nena3927,
We had a similar situation with our fourth little guy after finishing The Reading Lesson, which was a new situation for me as my other boys pretty much took off after phonics and were ready for the Emerging Reader's Set. I had stopped over the summer with phonics instruction (two different summers) while using The Reading Lesson, simply because I was so busy writing. I know this took a toll on my last little guy's readiness when he finished phonics. He also had tubes in his ears, which we had taken out this summer (due to fluid stuck in the tubes), so I don't think he was clearly hearing the sounds either. And, with my years of teaching spent helping kiddos learn to read, I knew all kiddos were different as to how much "phonics" they truly need and how much time it will take them to grow into being able to read real books. So all of these things were definitely playing a role too in my little guy's readiness to read.
I'll be honest that I ordered Hooked on Phonics (just the Level 1 and Level 2) to review. But the thing that really helped get my little one excited about reading (which I somehow forgot along the way) was to place "real" books that are very easy and that he CAN read without struggle in a shoebox and have him read to me or his Dad nightly from the box. I also realized that we had not been reading aloud picture books to my last little one very often (like we did for our other boys), so we read one book to him that is a hard picture book nightly, and he reads one book to us. This helped his enthusiasm for the written word to grow too.
My little one had the Bob books and all of the other "little" readers in his room, but he wasn't excited about them. He thought the stories didn't make sense, and truly he was beyond them maturity-wise now even if they were good reading practice level-wise. My other boys liked the Bob books, my oldest loved them in fact, but the older boys in our family read them when they were much younger. Once I took note of what my little guy could truly read without difficulty, I realized we had quite a ways to go in building fluency.
He didn't need another phonics program, he just needed time with me (or dad) reading the really easy readers to build confidence. So, we backed up to the super easy readers for awhile. For example, like Stephanie suggested above, we headed back to the "Shared My First Reading" "My First I Can Read Books" (which come before the Level 1 readers). These would be books like the easier "Biscuit" series and the "Mittens" series. We also used some Level 1 and above books, but they were the easier looking ones.
For example, some other books that worked for us were Mouse Soup, Wake Up Sun, Oscar Otter, Sir Small and the Dragonfly, Why Benny Barks, Grizzwold, Sammy the Seal, Danny and the Dinosaur, Pie Rats Ahoy, Hiccups for Elephant, My Dog Talks, Thomas and the School Trip, Clifford and the Big Leaf Pile, The Lion and the Mouse, the easier Little Critter books (like When I Get Bigger, Just Me and My Puppy, Merry Christmas Mom and Dad, All By Myself, The Trip, etc.). While these specific titles are in no way needed, I share them to get you thinking that often our little ones are overwhelmed by too much text on the page, and they are missing the thrill of reading a cohesive story with beautiful pictures. So, these books fill that gap.
As they read the easy books, they gain confidence, the sounds are reinforced, and they begin to enjoy reading. By placing books they can read in a box or a cube, we are setting apart those that will be enjoyable for the child to read without so much work. My little one started taking his box in the car to read on the way as we went places. He started reading with his box next to him in his bed. He took his box downstairs to read when he had free time. He asked for more Biscuit books and more Mittens books and read them all when they came. He has a ways to go, but I am thrilled that he is enjoying reading and wanting to read. I can see that he will be ready for the Emerging Reader's Set in a couple of months and be more prepared. We could start now, but it would be frustrating. Instead, we're building skills to begin strong in a couple of months.
When he doesn't remember a sound, I try to have him sound it out, or I restate the rule... remember "ou" says... When he's reading bigger words, I'll cover up part of the word with my finger(s) to show the word in manageable chunks and have him read each part and put it together to make the whole word. When he guesses, I'll repeat what he said, and ask, "Does that make sense?" I strive not to let him get frustrated and to make the reading fun!

I think this strategy of placing books kiddos can read into a box or a cube just for them is one that can be applied to many different ages. It sets apart books that really can be read by the child at whatever stage of reading he/she is at and keeps them from frustration with books that are way too difficult. I also try to remember that our school books push the kiddos into higher level material, so it is good to keep the free reading books easier. No one likes to be pushed to peak performance all of the time. Some things should be easier!
Blessings,
Carrie