I have a five year old that I am homeschooling, so this debate is very familiar to me :) I decided against Hooked on Phonics because of the price. However, I have spent twice that trying to find other materials to work. So I don't know if that was a great decision in hind sight. I am starting to see the merit in picking a program and sticking with it. That is probably what we are going to do next year with new materials.
My daughter is reading though after about four months of direct work. She has done well with the other material and I like that she never felt like learning was work. We used both Leap Frog and Starfall, so I will comment on those since they have already been recommended.
The Leap Frog DVDs are simply wonderful. The songs are catchy and perfect for kids learning to read. My two year old is already recognizing letters and sounds because of seeing it with her big sister. Because of how much the girls enjoyed this line, I have purchased the Letter Factory Game, Flash Cards, and tons of Leap Frog Electronic Games. All have been very good for the kids, but the best has been the DVDs.
Starfall is excellent. Their site is a fabulous resource for online games that promote reading. I purchase the workbooks they offered and have been very pleased (quick tip, you can get 25 for about double the price of getting one - I went in with other moms to share the cost...and I still have some left). They are honestly better than any books or workbooks I have bought in stores or through eBay. It is a very cheap, high quality suppliment that will really add to your reading program.
Check out your local Dollar Tree. One in our area has great supplies for teachers. You can also do a lot of cheap activities at home that will help. We make letter cookies and use flashcards to spell words together. I took sticky notes and wrote some sight words on the, stuck them around the house and then told the kids which one I wanted them to find. Great game. I am sure you get the point. Teaching your child to read seems overwhelming, but in actuality, it doesn't have to be that hard. Make sure you read daily and use your finger to follow along the words as you read. Slow down and let your child see if they recognize any.
Something I just started doing with my daughter is that I have her write out my grocery list. I just spell the words for her and she writes them down. Then when she is at the store she holds the list and helps me see where we need to go and what foods to find. Just about anything will help her learn to recognize letters and put them into words.
Sorry this is so long, but I haven't put the last four months of my life into a letter like this. I hope that some of this helps and feel free to ask any questions you might have. My best advice is to use what you have at home - an expert in the field of reading (you) and tons of books and reading materials already on hand.
Best of luck to you both!