We did your baby can read, with my first and while she could recognize a good hundred (or more) words, she wasn't really reading as she couldn't put them into sentences or sound them out (ex: she had a hard time reading bit, when she could "read" the word "rabbit").
What we have done, transitioned from sight words to learning phonics (with sight reading the most common letter blends - ex: com, ack, ing, etc.)
Here are a few of the activities we have done - maybe they will help you guys have fun learning together:
Made a phonics flip chart - http://quirkymomma.com/2010/phonic-flip-chart/
Had fun with word cards - http://quirkymomma.com/2010/sight-reading-cards/
Learning to write - http://quirkymomma.com/2010/penmanship/