The structure, mechanical properties, and machining performance of arc evaporated Ti-Al-O-N coatings have been investigated for an Al0.66Ti0.34 target composition and O-2/(O-2+N-2) gas flow-ratio varied between 0 to 24%. The coating structure was analysed using SEM, EDX, XRD, XPS, TEM, and STEM. Mechanical properties were analysed using nanoindentation and the deformation behaviour was analysed by probing the nanoindentation craters. The coatings performances in cutting tests were evaluated in a turning application in low carbon steel (DIN Ck45). It is shown that the addition of oxygen into the arc deposition process leads to the formation of a dual layer structure. It consists of an initial cubic NaCl-structure solid solution phase formed closest to the substrate, containing up to 35 at.% oxygen (O/O+N), followed by steady-state growth of a nanocomposite compound layer comprised of Al2O3, AlN, TiN, and Ti(O,N). The addition of oxygen increases the ductility of the coatings, which improves the performances in cutting tests. At high levels of oxygen, (> 13 at.%), however, the performance is dramatically reduced as a result of increased crater wear. (c) 2006 Elsevier B.V. All rights reserved.