A series of InGaAs films, compressively or tensilely strained, were grown on (001)InP substrates at 490 °C by gas source molecular beam epitaxy. Compressively strained (−0.5&percent;) (and lattice matched) layers were morphologically stable, but layers grown under tension (+0.5 to +0.6&percent; strain) developed facets on (113)Aor (114)Aplanes. In the first stages of growth of films under tension, and throughout all stages of growth for the compressively strained films, a fine scale (10 nm wavelength) composition modulation was found in the [110] direction. In the later stages of growth of films under tension, the regions of composition segregation were confined to the peaks and valleys of the faceted surface. Regions of high and low stress concentration (the valleys and the peaks) exhibit In/Ga ratios higher or lower, respectively, than the flat faceted surfaces. The elastic strain energy built into the film, associated with the [110] composition modulation, depends on the ratio of the modulation wavelength to film thickness. In films grown under tension, facet coarsening provides a means for the system to reduce the strain energy associated with segregation. Faceting (and facet coarsening) leads to a reduction in the misfit strain energy stored in the film. However, an analysis of the first stages of faceting shows that faceting cannot be explained as a roughening transition. ©1997 American Institute of Physics.