PHONICS. It's Proven.
Phonics is the only scientifically proven reading method. Over the last 16 years, volunteers working with 40L have taught hundreds of students with phonics, and they all improved their reading abilities.
In a survey of Public Schools throughout the United States in 1883, Joseph Rice found that phonics led to better results in reading than word methods.  In 1895 and 1896, he gave spelling tests to 33,000 children throughout the United States. He found that the best spelling results were obtained where the phonic method was used.  In 1967, Jeanne S. Chall published “Learning to Read: The Great Debate,” a comprehensive look at hundreds of studies of reading methods. She found that phonics was more effective than whole word methods. In 1983, Jeanne S. Chall republished "Learning to Read: The Great Debate," with new research findings strengthening the case for phonics.
Scientific studies have repeatedly found that phonics is the best way to teach reading. In fact, as Dr. Keith Stanovich says,
The history of reading instruction illustrates the high cost that is paid when the peer-reviewed literature is ignored, when the normal processes of scientific adjudication are replaced with political debates and rhetorical posturing. A vast literature has been generated on best practices that foster children’s reading acquisition (Adams, 1990; Anderson, Hiebert, Scott, & Wilkinson, 1985; Chard & Osborn, 1999; Cunningham & Allington, 1994; Ehri, Nunes, Stahl, & Willows, 2001; Moats, 1999; National Reading Panel, 2000; Pearson, 1993; Pressley, 1998; Pressley, Rankin, & Yokol, 1996; Rayner, Foorman, Perfetti, Pesetsky, & Seidenberg, 2002; Reading Coherence Initiative, 1999; Snow, Burns, & Griffin, 1998; Spear-Swerling & Sternberg, 2001). Yet much of this literature remains unknown to many teachers, contributing to the frustrating lack of clarity about accepted, scientifically validated findings and conclusions on reading acquisition. 
You can see some of the overwhelming evidence in favor of phonics for yourself at the National Right to Read Foundation, or NRRF.
Scientists have also found that the brain decodes words by sound. Even fast readers sound out each and every sound in words, they just do it so fast that you cannot tell by watching their eye movements. You can find out more about this on 40L's sight word and dyslexia pages.
Phonics is important for everyone, but according to Art Levine in 'The Great Debate Revisited,' "Low-income and slow students appear to benefit especially from explicit phonics instruction." It also has proven successful for students with dyslexia.
2. Rice, Joseph Mayer, "Scientific Management in Education," 1912.
3. Stanovich, P. J., & Stanovich, K. E. (2003). Using research and reason in education: How teachers can use scientifically based research to make curricular & instructional decisions . Washington, DC: US Department of Education. page 8.