Dynamic assessment (DA) is guided by theoretical conceptualization about the nature of cognitive modifiability and needs to construct diagnostic measures for children who do not reveal their learning potential in conventional static tests. The development of DA was stirred by inadequacy of conventional testing to provide precise answers for individual differences in learning ability, learning processes, cognitive functions, and non-intellective factors that are responsible for cognitive modifiability. The rationale for developing DA for preschool children is that early identification of children’s learning potential and deficient cognitive functions would facilitate development of mediation strategies to overcome their learning difficulties and actualize their learning potential. DA is defined as an assessment, by an active teaching process, of a child’s perception, learning, thinking, and problem solving. DA is aimed at modifying an individual’s cognitive functioning and observing subsequent changes in learning and problem-solving patterns within the testing situation. Development of DA was driven by criticism of standardized testing: (a) bias toward minority groups and children with special needs, (b) selective administration procedures of children with high-risk for being labled as intellectualy disabled, (c) lack of consideration of motivational and emotional factors, (d) lack of information on learning and metacognitive processes, and (e) inadequate recommendations on specific intervention strategies and prescriptive teaching. The main goals of DA are to assess learning potential, deficient cognitive functions, amount and nature of mediation required for change, and transfer of learning. The main mediation strategies used in DA are establishing prerequired thinking behaviors, self-regulation of behavior, enhancement of reflective and analytic processes, teaching task-specific concepts, feedback on success/failure in learning processes, and development of basic communication skills. DA of preschool children is more challenging than that of older children because executive functions and communication skills of young children are less developed. The best known DA approaches for young children are those of Lidz and Tzuriel; both are based on the theories of Vygotsky and Feuerstein. Lidz’s approach is focused on objectives that reflect curriculum demands of educational settings. Her Application of the Cognitive Functions Scale indicates the degree of mastery on cognitive tasks, responsiveness to intervention, and non-intellective factors. Tzuriel’s approach is characterized by innovations of instruments, assessment procedures adapted for developmental stages, mediation strategies, behavior checklists, and a recording and scoring for clinical and measurement versions. Tzuriel’s approach is characterized by 10 aspects: Adaptation of test materials to child’s developmental level, “bridging” of concrete operations to abstract operations, communication aspects, clinical and measurement versions, preliminary phase component of DA, scoring methods for the measurement version, transfer problems, comparison of modifiability across task dimensions, assessment of non-intellective factors, and creativity in construction of problems. A growing body of theory and research on DA supports the crucial role of the DA in: (a) reflecting better the learning potential of children than standardized testing, (b) confirming that the quality of mediation within the family, school, and peers systems is a strong determinant of cognitive modifiability, and (c) demonstrating DA as a powerful approach in revealing the implicit effects of intervention cognitive programs on cognitive development.