The purpose of this study was to investigate the preschoolers' understanding of the nature of mental representation. Twenty-one 5-year-olds and 15 6-year-olds were told two types of stories describing mental states (pretend and dream) and asked several questions. The results presented the two levels of their understanding. (1) Level 1: children could understand the ontological difference between mental representation and physical object. But they judged that mental representation could never be believed as true. (2) Level 2: in addition to the level 1 understanding, they could draw a epistemological distinction. They could understand the different representational relations between representation and its referent. This understanding was hardly shown before 6 years.