The influence of retained austenite on work hardening behavior of dual-phase steel has been investigated in an intercritically annealed dual-phase steel. The retained austenite was classified morphologically into either isolated or capsulated type. The capsulated type was found to be much stable mechanically than the isolated type since the former could be effectively protected from strain by hard martensite shell. The isolated type was easily deformed by the first several percent plastic strain. The increase in work hardening rate, caused by the strain induced transformation of retained austenite to martensite, was ascribed to the contribution of the isolated type, the major volume fraction of retained austenite.