Polyaniline (PANI) is a well‐studied material and is the pre‐eminent electrically conducting organic polymer with the potential for a variety of applications such as in batteries, microelectronics displays, antistatic coatings, electromagnetic shielding materials, sensors and actuators. Its good environmental as well as thermal stability and electrical conductivity tunable by appropriate doping make PANI an ideal active material for several applications. In this paper, we report the synthesis of water‐dispersible colloidal PANI/iron oxide composite nanoparticles using an in situ chemical oxidation polymerization method in a micellar medium of sodium dodecylsulfate, where the cores (iron oxide) are embedded in a PANI matrix layer. Transmission electron micrographs showed evidence of the formation of an iron oxide core/PANI shell composite with a thin layer of PANI over the iron oxide cores. The results of thermogravimetric, Fourier transform infrared and UV‐visible analysis indicated that the iron oxide nanoparticles could improve the composite thermal stability possibly due to the interaction between iron oxide particles and PANI backbone. We believe that the synthetic route described can also be adapted for the assembly of hierarchical structures of other metal oxides or hydroxides onto various cores. Copyright © 2010 Society of Chemical Industry