Hi L.,
I answered a post about this awhile back, so this is a cut and paste based on our experience.
We bought this off of ebay for a third of the price. As someone who did part of my master's work on the literacy skill acquisition process, this program seemed sound.
Of COURSE they're memorizing - how do you think you learned words at first? You were immersed in sounds and symbols and as you became older and made more connections, you realized which sounds went with which symbols. There are books that kids will "read" over and over, memorizing the words and not actually reading them. This is part of it: seeing the words in a familiar context and then, later, identifying them in an unfamiliar context. Along the way, the videos point out phonetic similarities between words, making this a bit of a hybrid between phonics and whole language.
Much of the success of this program is based on the level of parental engagement. If you're being intentional about using the words in outside life and reinforcing them by pointing them out in books, acting them out when possible, and showing the written form (flashcards, video, etc) the baby WILL identify them and begin to make connections outside of the video.
I think we underestimate the value of memorization as a learning tool, but there is a definite place for rote learning, especially when it comes to reading. Also, do not underestimate the value of carrying on a running dialogue (or, depending on the age, monologue - ha!) of the day with baby. Just being surrounded by words and language is training their ears to develop a vocabulary, which makes literacy much more attainable, because they already have a connection to the words when they see them.
Don't forget that to babies and toddlers, this isn't school and it isn't work! It's fun - our son LOVES it. Everything about a child's world at this age is about the joy of discovering, learning and making connections. As long as you're not forcing anything for your own reasons, what's wrong with facilitating the process?
UPDATE: I wouldn't pay full price for this, but if it was a gift, I don't see the harm in giving it a shot as a supplemental learning tool. I just wanted to give some information as someone who is experienced with the product as well as the literacy process so you could make an educated decision for yourself. A lot of people just blew it off w/out reason, so here are mine for why it could be a good addition to what your daughter is already learning. That will make it even more engaging for her - to recognize words and phrases she's been hearing all along. It also has games and songs that my son (20mos) loves.