Sometime between 2 and 3 years of age, children begin to use mental terms, for example, think, in their speech. A series of naturalistic studies and experiments sought to determine if young children are using mental terms to refer to the mental world, that is, are they making explicit reference to beliefs, ideas, thoughts, and intentions? Naturalistic observations revealed that the first uses of mental terms are for conversational functions and this use begins in the last half of the third year.Experimental investigations confirmed that children between the ages of 3 and 5 correctly distinguish real and mental items and correctly judged that they could think and dream of nonexistent, not‐real things. These findings, that mental terms are used by children for distinct, explicit mental reference almost as soon as the terms are used, suggest that theories of semantic and conceptual development which portray early development as perceptual, concrete, sensory, and external need to be re‐examined.