Transmission electron microscopy (TEM) was performed to study the microstructural evolution in Al-Cu-Fe quasicrystalline thin films. Thin films were grown by magnetron sputtering on sodium chloride crystals, which were subsequently dissolved in water to acquire free-standing films. Studies were conducted on the as-deposited sample, and samples that were annealed at 400 degreesC in Argon and 500 degreesC in air. Nanocrystalline films were found in the as-deposited sample. When annealed at 400 degreesC the films changed to a metastable crystalline cubic beta-phase as the dominant phase with secondary phases (theta- and omega-phases), which appear as small islands and precipitates on the surfaces, in the matrices and at grain boundaries, with specific orientations with respect to the cubic beta-phase. The metastable phase transformed into the icosahedral psi-phase plus residual Al-rich material (including lambda-phase) upon further annealing at 500 degreesC. TEM imaging combined with electron diffraction revealed various features associated with the phase evolution in the crystalline-quasicrystalline phase transformation. Some grains in the film functioned as sacrificial grains allowing others to grow into icosahedral phases. Elements near the boundary of the sacrificial grains diffused to form the psi-phase, resulting in fragments in the center of the grain. The roles of the sacrificial grains and elements diffusions, and the phase transformation mechanism are discussed. Additionally, the oxide layer of the film was an amorphous aluminum oxide that exhibited poor adhesion to the quasicrystalline films. (C) 2003 Elsevier B.V. All rights reserved.