
      by Atmosphere’s assets. The amount that can be borrowed under this facility is
      dependent on certain accounts receivable levels at Atmosphere. At March 31,
      2006, based on these specific collateral levels, Atmosphere could borrow up
      to
      $4.6 million under its line of credit, approximately $1.5 million of which
      was
      borrowed. The agreement, which was amended December 26, 2005, matures in August
      2007 and as such outstanding borrowings are recorded as long term in the
      accompanying balance sheets.





In
      addition, the Company had a debt facility of $2.0 million that required interest
      only payments and matured in June 2006. The Company renegotiated this debt
      facility to a $1.75 million line of credit with no restricted cash. On January
      31, 2006, the Company sold its corporate office building and certain of its
      office furniture to an outside party for cash and a $150,000 promissory note.
      Maxco entered into an agreement to lease its required office space from the
      purchaser for six months. The cash proceeds of $750,000 were used to pay down
      the related debt facility to its current balance, $2.0 million. The promissory
      note is secured by a life insurance contract of which the Company has been
      named
      as the beneficiary.





A
      summary
      of the Company’s debt obligations as of March 31 is as follows:


**2006**
              
              **2005*****(in
                  thousands)*****Short
                  term obligations:**Notes
                  payable (various interest rates)
              
              $
              1,414
              
              $
              1,554Revolving
                  line of credit (LIBOR1 + 2.0%)
              
              
              -
              
              
              5371,414
              
              
              2,091**Long
                  term obligations:**Term
                  notes (various variable interest rates)
              
              $
              2,741
              
              $
              4,930Revolving
                  line of credit (LIBOR1 + 1.25%)
              
              
              1,523
              
              
              -Mortgage
                  note payable (prime1 plus 1.75%)
              
              
              4,914
              
              
              4,962Equipment
                  purchase contracts, capitalized leaseobligations,
                  and other (various interest rates)
              
              
              2,043
              
              
              1,791Subordinated
                  debt (fixed rate of 10.00%)
              
              
              346
              
              
              34611,567
              
              
              12,029Less
                  current maturities
              
              
              4,436
              
              
              4,959$
              7,131
              
              $
              7,0701At
                  March 31, 2006 the London Interbank Offered Rate (LIBOR) was 4.88%
                  and the
                  prime rate was 7.75%.





On
      November 14, 2002, Maxco completed an agreement to sell its wholly owned
      subsidiary, Ersco Corporation to Contractor Supply Incorporated for cash and
      retired certain other debt of Maxco in excess of the sale price resulting in
      a
      short term note payable to the purchaser of approximately $4.1 million. In
      June
      2003 the Company agreed to assume a lease from Contractor Supply Incorporated
      and as a result, reduced the amount owed to Contractor Supply Incorporated
      by
      $2.3 million and the Company has recorded the $2.3 million obligation to the
      leasing company as a long term obligation in the accompanying financial
      statements. In June 2006, the Company paid off the obligation due CJC Leasing
      under this lease.





In
      February 2005, Maxco issued 250,000 shares of common stock valued at $4 per
      share to Contractor Supply Incorporated to further reduce the Company’s
      obligation to Contractor Supply Incorporated. The remaining Company debt owed
      to
      Contractor Supply Incorporated was subsequently assigned by Contractor Supply
      Incorporated to Ambassador Steel Corporation, and then by Ambassador Steel
      Corporation to its President, Daryle E. Doden. On September 30, 2005, Mr. Doden
      assigned this Company debt, approximating $1.25 million, to EM Investors, LLC.
      EM Investors, LLC converted the Company payable, including all accrued interest,
      to 7,812.5 shares of the Company’s series six preferred stock.





The
      Company’s weighted average short-term borrowing rate was 10.3% and 7.0% at March
      31, 2006 and 2005, respectively.





The
      Company entered into a swap agreement with a notional amount of approximately
      $2.7 million. The swap agreement, which expired December 15, 2005, was in a
      loss
      position of $38,000 at March 31, 2005.





