The microstructure of a twin roll cast (designated as TRC in short) and warm rolled Mg-4.5Al-1.0Zn (designated as AZ41 in short) alloy was investigated using OM and TEM after annealing treatment at the temperature range of 300oC~400oC. Tensile test was performed to show the influence of the annealing treatment on mechanical properties. The microstructure of AZ41 alloy sheet consisted of fibrous structure of elongated grains and shear bands along the rolling direction. Static recrystallization (SRX) was observed at and above 300oC during annealing treatment process. Shear bands, dislocations and twins play an important role during SRX and serve as nucleation sites, this leads to grain refinement. The sheet had higher strength and lower elongation after warm rolling. However annealing treatment after warm rolling induced the decrease of strength and increase of elongation. This results in the balance of strength and elongation in AZ41 alloy sheet. Annealing treatment at 400oC for 40min can be considered to be the optimum annealing treatment, and at this condition the tensile strength, yield strength and elongation are 375MPa, 285MPa and 17.7%, respectively.