Mechanical milling of Terfenol-D (Tb 0.3 Dy 0.7 Fe 1.97 ) was conducted under both dry and wet conditions. Nanoparticles of Terfenol-D were produced by mechanical milling, where Terfenol-D polycrystalline bulk samples were ball milled under argon atmosphere. Size reduction was found to be the main result of the dry mechanical milling. The magnetization and coercivity of the milled sample correlated with the particle size. Different results were obtained when using wet grinding. Nanocomposite of (Dy,Tb) 2 O 3 –Fe was found to form via the decomposition of (Tb 0.3 Dy 0.7 Fe 1.97 ) and the formation of rare earth oxides.