The effect of $ZrO_2$ dispersed phase on the mechanical properties in $Al_2O_3$-$ZrO_2$system has been studied. There are both metastable tetragonal phase and stable monoclinic phase of $ZrO_2$particles diespersed in Al2O3 matrix at room temperature. Metastable tetragonal $ZrO_2$ changes to the stable monoclinic structure within the stress field of the crack. And microcracks are formed by the expansion of $ZrO_2$during the tetragonal-monoclinic transformation on cooling. Therefore stress-induced phase transformation and inclusion-induced microcracking contribute to the mec-hanical properties of $Al_2O_3$-$ZrO_2$system. Sintered composites containing 10m/o $ZrO_2$ yield KiC values of 6.5MN/$m^{3/2}$ much greater than that of pure $Al_2O_3$ This increase results from microcrack extension and stress-induced phase transformation absor-bing energy by crack propagation. Flexural strength of composites is decreased considerably in comparison with pure $Al_2O_3$ This decrease results from microcrack as a crack former and higher porosity than pure $Al_2O_3$.