Thermomechanical treatment T10 (extension twinning + aging treatment) can largely enhance the precipitation strengthening effect of magnesium alloys. In this study, dislocation structure evolution and precipitation behavior during T10 treatment of an AZ80 extruded bar were analyzed mainly by two-beam diffraction in TEM. At a compressive strain of 1% in the extrusion direction (ED), a typical dislocation configuration, including basal I1 stacking faults (SFs) and dislocations, has been established in extension twins. As the strain reaches 7%, the volume fraction of extension twins increases to more than 90% at which point high dense I1 SFs and dislocations occur. After aging for 2 h at 150 °C for the 7% strained sample, masses of basal I1 SFs and dislocations remain in the extension twins and can act as effective nucleation sites and solute fast-diffusion channels for continuous precipitates. Consequently, the precipitates in extension twins become highly dense.