At least in our small city MN local school district, 1st grade was a learn-to-read year. (My DS skipped 1st, so I can't give specifics.) I believe a very large range of reading abilities is common for 1st grade.
You could try to contact the teacher for this upcoming year and tell her your concerns and ask if it's anything to worry about and/or if there's anything you can do to help. Maybe the school website has info about the curriculum?
I would encourage reading a lot to him at this point. I don't think that there's any reason to be worried at this stage. I have seen others recommend starfall.com, you could check that out.
