The formation of al2o3 dispersoids 0.1U and less in size in dilute iron-aluminum alloys by internal oxidation in wet hydrogen and dispersion strengthening of iron by application of the technique to iron powder were found to be feasible. In flowing h2-1.5 H2o gas, al2o3 dispersoids 0.1U and less in size formed (at 650 deg to 750 deg c) in fe-1 and 2 al sheet material but not in fe-3 or 4 al alloys. With higher temperatures and/or higher h2o/h2 volume-ratio gases, al2o3 and feal2o4 dispersoids >0.1U in size formed in all the sheet materials. Minus 100-mesh fe-2 al powders were internally oxidized under conditions that promoted formation of fine al2o3 particles in sheet materials, and then the oxidized powders were hydrogen reduced, sintered, extruded, and evaluated. During internal oxidation, fine al2o3 dispersoids formed within the powder grains, and coarse feal2o4 particles formed on the powder surfaces and grain boundaries. The feal2o4 content was essentially eliminated during sintering by reacting with the unoxidized aluminum that remained in the center of the larger internally oxidized powders. The tensile strength at 800 deg c depended upon the aluminum-oxygen weight ratio of these elements in the extrusions and reached a maximum of 17,000 psi. The stress-rupture strengths at 800 deg c of the better alloys were comparable with those of type 310 stainless steel.