The Jolly Phonics videos are good. My boys love them (ds1, age nearly 5 and ds2, age 3). There are two videos and they introduce all 42 sounds of the English language and show the children how to blend the sounds into words, e.g. s-a-t = sat. Nice characters and stories (Inky the Mouse teaches her friends Snake and Bee how to read with the help of Phonic the Computer).
You can get these for about a £1 on Amazon. I think they're available on DVD now too.