Ge nanocrystals (6-9 nm) embedded between amorphous Al 2 O 3 films were produced in a cluster beam deposition system. The microstructural evaluation and compressive stress experienced by the Ge nanocrystals due to the presence of an oxide layer, nanoparticle size distribution and their changes due to thermal annealing were studied by X-ray diffraction, HRTEM and Raman spectroscopy. Spectroscopic ellipsometry was used to measure the dielectric functions of the deposited films. A multilayer model based on the effective medium approximation was used to analyze the variation of percentage of defects and the extent of disorder with particle size of the nanocrystals. The correlation between the microstructural characteristics and optical properties was established by evaluating standard sum rules. Germanium nanocrystals show visible photo luminescence at room temperature around 3.0 and 2.8 eV. However, a peak shift towards lower energies with increasing particle size due to thermal annealing was not detected. The experimentally observed luminescence is presumably originated due to the presence of oxiderelated defect centers at the interface between the germanium nanocrystals and the embedded oxide layers.