The present work has been taken up to study the influence of microstructure on the formation of martensite in austempered ductile iron. Ductile iron containing 1.5 wt.% nickel and 0.3 wt.% molybdenum was subjected to two types of austempering treatments. In the first, called as conventional austempering, the samples were austempered for 2 h at 300, 350 or 400 degrees C. In the second treatment, called as stepped austempering, the samples were initially austempered at 300 degrees C for 10, 20, 30, 45 or 60 min. These were subsequently austempered for 2 h at 400 degrees C. Tensile tests revealed considerable variation in the strain-hardening behaviour of the samples with different heat treatments. In the case of samples subjected to conventional austempering, it was found that strain-hardening exponent increased with increasing austempering temperature. In the case of samples subjected to stepped austempering, increased strain hardening was observed in samples subjected to short periods of first step austempering. Study of the microstructures revealed that increased strain hardening was associated with the formation of strain-induced martensite. There was a greater propensity for the formation of strain-induced martensite in the samples containing more of blocky austenite. Retained austenite in the form of fine films between sheaths of ferrite was relatively more stable. Studies revealed that the morphology, size and carbon content of the retained austenite were important parameters controlling their tendency to transform to martensite.