Here is what you do.
1) Show a flash card with a word on it.
2) Point to the word and say it, moving your finger across the word as you say it.
3) Show a picture of what the word represents and say a simple sentence describing what the baby is seeing where the sentence ends or begins (or both) with the word.
Its better if the word has an action associated with it. Wave, Clap, etc...
I can show my baby a flash card with the word and she does the action and says the word. Without me saying the word first, which is the important part. At this point its probably just simple pattern recognition, however I bet that once I introduce more words she will be able to read new words that I have never showed her before. For example, waving or clapping once she learns to recognize the 'ing' at the end of a word.