The relationship between hillock formation and microstructure was studied in Al-Ta alloy films for interconnections of thin-film transistor-liquid-crystal displays. In-situ scanning electron microscopy observation of hillock formation, transmission electron microscopy studies of microstructures of both the hillock and film, and in-situ stress measurements during isothermal annealing were carried out on Al-2at.%Ta alloy films deposited on glass substrates by d.c. magnetron sputtering. Hillock size increased with annealing temperature and time during variable temperature and isothermal annealing, respectively, Macroscopic hillock number density saturated soon after the appearance of hillocks. New hillocks were observed on the outer perimeter of old hillocks. The distance between hillocks ranged from 20 mu m to 100 mu m, an extremely large distance in comparison with the grain size. The relationship between hillock formation and microstructures on AI-Ta alloy films can be explained by a model in which hillock formation due to lateral diffusion, i.e. diffusion in the film plane, results in compressive stress relaxation in a large area around the hillock. The fine-grained film structure caused by the addition of Ta plays an important role in reducing hillock density.