Do you know of the free site called, "Starfall?" It is a preschool website that teaches toddlers to read. My two-year-old grandson spent the night this weekend, and we did the site together. He was fascinated with it, and he could put letters together to make words.
It is a really good site, and it is free. I did download it on my iPhone, so when we go out, he is entertained, but the download was $2.99. I just loved this site and thought you might want to try it.
Here is the link: http://www.starfall.com/