Abstract: The microstructure of the stainless steel layer in the composite pipe prepared by centrifugal-thermit process was investigated. The thermal stress distribution in the composite pipe during cooling of the fabrication process was analyzed by means of the finite-element method. It demonstrated that the high thermal stress and the brittleness of the steel layer, caused by nonmetal inclusions and the precipitating phases, were responsible for the cracking of the stainless steel layer. During cooling, the thermal stress was high and would beyond the tensile strength of the stainless steel layer to cause cracks if it was not to be relaxed by the plastic deformation. Increasing the plasticity and reducing the thermal stress of the stainless steel layer, the cracking could be avoided.