Zirconia-toughened alumina cutting tools have been examined after machining an AISI 1040 steel. The Raman spectrum of zirconia and the fluorescence spectrum from alumina have been used to determine the extent of the tetragonal-to-monoclinic (t-m) transformation and the residual stresses in and around the worn-out crater, respectively. Although about 15% vol. m-zirconia is present even in a brand new cutting tool, it was shown that the crater region undergoes the t-m transformation up to 40% vol. In both cases, the transformed zone is concentrated near the surface. The residual stresses in alumina are slightly compressive in the new cutting tool and away from the crater region, but they become tensile inside the crater, where the t-m transformation of zirconia has occurred to a larger extent. A stochastic model has been used to predict the stresses and it has been found to reproduce very well the experimental data. Some evidence of the formation of a spinel reaction product in the crater region has been found, likely (Mg, Fe) AlO4
