The excellent mechanical properties of austempered ductile iron are due to the unique matrix microstructure called “ausferrite”. Such microstructure is obtained from the first stage reaction during isothermal transformation of austenite into ferrite and high carbon austenite. The second stage reaction is the decomposition of high carbon austenite into ferrite and carbide. In this study, the microstructure of Cu-alloyed ductile iron treated by two-step austempering was investigated using SEM and TEM. The two-step austempering consists of 1) quenching from 900°C to 300°C and hold for 6 minutes in a salt bath, and 2) increasing the temperature of the salt bath by 30°C at the rate of 3°C per minute and holding until the total time was 120 minutes. The SEM samples were prepared by grinding to 1200 grit, polishing with 0.3 micron alumina powder and etching using 2% nital. Thin foil discs of 3 mm diameter for TEM observation were prepared by mechanical thinning to 80-100 microns and were then dimpled to 20 microns. Final thinning was carried out using Gatan precision ion polishing system (PIPSTM). The thin foils were then examined using Jeol-JEM2010 operating at 200 kV. TEM results show that the matrix microstructure is ferrite subunits interspersed with retained austenite films. The subunits and austenite films exhibit either Kudjamov-Sachs (K-S) or Nishiyama-Wasserman (N-W) orientation relationships. Occasionally, fine carbide precipitate was observed.