My kids have all been early readers. I don't remember any of them sounding words out, except for once when my daughter was trying to imitate what she saw another child do.
I love the example of JenJoy's child reading the tabloids. It was at the supermarket that I first realized one of my kids was really reading, and not just remembering sight words. He'd been reading signs and individual words from 12 months, but at just over two, he was suddenly reading words I knew he hadn't encountered elsewhere. It was scary. By the time he was two and a half, he was consulting adult field guides to identify rocks and minerals, and seashells. We went on a weekend trip and he amused himself in his carseat by reading the liner notes to an Irish Tenors cd. At that point, he seemed able to read just about anything.
I wasn't surprised when my other kids were also early readers. I didn't try to teach them- they all seemed to pick it up on their own when they were ready. We have a print rich environment and read to the kids from the time they are babies.