Children with epilepsy (CWE) have social difficulties that can persist into adulthood, and this could be related to problems with understanding others' thoughts, feelings, and intentions. This study assessed children's ability to interpret and reason on mental and emotional states (Theory of Mind) and examined the relationships between task scores and reports of communication and behavior. Performance of 56 CWE (8–16 years of age) with below average IQ (n = 17) or an average IQ (n = 39) was compared with that of 62 healthy controls with an average IQ (6–16 years of age) on cognition, language, and two advanced Theory of Mind (ToM) tasks that required children to attribute mental or emotional states to eye regions and to reason on internal mental states in order to explain behavior. The CWE-below average group were significantly poorer in both ToM tasks compared with controls. The CWE — average group showed a significantly poorer ability to reason on mental states in order to explain behavior, a difference that remained after accounting for lower IQ and language deficits. Poor ToM skills were related to increased communication and attention problems in both CWE groups. There is a risk for atypical social understanding in CWE, even for children with average cognitive function.