Hi BKD,
My oldest son (now 14) went to 1st grade as a non-reader. He could sound out letters. I was worried because he had tested into a class for highly gifted kids and he'd be the youngest (the others were grades 2-6). How could he learn to read when no one else was at that level--they could easily read directions off the board? The teachers told me not to worry.
He learned to read almost immediately (within the 1st 9 wks he was fluent). By the end of 1st grade, he was at a 4th grade reading level. Ever since, reading is his passion. He plows through fiction, nonfiction, biography, all kinds of books and several magazines each month.
There was no problem--just timing, in my opinion, and the need to learn to read is what ultimately got him to do it. Maybe stubbornness too. I agree with Grinity that you should consider getting him out of his class situation.
BTW, I also have a son who learned to read at 3, so they are all different.