A year-long study examined how phonics or whole word instruction affected first graders' progress in reading and spelling words. Subjects, 80 Houston, Texas students of average reading and intellectual abilities from three classrooms receiving phonics instruction and three classrooms receiving whole word instruction, were administered a phonemic segmentation test three times during their first grade year and asked to spell, read aloud, and identify from a word list 60 regular and exception words. Results indicated that: (1) the phonics group read aloud and identified more words correctly than the whole word group; (2) reading groups did not differ in phonemic segmentation or spelling; (3) reading instruction appeared to help children relate their knowledge of regular word spellings to correct oral readings at a faster rate than whole word children's instruction did; and (4) there existed a unidirectional relation between phonemic segmentation and oral reading and a bidirectional relationship between phonemic segmentation and spelling. (Four figures and six tables of data are included; 49 references are attached.) (RS)