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Silicon‐germanium layers with Ge concentrations up to 14% are grown by liquid phase epitaxy on oxide‐patterned (111) Si substrates. Strains and defect formation are studied by transmission electron microscopy. Below Ge concentrations of 10% strain relaxation occurs via heterogeneous nucleation of dislocation loops at edges of the oxide mask. Cross‐slip leads to pinning points from where Frank–Read sources eject dislocations into the substrate. These dislocations relax strain induced by misfit and oxidation. At Ge contents above 10% misfit dislocations are observed at the Si/SiGe interface. Only a few threading dislocations occur and are confined to the seed areas where the SiGe layer grows directly on the Si substrate. Because edges of the oxide mask act as obstacles for dislocation propagation, SiGe layers growing laterally on the oxide‐covered Si substrate are almost dislocation free. © 1996 American Institute of Physics.