We examine the racial and ethnic concepts and related actions of very young children in a preschool setting. Breaking with much of the conventional literature on the cognitive development of preschool children, we argue that young children engage in interaction involving clear and often sophisticated understandings of racial and ethnic concepts and meanings. We discuss: (1) how racial and ethnic concepts are used to exclude or include others; (2) how racial or ethnic concepts are used to define oneself and others; (3) how power and control link to racial and ethnic understandings; and (4) how adults misperceive the racial and ethnic language and activities of children.