The　Mg-5Zn-2.5Er　matrix　composite　reinforced　with　the　in-situ　synthesized　Mg2Si　second　phase　particles　was　fabricated　via　repeated　plastic　working　(RPW)　process.　The　microstructures　and　the　nanocrystals　in　the　composite　have　been　investigated　using　transmission　electron　microscopy　(TEM),　high-resolution　transmission　electron　microscopy　(HREM)　and　energy　dispersive　X-ray　(EDX).　Great　deals　of　nanocrystals　were　found　in　the　matrix,　and　they　were　around　the　in-situ　synthesized　Mg2Si.　The　HREM　analysis　showed　that　the　size　of　nanocrystals　was　in　the　range　of　5-10　nm,　and　the　difference　in　their　crystallographic　orientation　was　bigger　than　15　degrees.　It　is　suggested　that　the　formation　of　nanocrystals　in　the　matrix　is　attributed　to　the　RPW　deformation　process　and　to　the　intensive　stresse　fields　around　the　in-situ　synthesized　Mg2Si　particles,　which　suppress　the　growth　of　nanocrystals　by　forming　nonequilibrium　grain　boundaries　containing　disordered　dislocation　networks　and　junction　disclinations.