The structure and magnetic properties of composite powders prepared by ball milling a mixture of Fe2O3 ‧ (0.4-1.0)Fe were investigated. Hysteresis loops and differential scanning calorimetry (DSC) curves are used to characterize the materials and to examine the effect of the solid state reaction induced by ball milling. The results showed that a solid state reaction in Fe2O3 ‧ (0.4-1.0)Fe clearly proceeds after only 1 h of ball milling. The system is characterized by a positive reaction heat of +2.23 kcal/mole. The diffraction lines related to Fe2O3 and Fe disappeared after 1 h of ball milling and, instead, diffraction lines of the intermediate phase of Fe3O4 plus FeO formed. The magnetization and coercivity of the Fe2O3 ‧ 0.8Fe powders were changed by the solid state reaction process of Fe2O3 by Fe during ball milling. The coercivity of the Fe2O3 ‧ 0.8Fe powders increased with increasing milling time and reached a maximum value of 340 Oe after 5 h of ball milling. This indicates the grain size of Fe3O4 was clearly reduced during ball milling. The magnetic properties of the annealed powders depend on the amount of magnetic Fe and Fe3O4 phases.