Computer simulations were used to study nucleation and development of misfit dislocations in coherent films on lattice mismatched substrates. Nucleation of a misfit dislocation was characterized as insertion of vacancies in the top layer of the film, whereas further development of the misfit dislocation was accompanied by the movement of a half dislocation loop towards the interface (1). The energetics of nucleation phenomenon was studied in the presence or absence of surfactants (a Monolayer of different atoms on top of the thin film) and also under different compressive stresses. An Au/Ni film substrate system and Au films with Ni or Ag as surfactants were used for calculations. In absence of a surfactant or when the surfactant atom lattice constant was larger (Ag) than the film atoms (Au), the energy of vacancy insertion (EVI) decreased with increase in compressive strains. When the surfactant atom was smaller (Ni), EVI increased with increase in compressive strains. This should inhibit insertion of vacancies into the film and thus formation of defects such as misfit dislocations.