A technique of composite processing of Fe2O3 and ammonium perchlorate (AP) was employed in making the propellant. The effects of composite processing of Fe2O3 on catalytic activity, on the thermal decomposition of AP, and on the burning rate of the composite propellant were investigated in this paper. Fe2O3/AP composite particles were prepared by a novel solvent-nonsolvent method. The results show that AP is successfully coated on the surface of Fe2O3. Composite processing of Fe2O3 and AP can improve the catalytic activity of Fe2O3. Fe2O3 exhibits better catalytic effect with increasing Fe2O3 content. The larger interface between Fe2O3 and AP and lower density of composite propellant (with the added Fe2O3/AP composite particles) are responsible for the enhancement of the catalytic activity of Fe2O3.