Background. Interpersonal communication problems are common among persons with schizophrenia and may be linked, in part, to deficits in theory of mind (ToM), the ability to accurately perceive the attitudes, beliefs and intentions of others. Particular difficulties might be expected in the processing of counterfactual information such as sarcasm or lies. Method. The present study included 50 schizophrenia or schizo-affective out-patients and 44 demographically comparable healthy adults who were administered Part III of The Awareness of Social Inference Test (TASIT; a measure assessing comprehension of sarcasm versus lies) as well as measures of positive and negative symptoms and community functioning. Results. TASIT data were analyzed using a 2 (group: patients versus healthy adults) x 2 (condition: sarcasm versus lie) repeated-measures ANOVA. The results show significant effects for group, condition, and the group x condition interaction. Compared to controls, patients performed significantly worse on sarcasm but not lie scenes. Within-group contrasts showed that patients performed significantly worse on sarcasm versus lie scenes; controls performed comparably on both. In patients, performance on TASIT showed a significant correlation with positive, but not negative, symptoms. The group and interaction effects remained significant when rerun with a subset of patients with low-level positive symptoms. The findings for a relationship between TASIT performance and community functioning were essentially negative. Conclusions. The findings replicate a prior demonstration of difficulty in the comprehension of sarcasm using a different test, but are not consistent with previous studies showing global ToM deficits in schizophrenia. Copyright © 2008 Cambridge University Press.