Surface modification techniques have recently become very popular for obtaining enhanced properties of steels. In particular, ultrasonic shot peening (USP) has been used to create a nanocrystalline layer on the workpiece surface that endows the surface with excellent mechanical properties. The microstructure evolution in the deformation layers including grain refinement and phase transformation of the samples treated by surface modification is now well-understood. However, investigations of the effects of USP on the physical properties of these samples such as the mechanism of changes in the magnetic properties are not very clear. In this work, the magnetic properties and microstructure of 301 stainless steel treated by ultrasonic shot peening for 5 and 10 min have been investigated. It was found that the microhardness increased from 220 to 550 HV after the USP treatment, while the thickness of the enhanced layers was similar to 450 mu m. From treated surface to the matrix, the specimens were ground at the depth intervals of 100 mu m thickness (0-100 mu m, 100-200 mu m, etc.), and their magnetic properties were measured using a physical property measurement system and a magnetic property measurement system, while the corresponding microstructural evolution was evaluated by X-ray diffraction, electron back-scatter diffraction, and transmission electron microscopy. It was found that the magnetic properties (saturation magnetization and coercivity) and microstructure (martensite transformation, grain refinement) were significantly changed in the gradient layers. The relationships between the saturation magnetization and the martensitic phase content, and between the coercivity and grain refinement were elucidated in this work.