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We present findings of an observational study investigating how young children interact with augmented reality story books. Children aged between 6 and 7 read and interacted with one of two story books aimed at early literacy education. The books pages were augmented using animated virtual 3D characters, sound, and interactive tasks. Introducing novel media to young children requires system and story designers to consider not only technological issues but also questions arising from story design and the design of interactive sequences. We discuss findings of our study and implications regarding the implementation of augmented story books.