The octave illusion described by D. Deutsch [Hearing Research and Theory, edited by J. V. Tobias and E. D. Schubert. Vol. 1. pp. 100–142 (1981)] is a phenomenon observed when two continuous sinusoidal tones bearing an octave relation (e.g., 400 and 800 Hz) are presented dichotically such that the ear/frequency relationship is switched at regular intervals (every 250 ms). The illusion consists of the impression, reported by a majority of listeners, that the tone with the higher frequency in one ear (usually the right) alternates with the low frequency in the other ear. The present paper attempts to account for the mislocalization component of the illusion, based on two recognized properties of the binaural system: (1) In order for a stimulus to be lateralized, the dichotic information must be in the same band(s) [e.g., L. A. Jeffress, Foundations of Modern Auditory Theory, edited by J. V. Tobias (Academic, New York, 1972), Vol. 2, pp. 349–368]; and continuous pure tones may be mislocalized based on information not deriving from their onset [i.e., the Franssen effect, W. M. Hartmann and B. Rakerd, J. Acoust. Soc. Am. 86, 1366–1373 (1989)]. It will be shown that these two properties, together with some basic peripheral processing characteristics, can lead to lateral shifts in the dichotic image, consistent with the illusion. [Work supported by the Department of Veterans Affairs.]