Condensation from the vapor state is an important technique for the preparation of nanopowders. Levitational gas condensation is one such technique that has a unique ability of attaining steady state. Here, we present the results of applying this technique to an iron-copper alloy (96Fe-4Cu). A qualitative model of the process is proposed to understand the process and the characteristics of resultant powder. A phase diagram of the alloy system in the liquid-vapor region was calculated to help understand the course of condensation, especially partitioning and coring during processing. The phase diagram could not explain coring in view of the simultaneous occurrence of solidification and the fast homogenization through diffusion in the nanoparticles; however, it could predict the very low levels of copper observed in the levitated drop. The enrichment of copper observed near the surface of the powder was considered to be a manifestation of the lower surface energy of copper compared with that of iron. Heat transfer calculations indicated that most condensed particles can undergo solidification even when they are still in the proximity of the levitated drop. It helped us to predict the temperature and the cooling rate of the powder particles as they move away from the levitated drop. The particles formed by the process seem to be single domain, single crystals that are magnetic in nature. They, thus, can agglomerate by forming a chain-like structure, which manifests as a three-dimensional network enclosing a large unoccupied space, as noticed in scanning electron microscopy and transmission electron microscopy studies. This also explains the observed low packing density of the nanopowders. © 2010 The Minerals, Metals & Materials Society and ASM International.