Notes
      and
      contracts payable are generally collateralized by assets purchased with proceeds
      of the borrowings. The aggregate principal maturities of long-term debt are
      approximately $4.4 million in 2007, $3.1 million in 2008, $2.8 million in 2009,
      $121,000 in 2010, $39,000 in 2011, and $1.0 million thereafter.





30


Maxco
      had
      provided the guarantee of certain debt obligations of certain real estate and
      other investments in an aggregate amount of approximately $2.0 million as of
      March 31, 2005. The Company’s real estate affiliates continue to operate under a
      forbearance agreement with a lender. In order to avoid foreclosure of the real
      estate assets that secure these loans, Maxco, as guarantor, in May 2005 agreed
      to purchase, through a subsidiary, the real estate secured by the Ledges land
      and buildings. As a result of this purchase a $1.8 million liability, which
      had
      been guaranteed by the Company, was assumed directly by the Company and is
      now
      included in short term debt in the accompanying March 31, 2006 balance sheet.
      At
      March 31, 2006, this debt balance approximated $1.2 million as proceeds from
      the
      sale of three condominium units were used to reduce the outstanding debt balance
      accordingly. In February 2006, the remaining guarantee of $125,000 was repaid
      as
      a result of the sale of the underlying asset. Consequently, no guarantees remain
      as of March 31, 2006. The Company is in the process of refinancing its Ledges
      land and building and has received a commitment from a lender. Upon closing,
      the
      Company’s real estate affiliate will no longer be operating under forbearance
      agreements.





The
      Company has recorded in the accompanying financial statements additional amounts
      that had been identified as guarantees prior to March 31, 2005. The amounts
      so
      recorded aggregated approximately $85,000 and $249,000 as of March 31, 2006
      and
      March 31, 2005, respectively.





**Settlement
      Agreement and Indemnification Matters**





Effective
      October 27, 2005, the Company entered into a Settlement Agreement with American
      Realty Equities, Inc. (American), Capital Center Associates, LLC, (Capital
      Center), L/M Associates, LLC (L/M) and Max A. Coon relating to property and
      the
      related mortgage on such property owned by Capital Center. Capital Center is
      majority owned by L/M which is 50% owned by Maxco, Inc.





The
      Settlement Agreement relates to a promissory note dated February 21, 2001,
      which
      was in default and guaranteed by Max A. Coon, the Company’s President and Chief
      Executive Officer, and others. American purchased the interest of Charter One
      Bank as lender of the promissory note which was in the original principal amount
      of approximately $10 million. On August 11, 2005, the Company agreed to
      indemnify Max A. Coon for any amounts he would be required to pay as result
      of
      personal guarantees he had on the Company’s real estate entities that were made
      for the sole benefit of the Company. American commenced an action in March
      2005
      to foreclose the construction mortgage and an action to enforce the guarantee
      against Max Coon and the other guarantors.





Without
      admitting any liabilities or fault, and to avoid the expense and uncertainties
      of litigation, the parties settled the litigation as detailed in the Settlement
      Agreement.





In
      summary, the Settlement Agreement states that the total amount to be paid to
      American is $8.5 million if paid on or before September 1, 2006.





If
      not
      paid by September 1, 2006 the parties agreed that the amount to be paid to
      American is the sum of the real estate proceeds upon sale of the property net
      of
      certain costs detailed in the Settlement Agreement plus an amount equal to
      sixty
      percent of the amount obtained by subtracting the real property proceeds from
      the amount due under the loan documents. If an insolvency event by Capital
      Center is instituted before payment on or before September 1, 2006 the total
      amount to be paid to American is $5.0 million plus American shall receive the
      proceeds derived from the sale or disposition of the property in the insolvency
      proceeding.





The
      Company has committed to pay the $8.5 million due under the settlement agreement
      by the required September 1, 2006 date. The Company estimates that the fair
      value of the building is $7.7 million which is based on a master lease concept.
      The value of the building fully leased is approximately $11.0 million. Maxco,
      as
      part of the sales transaction, would be required to lease vacant space in the
      building for two years. The payments would be held in an escrow account, the
      balance of which would initially be approximately $2.5 million. The Company
      has
      recorded the $800,000 difference between the fair value and the amount due
      under
      the settlement agreement as an impairment charge in the fourth quarter of fiscal
      2006.





