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The authors argue that our thinking about psychic reality is challenged by research observations of the child during the period of early language development. The toddler, at the beginnings of propositional speech, expresses the capacity for ‘two kinds of psychic reality’. A world of imaginative pretence occurs quite early, and supplements the child's everyday experience. The toddler is not confused by these two experiential worlds and, correspondingly, the use of imaginative activity is strongly supported by caregivers. While in some ways there is a rich history of developmental observation and psychoanalytic thinking about such early imaginative activity, its significance is only now being appreciated. Imaginative reality refers to a process in which the child makes use of what is familiar in the remembered past in order to try out a world of new possibilities in the present that, to some extent, are oriented towards the future. Conditional modes of thinking that are affectively meaningful are thereby engaged and practised in play. The authors present vivid observations that illustrate the early imaginative pretence mode of psychic reality. The observations are followed by a developmental discussion integrating recent research with psychoanalytic theory. As would be expected, thinking about early imaginative reality leads to a variety of new questions for research and clinical work.