The formation and development of serrated chip morphology and adiabatic shear bands (ASBs) and the microstructure of fracture surfaces in the serrated chips during hard machining of hardened alloy steel are observed, the mechanism of adiabatic shear fracture is analyzed. The observation and analysis indicate that the cutting speed has significant influence on the transformation of chip morphology and microscopic morphology of ASBs, the material properties can significantly influence on microstructural pattern of fracture surfaces and fracture mechanism during serrated chip formation. The ductile damage fracture induced by adiabatic shear has decisive effect on serrated chip formation, a microcosmic model of adiabatic shear ductile fracture during hard machining including nucleation, growth, coalescence and fracture of microvoids within ASB is proposed.