On
      August
      11, 2005 the Company agreed to indemnify Max A. Coon, chairman and president
      of
      the Company, for any amounts he would be required to pay as a result of personal
      guarantees he provided for the benefit of the Company’s real estate entities.
      Management estimates the amount of these guarantees to be up to $6.7 million.





Management
      estimates the maximum exposure under this guarantee to American is approximately
      $5.0 million if the Company does not pay the amount due under the settlement
      agreement by September 1, 2006.





In
      addition, the Company agreed to indemnify Max A. Coon for any amount he would
      be
      required to pay for a $1.7 million guarantee resulting from the sale of its
      major real estate portfolio.





The
      Company does not believe that there is any unusual degree of risk related to
      the
      indemnification of these guarantees made by Max Coon because of sufficient
      underlying asset values supporting the respective debt obligation and other
      conditions of such indemnification; as such, no amounts have been accrued for
      such guarantees as of March 31, 2006. ****





**NOTE
      5 - PREFERRED STOCK**





Maxco
      may
      issue up to 100,000 shares of preferred stock with terms determined by Maxco’s
      Board of Directors.





Series
      Three Preferred Stock is voting stock on a par with the common stock, and has
      twenty votes per share. Quarterly cumulative dividends are provided at the
      annual rate of 10% of face value annually, subject to the restrictions of
      Michigan corporate law and the discretion of the Maxco Board of Directors.
      The
      stock is callable at the option of the Company, with the call price declining
      at
      the rate of one percent per year to a minimum price after February 1999, equal
      to face value ($60 per share).





31


Series
      Four Preferred Stock is cumulative, callable at the Company’s option, is
      non-voting, has no conversion rights, and pays an annual dividend at the rate
      of
      10% of face value annually.





Series
      Five Preferred shares have a face value of $120, are callable at the Company’s
      option, are non-voting, have no conversion rights, and pay a quarterly
      cumulative dividend at the rate of 10% of face value annually.





Series
      Six Preferred Stock, established February 4, 1999, is voting stock on a par
      with
      the common stock, and has twenty votes per share. Quarterly cumulative dividends
      are provided at the annual rate of 10% of face value annually, subject to the
      restrictions of Michigan corporate law and the discretion of the Maxco Board
      of
      Directors. The stock is callable, at the option of the Company, at any time
      after the second anniversary of their issuance in whole or in part. The call
      price will be face value ($160 per share) plus a declining premium amount,
      which
      shall be equal to 5% until the third anniversary of issuance and shall decline
      1% annually thereafter to zero following the seventh anniversary.





Effective
      January 1, 2002, the Maxco Board of Directors suspended the payment of dividends
      on all preferred stock. These dividend payments have been accrued in the
      accompanying financial statements and totaled approximately $1.9 million at
      March 31, 2006, or $0.55 per common share.





**NOTE
      6 - COMMON STOCK OPTIONS**





Under
      the
      terms of Maxco’s incentive common stock option plan, options for the purchase of
      up to 500,000 shares of common stock may be granted. Any such options are
      immediately exercisable upon grant.





There
      were 40,000 stock options outstanding and exercisable at March 31, 2006 with
      a
      weighted average price of $7.13 per share and an exercise price ranging from
      $7.00 to $7.50. There were no options granted during the years ended March
      31,
      2006, 2005, or 2004. The weighted average remaining contractual life of the
      outstanding options is approximately three years.





The
      Company adopted SFAS No. 123 (Revised 2004), “ *Share
      Based Payment”* (“SFAS
      No. 123R”), under the modified prospective transition method on January 1, 2006.
      SFAS No. 123R requires companies to measure and recognize the cost of employee
      services received in exchange for an award of equity instruments based on the
      grant-date fair value. Share-based compensation recognized under the
      modified-prospective transition method of SFAS No. 123R includes share-based
      compensation based on the grant-date fair value determined in accordance with
      the original provisions of SFAS No. 123, “ *Accounting
      for Stock-Based Compensation”,* for
      all
      share-based payments granted prior to and not yet vested as of January 1, 2006
      and share-based compensation based on the grant-date fair-value determined
      in
      accordance with SFAS No. 123R for all share-based payments granted after January
      1, 2006. SFAS No. 123R eliminates the ability to account for the award of these
      instruments under the intrinsic value method proscribed by Accounting Principles
      Board (“APB) Opinion No. 25, *Accounting
      for Stock Issued to Employees,* and
      allowed under the original provisions of SFAS No. 123. Prior to the adoption
      of
      SFAS No. 123R, the Company accounted for its stock option plans using the
      intrinsic value method in accordance with the provisions of APB Opinion No.
      25
      and related interpretations.





