The recrystallization of ferrite and austenite formation during intercritical annealing were studied in a 0.08C-1.45Mn-0.21Si steel by light and transmission electron microscopy. Normalized specimens were cold rolled 25 and 50 pct and annealed between 650 °C and 760 °C. Recrystallization of the 50 pct deformed ferrite was complete within 30 seconds at 760 °C. Austenite formation initiated concurrently with the ferrite recrystallization and continued beyond complete recrystallization of the ferrite matrix. The recrystallization of the deformed ferrite and the spheroidization of the cementite in the deformed pearlite strongly influence the formation and distribution of austenite produced by intercritical annealing. Austenite forms first at the grain boundaries of unrecrystallized and elongated ferrite grains and the spheroidized cementite colonies associated with ferrite grain boundaries. Spheroidized cementite particles dispersed within recrystallized ferrite grains by deformation and annealing phenomena were the sites for later austenite formation.