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The unconscious conflicts in neuroses do not differ materially from those in schizophrenia. The difference lies in the defense reactions which ensue. In the former, anxiety leads to a series of defensive maneuvers on the part of the ego which sometimes include regression to the preoedipal phase; in the latter, the very organization which initiates the defensive process, namely the ego, is itself injured by the disease process. The primary defense in schizophrenia is regression to the narcissistic phase. Breakdown of the ego results in alterations in the functions of attention, conceptual thinking, perception, and memory which are secondary defenses against the conflict. Failure of countercathexis may lead to a breakthrough of the primary process. A psychotic reality then develops that consumes the cathexis previously directed to real objects and includes delusions and hallucinations that are outcomes of the restitutive processes. During treatment this psychotic reality may be transferred to the therapist and so remain until capacity for object cathexis develops. If the latter should occur, the usual ego defenses make their appearance both in and outside the transference. The paper, a preliminary inquiry by the author along lines suggested by Freud, contains interesting clinical material.