For
      periods presented prior to the adoption of SFAS No. 123R, pro forma information
      regarding net income and earnings per share as required by SFAS No. 123R has
      been determined as if the Company had accounted for its employee stock options
      under the original provisions of SFAS No. 123. The Company has determined that
      there is no difference between the reported net loss and loss per share and
      the
      pro forma net loss and net loss per share if the options were accounted for
      under SFAS 123R for all periods presented.





**NOTE
      7 - 401(K) EMPLOYEE SAVINGS PLANS**





Company
      contributions charged to operations under the 401(K) employee savings plans
      were
      approximately $183,000, $178,000, and $145,000 for the years ended March 31,
      2006, 2005, and 2004, respectively.





32


**NOTE
      8 - FEDERAL INCOME TAXES**





Federal
      income taxes consist of the following components:


**Year
                  Ended March 31,****2006**
              
              **2005**
              
              **2004*****(in
                  thousands)***Current
              
              $
              -
              
              $
              -
              
              $
              -Deferred
              
              
              -
              
              
              -
              
              
              --
              
              
              -
              
              
              -Deferred
                  amount allocated to equity inincome
                  of affiliates
              
              
              -
              
              
              -
              
              
              -$
              -
              
              $
              -
              
              $
              -





The
      reconciliation of the income taxes computed at the United States federal
      statutory tax rate to income tax expense (benefit) reported in these financial
      statements is as follows:


**Year
                  Ended March 31,****2006**
              
              **2005**
              
              **2004*****(in
                  thousands)***Income
                  tax expense (benefit) computed atUnited
                  States statutory rate (34%)
              
              $
              5
              
              $
              45
              
              $
              (521
              )Increase
                  (reduction) in valuation allowance
              
              
              (685
              )
              
              (169
              )
              
              517Other
              
              
              680
              
              
              124
              
              
              4$
              -
              
              $
              -
              
              $
              -





During
      fiscal year 2006, the Company paid $12,000 in federal AMT for the year ended
      March 31, 2005. No federal income taxes were paid in fiscal years 2005 or
      2004.





As
      of
      March 31, 2006, the Company has net operating loss (NOL) carryforwards of $5.9
      million, $5.5 million of which expires in 2023 with the remaining $350,000
      expiring in 2024.





The
      Company assumed the utilization of net operating loss carryforwards to offset
      taxable income in fiscal 2006. The Company amended its March 31, 2002 Federal
      income tax return to reflect the write offs of its investment in its
      discontinued affiliate, Foresight, Inc.’s stock, amounts the Company was
      required to pay as guarantor of Foresight’s banking agreement, and certain other
      advances to Foresight. As a result of this amendment, the Company received
      a
      federal income tax refund of approximately $790,000 which is recorded in accrued
      taxes payable at March 31, 2006. The Company is currently under audit by the
      Internal Revenue Service (IRS) and the factual discovery process by the IRS
      is
      still in process on this issue. While management believes that the facts and
      tax
      law support the claim, this matter is not yet settled. Accordingly, the Company
      has recorded the refund in accrued taxes payable.





