The plastic behavior of an aluminum alloy reinforced with axially aligned stainless-steel wires was examined by transmission electron microscopy. Residual transverse stresses, of the order of the yield stress of the matrix, were induced in the matrix upon cooling from an elevated temperature due to the difference in thermal coefficients of expansion between the filaments and matrix. As a result, the matrix was in a strain-hardened condition, and little additional strain hardening occurred during the application of tensile loads exceeding the first yield stress of the composite. Dislocation motion in the matrix began at the first yield stress of the composite and continued at a low rate of work hardening. Interfacial areas, formed by diffusion into the matrix, consisted of two distinct regions, each approximately 1 µm in width. Both regions are thought to contain ordered iron-aluminum intermetallic phases. Polycrystalline γ-Al2O3 was found in the region adjacent to the filaments; this region may also contain complex oxides of (iron, aluminum, chromium). The mechanical bond at the interface was found to be the result of lack of adhesion between the filaments and the intermetallic interfacial phase. The results of the study demonstrate the potential of using dislocation-density measurements to determine the in situ plastic behavior of the matrix and the value of high-resolution observations in the characterization of interfaces. Recommendations for future studies are made.