Micro-features such as grooves and lenses, which perform optical functions in flat displays, should be manufactured with a good form accuracy because this is directly related to their optical performance. As the size of the display increases, it is very difficult to maintain a high relative accuracy because of the inherent geometric errors such as the waviness of a large-area plate. In this paper, the optical effect of these geometric errors is investigated, and surface-referenced micro-grooving to measure and compensate for such geometric errors on line is proposed to improve the form accuracy of the micro-grooves. A PZT-based fast depth adjustment servo system is implemented in the tool holder to maintain a uniform groove depth in reference to the wavy surface. Through experiments, the proposed method is shown to be an efficient way to produce high-quality micro- grooves on a wavy die surface.