During
      fiscal 2006, the Company utilized approximately $912,000 of NOL carryforwards
      which, along with other temporary differences led to a reduction of $685,000
      of
      the deferred income tax valuation allowance. During
      fiscal 2005, the Company utilized approximately $1.5 million of NOL
      carryforwards, which, along with other temporary differences, led to a reduction
      of $169,000 of the deferred income tax valuation allowance. In
      2004
      the Company recorded a deferred tax asset valuation allowance of $517,000 due
      to
      the uncertainty in the ultimate realization of its deferred tax assets. The
      following table summarizes changes in the deferred tax valuation
      allowance:


**Year
                  Ended March 31,****2006**
              
              **2005**
              
              **2004*****(in
                  thousands)***Beginning
                  balance
              
              $
              3,354
              
              $
              3,523
              
              $
              3,006Charged
                  (credited) to costs and exp enses
              
              
              (685
              )
              
              (169
              )
              
              517Ending
                  balance
              
              $
              2,669
              
              $
              3,354
              
              $
              3,523


33


Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes. Significant components of the
      Company’s deferred tax liabilities and assets were as follows as of March 31:


**2006**
              
              **2005*****(in
                  thousands)*****Deferred
                  Tax Liabilities:**Depreciation
              
              $
              1,930
              
              $
              2,424Other
              
              
              -
              
              
              200**Total
                  Deferred Tax Liabilities**
              
              
              1,930
              
              
              2,624**Deferred
                  Tax Assets:**Net
                  operating loss carryforwards
              
              
              1,995
              
              
              2,498Net
                  cumulative unrealized impairment losses
              
              
              1,520
              
              
              1,874Wages/incentives
                  not paid
              
              
              1,003
              
              
              454Allowance
                  for doubtful accounts
              
              
              61
              
              
              51Marketable
                  securities
              
              
              -
              
              
              1,101Other
              
              
              20
              
              
              -**Total
                  Deferred Tax Assets**
              
              
              4,599
              
              
              5,978**Valuation
                  Allowance for Deferred Tax Assets**
              
              
              2,669
              
              
              3,354**Net
                  Deferred Tax Assets**
              
              
              1,930
              
              
              2,624**Net
                  Deferred Tax Assets (Liabilities)**
              
              $
              -
              
              $
              -


**NOTE
      9 - OTHER INVESTMENTS**





Real
      Estate (Discontinued and Held For Sale) :





Maxco
      has
      effective ownership interests ranging from 31-50% in primarily two LLC’s that
      have been involved in the development and ownership of real estate in central
      Michigan. In 2003, the Company’s affiliated entity, L/M Associates II, sold
      substantially all of the properties in its real estate portfolio. Pursuant
      to
      the terms of the sale agreement, in July 2004, L/M Associates (L/M) exercised
      its option to require the managing member of the acquiring entity to repurchase
      L/M’s 16% interest in the acquiring entity. To date this requirement has not
      been satisfied and L/M Associates intends to pursue other collection remedies
      against the managing member of the acquiring entity. In addition, the managing
      member of the acquiring entity, subsequent to December 31, 2005, has listed
      the
      applicable properties for sale with a major real estate firm.





Any
      risks
      on guarantees that Maxco has estimated would be required to be paid by Maxco
      have been recorded in the accompanying financial statements and Maxco’s
      investment has been adjusted to the net realizable value of the remaining
      assets. Impairment charges totaling $800,000 were recognized during the year
      ended March 31, 2006 to further reduce the carrying value of the Company’s
      investment in real estate to its estimated fair value less costs to sell.





In
      May
      2005, Maxco purchased an entity which owns two buildings from L/M Associates.
      The debt associated with this transaction was approximately $1.8 million which
      was previously identified as guaranteed debt. In February 2006, the remaining
      guarantee of $125,000 was repaid as a result of the sale of the underlying
      asset. Consequently, no guarantees remain as of March 31, 2006.





Technology
      Related :





In
      addition to its investment in Integral Vision, Inc., the Company has an equity
      interest in Provant, Inc. Maxco recorded an impairment charge of approximately
      $366,000 in other income (expense) in 2004 to recognize a declines in the fair
      value of its investment that was deemed other than temporary. On March 11,
      2004
      Provant completed the sale of substantially all of its remaining assets and
      is
      in the process of final liquidation.





Energy
      Related :





Maxco
      has
      a 50% interest in Robinson Oil Company, LLC (“Robinson”), which is in the
      business of acquiring and developing oil and gas interests. Impairment charges
      of $30,000 and $260,000 were recognized during the years ended March 31, 2006
      and 2005, respectively, to reduce the carrying value of the Company’s investment
      in Robinson to its estimated fair value.





