The temperature capability of yttria-stabilized zirconia thermal barrier coatings (TBCs) is ultimately tied to the rate of evolution of the "nontransformable" t' phase into a depleted tetragonal form predisposed to the monoclinic transformation on cooling. The t' phase, however, has been shown to decompose in a small fraction of the time necessary to form the monoclinic phase. Instead, a modulated microstructure consisting of a coherent array of Y-rich and Y-lean lamellar phases develops early in the process, with mechanistic features suggestive of spinodal decomposition. Coarsening of this microstructure leads to loss of coherency and ultimately transformation into the monoclinic form, making the kinetics of this process, and not the initial decomposition, the critical factor in determining the phase stability of TBCs. Transmission electron microscopy is shown to be essential not only for characterizing the microstructure but also for proper interpretation of X-ray diffraction analysis.