The microstructure of composite diffusion layer of the nitrided and chromized 0.2% carbon steel is investigated using TEM and EDS. It is found that laths of austenite with high nitrogen (λN) precipitate from α-ferrite matrix in the deeper zone of the diffusion layer. These λN laths are all twins, with their {111} twinning planes parallel to the lath axis, thus forming a characteristic "back-to-back" morphology. There are two types of λN lath. The first is a genuinely {111} twin, and λN and α keep the accurate K-S relationship, and each λN and α form a sharp and smooth λN/α interface of {335}λN//{341}a, namely habit plane {335}fcc. The second is a pseudo-twin, with micro-twins {111} or faults formed within the two twin components. Localized lattice deformation (relaxation) seems to have occurred at the interfaces of the second type of λN due to the formation of micro-twins or faults within the twin components. These micro-twins or faults make the orientation relationship (OR) between each of the λN and the (-matrix deviate from the accurate K-S OR, and the OR between two λN twin components deviate from the genuine {111} twin relationship. In addition, the λN/α interface of the second type of λN is not as sharp or smooth as that of the first one.