Previous headphone experiments have shown that listeners can lateralize high-frequency sine-wave amplitude-modulated (SAM) tones based on interaural time differences in the envelope. However, when SAM tones are presented to listeners in free field or in a room, diffraction by the head or reflections from room surfaces alter the modulation percentages and change the shapes of the envelopes, potentially degrading the envelope cue. Amplitude modulation is transformed into mixed modulation. This article presents a mathematical transformation between the six spectral parameters for a modulated tone and six mixed-modulation parameters for each ear. The transformation was used to characterize the stimuli in the ear canals of listeners in free-field localization experiments. The mixed modulation parameters were compared with the perceived changes in localization attributable to the modulation for five different listeners, who benefited from the modulation to different extents. It is concluded that individual differences in the response to added modulation were not systematically related to the physical modulation parameters themselves. Instead, they were likely caused by individual differences in processing of envelope interaural time differences.