I don't believe that this speaks directly to lip reading, but I definitely concur with BobY's assertion that a good part of comprehension of spoken language depends on facial expressions, gestures and other body language. I spent only six months in Korea, making little attempt to learn to speak the language (most of my energy went to learning to *read* Korean, so that I could identify streets, businesses, etc) - a few Korean friends came over to my apartment the night before my departure for a little party, and I surprised them and myself by keeping up perfectly with their conversation in Korean. I interjected comments periodically in English, but they were always perfectly in context with the conversation. Eventually, one friend turned to me realizing "Hey - we were speaking Korean and you understood!" It was a strange experience, but very cool. Reminded me of the movie The Thirteenth Warrior, where the main character (a Moor of some stripe) divines the language of his Viking travelling companions. Antonio Banderas, if you're reading this, I'm still waiting for you...

In my intentional studies of Spanish (as opposed to this unintentional study of Korean), the telephone thing never really occurred to me. I had confidence in my fluency when I started dreaming in Spanish.