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 $Al_2O_3$, $Ni(NO_3)_2{cdo}6H_2O$ and $Fe(NO_3)_3{cdo}9H_2O$ 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.