This paper provides an update on the current status of theory and evidence relating to children's understanding of the pretencereality distinction. The paper starts by highlighting the striking paradox between children's early competence in pretence and their experiences of pretence-reality confusions as late as middle childhood. This is followed by a detailed review of various theories that have been offered to explain this phenomenon. Specifically, theories attributing the paradoxical findings to methodological differences between studies are reviewed and dismissed before considering the transmigration and availability hypotheses (Harris, Brown, Marriott, Whittall & Harmer, 1991;Johnson & Harris, 1994), the role of context and the child's emotional involvement in the pretence, and the pretence continuation account (Golomb & Galasso, 1995). It is argued that none of these theories alone can explain pretence-reality confusions and that these are best explained in terms of the combined influences of cognitive availability, empirical evidence of reality, context, affect and individual differences. Further research is necessary to fully explore the nature, cause and developmental trajectory of individual differences in this domain.