Detailed microstructure of MgO/Y2O3 co-doped BaTiO3 materials were examined using transmission electron microscopy (TEM). For the 1250°C-sintered BaTiO3 samples possessing flat K-T characteristics, which meet the X7R specification, the granular structure is complicated. Most of the grains are very small (∼ 150 nm) and are highly strained. The small grains contain large proportion of Y2O3 species and are paraelectric, whereas the large grains contain Y2O3 species unevenly distributed and are of core-shell structure. In contrast, for the 1300°C-sintered BaTiO3 samples, which have K-T properties slightly off the X7R specification, the grains grew larger to around 300 nm. The core-shell structured grains are seldom observed. Apparently, it is the existence of such a non-equilibrium core-shell microstructure, which renders the dielectric properties of the BaTiO3 materials extremely sensitive to the processing parameters.