The transient heat flow and thermal stress during surface hardening by high frequency induction heating were analyzed using the finite element method. Using the modified two-dimensional finite model, the thermal and residual stresses during high frequency induction hardening were successively calculated. The thermal stresses were induced mainly by the temperature gradient and martensitic phase transformation; the phase transformation was found to have a greater influence on the residual stress than the temperature gradient. The simulation results revealed that there is a compressive residual stress within the hardening area and there is a maximum tensile residual stress near the exterior of the hardened zone. The effect of transformation plasticity was considered by using an additional strain in the numerical analysis of the high frequency induction hardening. The difference between the residual stresses considering and not considering the transformation plasticity was large, so it cannot be considered a negligible factor. In the non-hardening region, however, the stresses were distributed similarly.