Other :





Maxco
      has
      a 36% equity interest in Phoenix Financial Group, LTD and its subsidiary
      Cambridge Group Investments, LTD, dba Bondpage.com (“Cambridge”), a registered
      broker-dealer of securities that is primarily focused on the trading of fixed
      income investments over the Internet. An impairment charge of $226,000 was
      recognized during the year ended March 31, 2006 to reduce the carrying value
      of
      the Company’s investment in Phoenix Financial Group to its estimated fair value.





34


In
      summary, the Company recorded the following charges to recognize declines in
      the
      value of its investments that were deemed other than temporary:


**Year
                  Ended March 31,****2006**
              
              **2005**
              
              **2004*****(in
                  thousands)***Robinson
                  Oil
              
              $
              30
              
              $
              260
              
              $
              -Phoenix
                  Financial
              
              
              226
              
              
              -
              
              
              -Real
                  estate
              
              
              800
              
              
              350
              
              
              749Provant
              
              
              -
              
              
              -
              
              
              366$
              1,056
              
              $
              610
              
              $
              1,115


A
      significant portion of these adjustments were recorded during the fourth quarter
      of each of these fiscal years, and in total served to increase the net loss
      per
      share by $0.31, $0.19 and $0.36 in 2006, 2005 and 2004,
      respectively.





The
      components of the real estate investments held for sale is summarized as
      follows:


**March
                  31,****2006**
              
              **2005*****(in
                  thousands)***Ledges
                  Commerce Park, net1
              
              $
              -
              
              $
              343Capital
                  Center Associates building
              
              
              7,700
              
              
              4,250Capital
                  Center Associates obligation
              
              
              (8,500
              )
              
              (4,263
              )Michigan
                  Equities Investment Properties, net
              
              
              896
              
              
              808Other
              
              
              531
              
              
              712$
              627
              
              $
              1,8501In
                May 2005, Maxco acquired the common stock of Ledges Commerce Park
                and as
                such, has recorded the assets acquired at their fair value and the
                liabilities assumed at the amount at which they are expected to be
                settled
                as of March 31, 2006.





The
      composition of the net carrying value of non-real estate related investments
      is
      summarized as follows:


**March
                  31,****2006**
              
              **2005*****(in
                  thousands)***Phoenix
                  Financial
              
              $
              250
              
              $
              576Integral
                  Vision
              
              
              377
              
              
              211Robinson
              
              
              61
              
              
              91$
              688
              
              $
              878





The
      combined unaudited results of operations and financial position of the Company’s
      unconsolidated non-real estate affiliates are summarized below:


**Technology
                  Related**
              
              **Energy
                  Related and Other****March
                  31,**
              
              **March
                  31,****2006**
              
              **2005**
              
              **2004**
              
              **2006**
              
              **2005**
              
              **2004**Condensed
                  income statement information:Net
                  sales
              
              $
              232
              
              $
              1,972
              
              $
              322
              
              $
              3,185
              
              $
              4,426
              
              $
              3,866Gross
                  margin
              
              
              (249
              )
              
              506
              
              
              (123
              )
              
              3,185
              
              
              4,426
              
              
              3,778Net
                  income (loss)
              
              
              (3,024
              )
              
              (2,284
              )
              
              (2,181
              )
              
              (343
              )
              
              50
              
              
              294Condensed
                  balance sheet information:Current
                  assets
              
              $
              2,400
              
              $
              737
              
              $
              539
              
              $
              511
              
              $
              992
              
              $
              1,055Non-current
                  assets
              
              
              189
              
              
              160
              
              
              337
              
              
              573
              
              
              558
              
              
              682$
              2,589
              
              $
              897
              
              $
              876
              
              $
              1,084
              
              $
              1,550
              
              $
              1,737Current
                  liabilities
              
              $
              575
              
              $
              2,949
              
              $
              2,970
              
              $
              238
              
              $
              243
              
              $
              366Non-current
                  liabilities
              
              
              378
              
              
              2,369
              
              
              1,645
              
              
              -
              
              
              40
              
              
              162Stockholders'
                  equity (deficit)
              
