Study Objectives: We investigated a generally unappreciated feature of the sleep disorder narcolepsy, in which patients mistake the memory of a dream for a real experience and form sustained delusions about significant events. Design: We interviewed patients with narcolepsy and healthy controls to establish the prevalence of this complaint and identify its predictors. Setting: Academic medical centers in Boston, Massachusetts and Leiden, The Netherlands. Participants: Patients (n = 46) with a diagnosis of narcolepsy with cataplexy, and age-matched healthy healthy controls (n = 41). Interventions: N/A. Measurements and Results: "Dream delusions" were surprisingly common in narcolepsy and were often striking in their severity. As opposed to fleeting hypnagogic and hypnopompic hallucinations of the sleep/wake transition, dream delusions were false memories induced by the experience of a vivid dream, which led to false beliefs that could persist for days or weeks. Conclusions: The delusional confusion of dreamed events with reality is a prominent feature of narcolepsy, and suggests the possibility of source memory deficits in this disorder that have not yet been fully characterized.