What I did in a similar situation when my son was in K (and I am not saying you should do this, mind you, but it did *finally* result in a positive change in the teacher's perceptions of my son's abilities), was to simply pack one of the chapter books my son was reading to himself at home into his backpack, and tell him that when the class was working on reading, he was to take that book out and use it instead.
The rest of the class was using The Bob Books. The teacher had been informed repeatedly that DS could read. I still kept getting reports from her months into the school year that said things like "DS knows all of his letters and letter sounds!"(He'd known them since he was 2.), or "DS has great word-attack skills!" (Duh. He can read.) It took him whipping out Mrs. Frisby and the Rats of N.I.H.M. during reading time and reading a random page of it aloud to her (at her request, since she thought he might have memorized it (?!?)) for her to even sort of grasp what we were saying.