              
              1,636
              
              
              (4,421
              )
              
              (3,739
              )
              
              846
              
              
              1,267
              
              
              1,209$
              2,589
              
              $
              897
              
              $
              876
              
              $
              1,084
              
              $
              1,550
              
              $
              1,737


35





**NOTE
      10 - CONTINGENCIES AND COMMITMENTS**





Maxco
      and
      certain operating subsidiaries occupy facilities and use equipment under
      operating lease agreements requiring annual rental payments approximating
      $273,000 in 2007, $241,000 in 2008, $197,000 in 2009, and $139,000 in 2010
      for a
      total commitment aggregating $850,000. Rent expense charged to operations,
      including short-term leases, aggregated $209,000 in 2006, $445,000 in 2005,
      and
      $422,000 in 2004.





In
      April
      2004 the Company entered into an incentive agreement with the President of
      its
      wholly-owned subsidiary Atmosphere Annealing, Inc. The agreement provides for
      compensation to the officer based on the increased value, as defined, of the
      subsidiary by March 31, 2006. The incentive is equal to 1% of the first $25
      million in value plus 10% above that base amount. Since no such sale occurred
      by
      March 31, 2006, at the option of Maxco the incentive is payable in cash or
      its
      equivalent in stock of Atmosphere Annealing, Inc. held by Maxco. As party to
      the
      agreement, Maxco, Inc. is recognizing incentive compensation expense on a
      pro-rata basis under the terms of the agreement. As of March 31, 2006, the
      amount accrued was $2.0 million, including $1.4 million charged to operations
      during the year then ended.





The
      Company is involved in various lawsuits and other claims arising in the ordinary
      course of business. While the results of these matters cannot be predicted
      with
      certainty, management, upon advice from counsel, believes that losses, if any,
      arising from these proceedings will not have a material adverse effect on its
      financial statements.





**NOTE
      11 - INDUSTRY SEGMENT INFORMATION**





The
      following summarizes Maxco’s industry segment information:


**2006**
              
              **2005**
              
              **2004*****(in
                  thousands)*****Net
                  Sales:**Heat
                  treating
              
              $
              46,564
              
              $
              45,364
              
              $
              40,754Corporate
                  and other
              
              
              -
              
              
              -
              
              
              44**Total
                  Net Sales**
              
              $
              46,564
              
              $
              45,364
              
              $
              40,798**Operating
                  Earnings (Loss)**Heat
                  treating
              
              $
              5,515
              
              $
              4,202
              
              $
              2,137Corporate
                  and other
              
              
              (3,343
              )
              
              (2,199
              )
              
              (1,968
              )**Total
                  Operating Earnings**
              
              $
              2,172
              
              $
              2,003
              
              $
              169**Identifiable
                  Assets:**Heat
                  treating
              
              $
              27,292
              
              $
              27,081
              
              $
              29,472Corporate
                  and other
              
              
              2,618
              
              
              3,357
              
              
              2,671Investments
                  and advances
              
              
              4,215
              
              
              2,728
              
              
              3,338**Total
                  Identifiable Assets**
              
              $
              34,125
              
              $
              33,166
              
              $
              35,481**Depreciation
                  and Amortization Expense:**Heat
                  treating
              
              $
              3,065
              
              $
              2,900
              
              $
              2,865Corporate
                  and other
              
              
              23
              
              
              26
              
              
              34**Total
                  Depreciation and Amortization Expense**
              
              $
              3,088
              
              $
              2,926
              
              $
              2,899**Capital
                  Expenditures:**Heat
                  treating
              
              $
              1,698
              
              $
              1,041
              
              $
              698Corporate
                  and other
              
              
              16
              
              
              1
              
              
              -**Total
                  Capital Expenditures**
              
              $
              1,714
              
              $
              1,042
              
              $
              698





Accounting
      policies of the business segments are consistent with those described in the
      summary of significant accounting policies (see Note 1).





Identifiable
      assets are those assets that are used in Maxco’s operations in each industry
      segment. Corporate assets are principally cash, notes receivable, investments,
      and corporate office properties.





Maxco
      has
      no significant foreign operations, export sales, or inter-segment
      sales.





The
      nature of the Company’s heat treating services may produce sales to one or a
      small number of customers in excess of 10% of total sales in any one year. The
      Company’s base of customers is concentrated among original equipment
      manufacturers as well as Tier I and Tier II suppliers in North America. The
      loss
      of business from a major customer, the discontinuance of particular vehicle
      models or a change in regulations or auto consumer preferences could materially
      adversely affect the Company. In addition, certain of the Company’s customers
      have suffered financial distress, which may materially adversely impact the
      Company as well in terms of the potential for lost revenue and/or uncollectible
      accounts receivable. It
      is
      possible that the specific customers reaching this threshold may change from
      year to year. Loss of any one of these customers could have a material impact
      on
      the Company’s results of operations. For the year ended March 31, 2006 sales to
      Honda of America Manufacturing, Inc. and GM Powertrain represented 33.2% and
      10.4% of consolidated sales, respectively. Amounts due from these customers
      represented 33% of the respective outstanding trade receivable balance at March
      31, 2006. For the year ended March 31, 2005 sales to Honda of America
      Manufacturing, Inc. and GM Powertrain represented 33.3% and 10.7% of
      consolidated sales, respectively. Amounts due from these customers represented
      31% of the respective outstanding trade receivable balance at March 31, 2005.
      For the year ended March 31, 2004 sales to Honda of America Manufacturing,
      Inc.
      and GM Powertrain represented 38.3% and 14.3% of consolidated sales,
      respectively.





36





**NOTE
      12 - INCOME (LOSS) PER SHARE**





The
      following table sets forth the computation of basic and diluted loss per
      share:


**Year
                  Ended March 31,****2006**
              
              **2005**
              
              **2004*****(in
                  thousands except per share data)*****Numerator:**Net
                  income (loss)
              
              $
              14
              
              $
              134
              
              $
              (1,531
              )Preferred
                  stock dividends
              
              
              (470
              )
              
              (408
              )
              
              (408
              )**Numerator
                  for basic and diluted earnings per share—****loss
                  available to common stockholders**
              
              $
              (456
              )
              $
              (274
              )
              $
              (1,939
              )**Denominator:****Denominator
                  for basic and diluted earnings per share—****weighted
                  average shares**
              
              
              3,454
              
              
              3,139
              
              
              3,108**Basic
                  and Diluted Loss Per Share**
              
              $
              (0.13
              )
              $
              (0.09
              )
              $
              (0.63
              )





**NOTE
      13 - SUBSEQUENT EVENTS**





On
      April
      3, 2006 the Board of Directors abandoned its decision to propose to the
      Company’s common and voting preferred shareholders a transaction that would call
      for a 1-for-1,000 reverse stock split followed immediately by a 1,000-for-1
      forward stock split of Maxco’s common stock. The previously proposed
      transaction, if implemented, was expected to enable the Company to terminate
      the
      registration of its common stock.





The
      Board
      of Directors also decided to engage GBQ Consulting, LLC to locate an investor
      or
      purchaser of the Company including its subsidiary Atmosphere Annealing, Inc.
      Such sale is not expected to occur by March 31, 2007.





37


**MAXCO,
      INC.**


**ANNUAL
      REPORT ON FORM 10-K**





**EXHIBIT
      INDEX**





Exhibit
              No.
            Description




21
            Subsidiaries
                of the Registrant





23
            Consent
                of Independent Registered Public Accounting Firm (Form S-8 filed
                June 2,
                1992 - File No. 33-48351 and Form S-8 filed November 19, 1998 - File
                No.
                333-67539)





31.1
            Certification
                of Chief Executive Officer of periodic report pursuant to Rule 13a-15(e)
                or Rule 15d-15(e).





31.2
            Certification
                of Chief Financial Officer of periodic report pursuant to Rule 13a-15(e)
                or Rule 15d-15(e).





32.1
            Certification
                of Chief Executive Officer of periodic report pursuant to 18 U.S.C.
                §1350.





32.2
            Certification
                of Chief Financial Officer of periodic report pursuant to 18 U.S.C.
                §1350.






38