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Starfall is an excellent (and free) website that teaches early reading skills to children. My 3-year-old son would spend hours on this website if I let him. His 20-month-old brother watches over his shoulder, soaking it all in. They have both learned so much from these activities, and I see no need to buy expensive computer programs as long as Starfall is available.
Although it's great for preschoolers, it has material that's good for higher-level readers as well. I know elementary school teachers who use it in the classroom. I've also heard it's great for children with learning disabilities, like dyslexia and language processing disorders.