An Fe/Al₂O₃ nanocomposite was prepared by high energy ball milling method, and which then annealed at 700^oC for 0.5 h in Ar atmosphere. The effect of annealing on the microstructure, magnetism and microwave-absorption properties of Fe/Al₂O₃ nanocomposite has been investigated. It follows that the annealing resulted in increasing grain size, decreasing lattice defects and releasing the residual microstrain; meanwhile, decreasing the intensity of photoluminescence peaks of Al₂O₃ significantly, therewith the peaks at 398 nm and 484 nm exhibit a blue shift. An optimal reflection loss of -11.4 dB at 15.5 GHz was measured for a 7.7 mm thick layer of as-milled composite powder mixture with paraffin. However, the annealing treatment could remarkably enhance the dielectric loss, magnetic loss and microwave absorption performance of the composite, leading to an optimal reflection loss of -35.5 dB at 17 GHz for a layer thickness of 6.4 mm for the annealed composite.