I taught my daughter to read when she was three. Now she has a three year old and she wants to teach him to read. I think we started out just reading her favorite books over and over again and later we got workbooks to do, too. I did find some interesting websites that have suggestions on how to go about it now:
The Well-Trained Mind
starfall.com
Reading Buddy 2.0
Succeed to Read
Preschool Express
WowzaBrain
If you have a suggestion, feel free to add a comment!
MyGrandmaSue 
Wow,
I’m very happy to see you liked my site enough to link to it! With a degree in remedial reading, you know that some kiddos struggle with reading, though, which is why my partner, Bridget, and I started WowzaBrain.com.
We help parents improve their children’s reading ability at home. It must work because, on average, our members’ kids improve their reading levels by three years in just one semester.
We charge, but we’re the least expensive, most user-friendly service like ours that we’ve found.
Please have a looksee at http://WowzaBrain.com. If you have a question the site doesn’t answer, email us or give us a call. We’re hassle free.
Peggy