This article explores what it means to be a competent reader of picture storybooks by examining the abilities of some 4-6-year-olds, who were read stories aloud in class. Jonathan Culler's concept of "literary competence" was used to tease out the children's implicit knowledge of the structures and conventions that enable them to read a work of fiction as literature. From a more practical point of view, Lawrence Sipe's class-based work, discussing picture storybooks with first and second grade children, provided some useful guidelines. This current study draws on an educational design experiment involving "literary conversation guides," which help probe children's understanding of such story features as character and irony. (Contains 1 footnote and 3 figures.)