A finite element model is developed to predict the chip formation and phase transformation in orthogonal machining of hardened AISI 52100 steel (62HRC) using Polycristalline Cubic Boron Nitride (PCBN) tools. The model mainly includes a chip separation criterion based on critical equivalent plastic strain; a Coulomb's law for the friction at the tool/chip interface; a material constitutive relation of velocity-modified temperature; a thermal analysis incorporating the heat dissipated from inelastic deformation energy and friction; and an annealing effect model, in which the work hardening effect may be lost or re-accumulate depending on material temperature. This fully coupled thermalmechanical finite element analysis accurately simulates the formation of segmental chips and predicts the phase transformation on the chips, as verified by experiment. It is found that high temperatures around the secondary shear zone causes fast re-austenitization and martensite transformation, while other parts of the chips retain the original tempered martensitic structure.