Thick crack-free AlGaN films have been grown on inclined-facet GaN templates. Light emitting diodes with λ = 323 nm has been achieved on these epilayers. The GaN template was grown at a low temperature in order to obtain triangle-facet growth fronts. Subsequent growth of AlGaN on this template involving a lateral overgrowth process exhibits interesting properties. The microstructure and optical characterizations were done using transmission electron microscopy and cathodoluminescence. At the AlGaN/GaN interface, a high density of dislocations was created due to lattice mismatch strain. Another unexpected set of triangular boundaries was observed inside the AlGaN layer, which grew without any change of the growth parameters. These boundaries were found to arise from domains grown in different directions. Monochromatic cathodoluminescence images indicate that Al content is different between the vertically-grown and the laterally-grown domains, suggesting that lattice mismatch strain exists between them. Dislocations were created at these mismatched boundaries to relax the strain. © 2003 WILEY-VCH Verlag GmbH & Co. KGaA.