Plasma-induced surface segregation and oxidation of Fe in nickel-iron (NiFe) thin films have been investigated. Reactive species in an oxygen plasma are found to be the driving force for Fe surface segregation and oxidation. Mapping of the film optical density change as a function of plasma exposure conditions indicates that segregation and oxidation are accelerated dramatically by the presence of reactive radicals and ion bombardment. For plasma oxidation protection, tantalum is found to be a more effective capping layer than tantalum oxide. With a tantalum capping layer, NiFe films maintain their magnetic properties until the tantalum capping layer is completely oxidized.