This chapter concerns changes in the child's perception of psychic reality during normal development, culminating in the major shift in the child's understanding of minds (theory of mind) at the oedipal stage, which we equate with the qualitative shift in the development of mentalization whereby the self becomes a representational agent (see chapter 5). We integrate empirical studies of this transition with material from the analysis of a 4-year-old girl. We propose a psychoanalytic model of the development of an awareness of mental states, which conceives of the very young child as using two modes for representing internal states or—using psychoanalytic terminology—psychic reality; we have called these "psychic equivalent" and "pretend" modes, which differ primarily in the assumed relationship between internal and external realities. We argue that the integration of the dual modes into a singular reflective mode is normally completed by about the age of 4, with the mentalization of affect leading the mentalization of belief states or cognitions: the child first understands that people have different feelings, then that they may have different thoughts about the same external reality. We link Freud's classic notion of psychic reality and current psychoanalytic formulations of symbolization. This chapter describes normal psychological growth in childhood; the next offers a further clinical example, which applies the model outlined in 254this chapter and chapter 4 to a young child. Chapter 8 concerns the changes that occur in adolescence, and the following two chapters, using the same developmental model, consider failures of these crucial cognitive transitions as seen in adult personality disorder.