We have investigated site occupancy and interfacial energetics of a TiAl-Ti(3)Al binary-phase system with O using a first-principles method. Oxygen is shown to energetically occupy the Ti-rich octahedral interstitial site, because O prefers to bond with Ti rather than Al. The occupancy tendency of O in TiAl alloy from high to low is α(2)-Ti(3)Al to the γ-α(2) interface and γ-TiAl. We demonstrate that O can largely affect the mechanical properties of the TiAl-Ti(3)Al system. Oxygen at the TiAl-Ti(3)Al interface reduces both the cleavage energy and the interface energy, and thus weakens the interface strength but strongly stabilizes the TiAl/Ti(3)Al interface with the O(2) molecule as a reference. Consequently, the mechanical property variation of TiAl alloy due to the presence of O not only depends on the number of TiAl/Ti(3)Al interfaces but also is related to the O concentration in the alloy.