The research on young children and race has previously relied on Piagetian developmental concepts to describe ages and stages in the development of children's racial and ethnic understandings, leaving uninvestigated the situated meaning and consequences of children's learning. Drawing from a qualitative study of young children's (ages 3.5 to 5.5) day-to-day experiences with racial and ethnic diversity in an early childhood classroom, this article takes a critical sociocultural approach to examine children's language and social interactions. Classroom participant observation and interviews with six focal students revealed children actively constructing understandings by appropriating various social tools. The children in this study enacted racial and ethnic identities, constructed theories about how differences operate, formed peer groups, and made sense of the multitude of messages they received about diversity. (Contains 6 notes and 1 table.)