Processing and properties of Al_2O_3 composites with Ni-Fe content of 10 and 15 wt% were investigated. Homogeneous powder mixtures of Al_2O_3/Ni-Fe alloy were prepared by the solution-chemistry route using Al_2O_3, Ni(NO_3)_2cdot6H_2O and Fe(NO_3)_3cdot9H_2O powders. Microstructural observation of composite powder revealed that Ni-Fe alloy particles with a size of 20nm were homogeneously dispersed on Al_2O_3 powder surfaces. Hot-pressed composites showed enhanced fracture toughness and magnetic response. The properties are discussed based on the observed microstructural characteristics.