My dd was reading chapter books when she started 1st grade. Her 2nd grade teacher told me that she is an outstanding reader (currently reads about 8th grade level).
She learned to read with what some call "whole language" approach. Basically she has a great memory and just memorized a whole lot of words. In second grade, her teacher started using a phonics system (don't know which one). At first I was uneasy with the idea, but it has actually been a good experience for her.
She was not asked to start reading books below her level, and by learning phonics she can actually tackle books way above her grade level. I don't think learning phonics is by itself a bad thing. I see it as a back up system. If you don't know a word, you can figure it out.
