Both my kids learned mostly by watching the Leapfrog Letter Factory and Word Factory DVDs. They really liked these and learned all the letter sounds from those and the idea that you put the letter sounds together to form a word. Then they started trying on their own to sound out words, guess how to spell words, etc.... We never really actively tried to teach them. We have a few reading-related games around too, and those might have helped too. I was reading somewhere that the age at which kids learn to read is based primarily on their interest in it.
