The effect of thermal annealing temperature on the microstructure and phase composition of nitrided layer formed on AISI 304 stainless steel by plasma nitriding were investigated. The phase composition and structure of the nitrided have been analyzed by X-ray diffraction (XRD) and scanning electron microscopy (SEM). The XRD analysis of nitrided samples at 420oC showed the presence of γN phase in the nitrided layer. The temperature at which the nitrogen expanded austenite started to decompose was about 450oC. Above this critical temperature the γN phase transformed into a mixture of CrN and α-phase. The surface hardness of nitrided layer also slightly changed with annealing temperature.