The effect of hardness on the residual stress in the machined surface of AISI 4340 steel was studied. Chips produced during the machining also were examined and the surface structure was investigated using optical microscope and scanning transmission microscope. Reflection electron diffraction study revealed the existence of austenite in the white layer of the machined surface together with untempered martensite. The residual stress near the machined surface or hardened steel is a compressive stress, and it changes to tensile stress as the hardness decreases. Chip segmentation was observed when steel with hardness of over Rc 50 was machined.