The objectives of the study were to determine the relationship between functional health literacy and performance on the Mini-Mental State Examination (MMSE). New Medicare managed-care enrollees aged 65 years and older, living independently in the community in four US cities (Cleveland, Houston, Tampa, and Fort Lauderdale/Miami), were eligible to participate. In-home interviews were conducted to determine demographics and health status, and interviewers then administered the Short Test of Functional Health Literacy in Adults (S-TOFHLA) and the MMSE. We then determined the relationship between functional health literacy and the MMSE, including total scores, subscale scores (orientation to time, orientation to place, registration, attention and calculation, recall, language, and visual construction), and individual items. Functional health literacy was linearly related to the total MMSE score across the entire range of STOFHLA scores (R2 = 0.39, p < 0.001). This relationship between health literacy and MMSE was consistent across all MMSE subscales and individual items. Adjustment for chronic conditions and self-reported overall health did not change the relationship between health literacy and MMSE score. Health literacy was related to MMSE performance even for subscales of the MMSE that were not postulated to be directly dependent on reading ability or education (e.g. delayed recall). These results suggest that the lower MMSE scores for patients with low health literacy are only partly due to 'test bias' and also result from true differences in cognitive functioning. 'Adjusting' MMSE scores for an individual's functional health literacy may be inappropriate because it may mask true differences in cognitive functioning.