Pseudologia fantastica is discussed from the classical viewpoint as a defensive effort based primarily on denial and directed towards unacceptable wishes and impulses. This view is contrasted with British object relations theory which stresses schizoid and dissociative elements and the function of pseudologia fantastica in maintaining a viable self. While appearing at times to reflect creativity, pseudologia fantastica in fact constitutes a failure of potential space. The treatment of an adolescent boy is presented to illustrate the technical necessity of providing a holding and containing function which allows for the gradual emergence of potential space. As the patient's self develops, the treatment may eventually address internal conflicts typical of adolescence.