Thermal barrier coatings (TBCs) are multilayered systems, composed of four components: ceramic top coat, thermal growth oxide, bond coat and the superalloy substrate. Each layer in the system is dynamic and all interact to control the system’s durability. The chemistry and microstructure of the bond coat is believed to be crucial, because of its influence on the mechanical and physical properties of bond coat and thereby on the state of stress in the whole TBC system. Recently a martensitic transformation has been found in thermally-cycled platinum aluminide bond coats. In situ TEM observations and high temperature X-ray analysis will be presented to demonstrate that the transformation is reversible and that it occurs on each thermal cycle. The L10 martensite is stable at lower temperatures and the B2 parent phase at elevated temperatures. The phase transformation is associated with a jump in volume and a quantitative measurement indicates that the atomic volume of the B2 phase is approximately 2% smaller than that of the martensite. Thus, the phase transformation produces about 0.7 % strain, which has been incorporated into FE model of the TBC system. During heating, the transformation strain is accommodated by plastic deformation and creep. During cooling, because the transformation temperature is below the ductile-brittle transition point of the bond coat, the transformation strain cannot be completely dissipated by non-elastic deformation and significant stresses appear to develop in the system.