The present authors have proposed in situ composites in which cold working was applied to the cutting chip mixture of dissimilar materials. The composites have exhibited superior strength together with ultra fine grain structure. In this study, such composite materials are produced by combining 6061 aluminum alloy and IF steel chips. Microstructural evolution processes are visualized by means of the microtomography as well as the TEM observation. It has been clarified that ultra fine grains with a large fraction of high angle boundaries are obtained due to the effects of severe plastic deformation during cutting. Grain size of the matrix aluminum alloy is reduced to about 220 nm by applying swaging strain of only 1.9. It should be noted that the significant strain hardening of the chips occurs during initial deformation stage where strain applied by swaging seems to be consumed mostly for consolidation. The chips gradually change their orientation in the material at this stage. It can be inferred that the rapid development of ultra fine structure in the matrix is also attributed to gradual change in deformation axis thereby realizing effective multi axial deformation. Overall, the utilization of chips is identified as a highly effective way of grain refining compared to the other uniand multi axial deformation processes.