Previous investigations have shown that the stability of Pb‐alloy Josephson junction devices during repeated thermal cycling between 298 and 4.2 K can be improved by using &egr;‐phase Pb‐Bi films as the counter electrode. The improvement was attributed to the hcp structure that has more resistance to strain relaxation by dislocation glide than fcc materials. In the present paper the strain behavior and microstructure changes of &agr;(fcc) and &egr;(hcp)‐phase Pb‐Bi films, which were prepared by co‐deposition of Pb and Bi onto Si substrates from a single source at 273 K and then cooled to as low as 4.2 K or heated to 350 K, have been studied by using x‐ray diffraction and transmission electron microscopy (TEM). Most of the strain introduced into the films upon cooling to 4.2 K due to the thermal expansion coefficient mismatch between the films and the substrate was found to be supported elastically by &egr;‐phase Pb‐Bi films thinner than 0.8 &mgr;m, and no change in microstructure was observed by TEM upon cooling 0.2‐&mgr;m‐thick films to 100 K. However, significant strain relaxation was observed in &agr;‐phase Pb‐Bi films as thin as 0.2 &mgr;m. The dominant strain relaxation mechanism in the &agr;‐phase film at low temperatures was very similar to that observed in Pb films: Dislocations glided across the grains to relax the strain, and the glide motion was impeded by the grain boundaries, the native oxide on the film surface, the substrate and twins. Upon warming the film to room temperature, a large number of dislocations remained, and did not slip out as in the case of the Pb films. In addition to strong resistance to strain relaxation of the &egr;‐phase films due to the hcp structure, the fiber structure of the films was found to be unfavorable for dislocation glide. Grain growth in the &agr;‐phase films commenced upon heating to 340 K, while in the &egr;‐phase films grain growth was first observed at the higher temperature of 350 K, despite the fact that the &egr;‐phase film has a lower melting temperature. From the present results it is clear that the thermal stability of the &egr;‐phase Pb‐Bi films is superior to that of the &agr;‐phase films.