The child's central interest shifts to the genital region. This stage is called the phallic phase nd lasts from approximately two years of age to age six. Sexual gratification becomes more erotic during this time as evidenced by the child's masturbation: actual manipulation of the genitals.

It is during this stage that he phallus acquires a special significance. Freud believed that the increased awareness in the male of his sexual organs leads him to subconsciously desire his mother. In addition, the male child grows envious and resentful of his father and wishes to replace him as the object of his mother's love. The situation is called the Oedipus Complex.

Similarly, a female undergoes a complex wherein she desires her father and rivals with her mother for her father's affections. This is called the Electra Complex. This complex involves penis envy on the part of the female child. She believes that she once had a penis but that it was removed. In order to compensate for its loss, Freud believed the girl wants to have a child by her father. Eventually, however, both the boy and the girl pas through these complexes. Once this happens, they begin to identify with the parent of their own sex. This marks the end of the phallic phase and the beginning of a new one.