Tetrahedral amorphous carbon films with 70%-88% sp(3) content are studied by atomic force microscopy (AFM), transmission electron microscopy (TEM), and Raman spectroscopy as a function of annealing temperature in the range 25-1100 degreesC. Using a high-resolution AFM current imaging, we directly image the formation and growth of conducting graphitic (sp(2)-bonded) nanoclusters in the ta-C films. Overall results from all the techniques used show that the structural and electronic changes in the films depend sensitively on the initial sp(3) content. Cross-sectional TEM confirms that the clusters appear not only at the surface of the films but in the bulk as well. The growth and, perhaps, the partial orientation of the sp(2)-bonded nanoclusters in the size range of 1-3 nm is accompanied by a large reduction in the film stress, which decreases sharply in the temperature range 500-600 degreesC. (C) 2004 American Institute of Physics.