As of January 19, 2012, Matthew can sight read at least 439 words (see photos below). He learns an average of 9 new words per week, flashcard style. I use plain unruled index cards and write the words with a black marker.
We review several words daily. He's a strong visual learner so learning to sight read is easy for him.
How do I choose which words to teach him? I started with words that he heard daily and are of high interest to him. Then I downloaded Mrs. Perkins' Dolch Sight Vocabulary (220 most common English words). And finally, we got a list of 1000 most common English words from NACD. (Also google "1000 most common English words").