A sonar transducer, 28 mm in diameter and 40 mm long, has been built using composite Terfenol-D, consisting of grains of Terfenol-D embedded in an epoxy and magnetically aligned while the epoxy is setting. The transducer has been tested in air, where it has a resonant frequency of 18 kHz, and Q equals 18 at low amplitudes. In water it is expected to have Q equals 4.5, an acoustic output power of 48 watts, a power efficiency of 32 percent, and a maximum duty cycle of 6 percent. Surprisingly, hysteresis losses appear to be negligible when the bias field is greater than 800 oersteds, and 90 percent of the power dissipation is due to eddy currents, with 10 percent due to ohmic losses in the coil. The anomalously high eddy currents, still much lower than in monolithic Terfenol-D, can be understood in terms of the arrangement of Terfenol-D grains in the composite. At this time we have no explanation for the anomalously low hysteresis loss. It should be possible to greatly reduce the eddy currents, increasing the power efficiency to 76 percent, the output power to 69 watts, and the maximum duty cycle to 60 percent. Composite Terfenol-D should be superior to both monolithic Terfenol-D and PZT in transducers for sonar arrays operating in the 20 to 30 kHz range.