Forty-eight pupils from grades one, three, and five participated in a study of the extent to which children are able to use their prior knowledge and expectancies to aid them in integrating verbal material and in drawing appropriate inferences. Six stories were constructed for each of four inference levels, and 11 questions were prepared for each story. Order of stories was counterbalanced across the three sessions in which they were administered to the children. The picture of language development which emerges from this study is that at first children learn to draw inferences from information which assumes or maps onto their prior knowledge; second, they learn to draw the necessary implications from arbitrary material; and third, they learn to draw the necessary implications from information which contradicts their prior world knowledge. Alternatively, development consists of learning to detach oneself from what is known and to constrain one's interpretation of linguistic information to what is explicitly stated, an ability which several authors have suggested appears to be a consequence of formal schooling. (AA)