My 3-year old and 4-year old are journeying through this book.
http://www.amazon.com/gp/reader/0671631985/ref=sib_dp_pt#reader-link
So far, I can give it nothing but glowing recommendations. We just finished day #17 and I can say with certainty that the girls would not be reading as well as they are if I had tried this on my own with Bob books or Hooked on Phonics. those are nice books, but this one is different; not only does it provide a fascinating approach for the child, but it also tells the parent exactly what to do and say. Sometimes it takes some patience from me and sometimes from the children, but overall, I am very excited and hopeful about this program.
Update 6/8/11-- Day #20 (or is it 21?) was tougher for one child (they seem to switch--when one breezes through, the other stumbles, and vice versa), the number of new sounds is piling up, but they are really improving. They read, "This cat is sick. This cat is sad." And they really read it on their own, without any memorizing. The book teaches them how to figure it out without ever asking, "I forgot that word, what is it again?" They rely on their own logic & phonetic skills, not mommy's help.