Fe-Co alloy powders were prepared by mechanical alloying of the elemental Fe and Co powders in air and subsequently annealed at various temperatures. Structural and magnetic characteristics of the annealed powders were studied in detail as a function of annealing temperatures by using an X-ray diffractometer (XRD), a field emission scanning electron microscope, a vibrating sample magnetometer, and a physical property measurement system. The XRD results showed an existence of the nanocrystals with sizes of 15–50 nm. The magnetic studies indicated a strong increase of magnetization and a sharp decrease of coercivity as annealing temperature increased. Both the effect of the oxidation on the magnetic properties as well as magnetization stability of the annealed samples will be discussed.