Understanding phonics was a huge help to me when I began studying foreign languages in middle school. I actually majored in foreign languages in college and speak one besides English fluently, as well as conversational in another language and I can easily read two others. It also helped me as a teacher of kids whom English is a second language.
My DS is a primarily Leapfrog-taught phonetic reader. It took him longer to read fluently than those who we know who are sight word readers. However, from what I've seen, he is able to tackle new harder words much more effectively than those who are sight readers. I don't think it really matters much in the long run- sight readers memorize new words very quickly!
Chris and SPG- if you've never studied language that is from a different base than your first (like English is primarily latin-based), diagramming sentences is a very very useful skill! Sometimes you have to know which is the direct object and indirect object to conjugate the proper case. Most high school students in the US can't do that today! (Seriously revealing my language geekiness here!)
