I just read the first 3 chapters of Matilda by Roald Dahl to my mesmerized 2 year old. The illustrations by Quentin Blake are so perfect! I am sure a lot of it goes right over her head, but she loves it none the less. Reading aloud slightly above her level is a great way to build up her vocabulary and stretch her understanding. She is getting the basic plot though- I know because I stop and ask her questions about what's going on every few pages.