Both theoretical analysis and transmission electron microscopy (TEM) complementary studies have been conducted to evaluate the possible role of subgrain formation as a strengthening mechanism in a nanocomposite consisting of Al2O3 and 5 vol % 0.15 mu m SiC particles. The theoretical calculation predicted that the residual stresses due to thermal expansion mismatch between Al2O3 and SiC are insufficient to induce the extensive plastic deformation required for subgrain formation upon annealing. This prediction was consistent with TEM observations that the bulk of the material was completely free from subgrains, and that only a low density of dislocations was present in isolated areas. The results suggest, therefore, that microstructure refinement through subgrain formation can not account for the superior mechanical behaviour of the nanocomposite reported in previous studies. TEM examination of the ground surfaces revealed significant plastic deformation in both single phase Al2O3 and the nanocomposite. Upon annealing at 1300 degrees C for 2 h, dislocation-free subgrains were formed in Al2O3, whereas a high density of tangled dislocations were present in the nanocomposite. These observed differences are consistent with the fact that during annealing, residual stress relaxation is more difficult in the nanocomposite than in Al2O3.