This study was designed to examine factors associated with literal interpretations of homonyms. Participants were 212 second graders, ages 7;0-8;11, who listened to a story containing 16 key words. The key words were homonymous words ("pseudo-homonyms"), nonsense words, or familiar words used accurately. While listening to the story, children selected an illustration of each key word. Later, they were asked to recall the key words and to justify their picture selections. There was no association between interpretation and recall accuracy for nonsense words or familiar words used accurately; however, children who accurately recalled a homonymous key word were more likely to interpret the homonym "literally," relative to children who failed to recall the key word. Yet most of the children who correctly interpreted the pseudo-homonyms also correctly interpreted these key words. Most children correctly recalled the story context regardless of key word type, but whereas correct recall of context predicted accurate interpretation of nonsense words and familiar words used accurately, it did not do so for homonyms. Children made equivalent numbers of literal and accurate interpretations of homonyms, even when correctly recalling context. Children's justifications for their word interpretations implicated the role of metacognitive skills, particularly in terms of selective attention, as a factor influencing homonym interpretation.