The role of magnetic domains and domain walls in exchange bias has stimulated much contemporary deliberation. Here we present compelling evidence obtained with small-angle scattering of unpolarized- and polarized-neutron beams that magnetization reversal occurs via formation of 10-100s nm-sized magnetic domains in an exchange-biased DyFe₂/YFe₂ superlattice. The reversal mechanism is observed to involve rotation of magnetization in and out of the sample plane. Remarkably, the domains are arranged in a quasiperiodic manner in the plane of the sample. The length scale of domain formation is similar to that of structural defects at the seed-layer-superlattice interface.