In friction welding, a favourable combination of process parameters helps to form a strong joint. Metallurgical transformations take place depending on the material combination and process parameters. Mechanical testing and macroscopic and microscopic examinations help to characterize the joints. Friction-welded joint made of high-carbon high-chromium steel D3 and mild steel AISI 1010 is subjected to studies to establish a functionally graded tooling element. In order to enhance the quality of the joint, post-weld heat treatment has been attempted which gave the interesting results. The mechanical strength and microhardness of the joint were improved by 16% and 14%, respectively, after annealing compared to non-heat-treated specimens. The structure details and constituents of fusion line as well as heat-affected zones were studied by optical and scanning electron microscope, EDX and XRD analyses. Transformation of the deformed metastable phases (retain austenite and un-tempered martensite) into joint materials with refined structure and composition could be achieved near the fusion line by heat treatment. This is expected to enhance the service life of friction-welded components.