Morphology and microstructure evolution of Al0.3Ga0.7N epilayers grown on GaN/sapphire templates with low-temperature (LT) AlN interlayers (IL) by means of metal organic chemical vapor deposition have been investigated by transmission electron microscopy and atomic force microscopy. It is found that the IL improves the surface morphology and suppresses edge-type threading dislocations (TDs). When the IL thickness is 20nm, there is the lowest density of the edge-type TD with 8.7×108cm−2. However, the edge-type TD density increases somewhat as IL thickness increases to 40nm. It is believed that two mechanisms determine the microstructure evolution of the AlxGa1−xN epilayers. One is the TD suppression effect of LT-AlN ILs that ILs can provide an interface for edge-type TD termination. Another is the TD introduction effect of ILs that new edge-type TDs are produced. Due to the lattice mismatch between AlN, GaN, and AlxGa1−xN, the strain in AlxGa1−xN epilayers is modified by inserting the AlN IL, and thus changes the formation of the edge-type TDs.