My 3 1/2 year old son was enamored with this for over an hour.
In the Learn How to Read section is a series of simple stories with pictures and animations. Each page is presented with a sentence at the bottom of the page where the child can click on each word in the sentence. The word is pronounced phoenetically as the letters are highlighted.
Absolutely Wonderful!

Lots of other activities too numerous to mention including making a snowman, planting a flower, word hunt...
Highly recommended!

http://www.starfall.com