Abstract Two-step epitaxy consisting of low-temperature GaN nucleation layers (NLs) and high temperature (HT) GaN overgrowths, deposited on sapphire (0001) by metal-organic chemical vapour deposition, has been examined by transmission electron microscopy and atomic force microscopy. Results indicate that NLs consist of faceted crystalline islands that exhibit a spread in rotation about the (0001) axis. These islands undergo a metamorphosis on annealing and become rounded. The lateral growth during HT deposition of GaN occurs by the attachment of atomic species to steps associated with the rounded islands, resulting in faceted flat-topped islands. Furthermore, growth occurs preferentially in certain regions which evolve into ‘growth patches’. These patches then grow vertically and laterally over the underlying subgrains. The coalescence of these patches produces a continuous GaN layer. The origins of threading dislocations (TDs) in GaN layers have also been investigated. Results show that the majority of TDs do not form during the coalescence of islands as was assumed previously. Instead, two possible sources of TDs have been identified: firstly, growth faults in NLs and, secondly, point defects. Partial dislocations associated with the faults in the NLs constitute the major source of basal plane dislocations, which may develop into TDs by self-glide and climb. It has also been suggested that the mosaic structure observed in fully grown GaN layers is due to elastic interactions between TDs, which glide and climb to form subgrain boundaries.