Sedimentation in organic solvents was followed by hot-pressing to produce 2 mole % yttria stabilized zirconia-NiAl functionally graded materials (FGM's). These FGM's were better able to accommodate high levels of residual stress than alumina-NiAl FGM's; this is possibly due to enhanced tetragonal phase retention. However, we found that the zirconia layer in these FGM's subsequently experiences room temperature transformation of t-ZrO2 to m-ZrO2.