Reading with your little one is a great way to bond with them and expose them to new things.  They understand a bit, but they understand most that you are there with them.  Be silly - they understand silly pretty early on, and whether or not you're happy reading to them.  Make it fun.

Sandra Boynton is a must; my favorites from her are:

Lamaze Books are great

And here are some other favorites

And to round out the list with some books for parents: