IMHO, reading/phonics are the most important academic skill that we can teach our kids. So many kids today cannot read past a 5th grade level because they were rushed through phonics. I would definitley continue the phonics through the end of 3rd grade. We want our kids to grow slow, like oak trees, and have a solid undertstanding of phonics. It lays the foundation of learning everything else.
We use a 3 year phonics program called Teaching America to Read and Spell. It does not have a lot of bells and whistles but is really great.
That is just my opinion