heartmama -- I have nothing new to add to this thread, but thought I'd chime in with a reassuring word. Your son sounds *so* normal. My son is in 2nd grade in an alternative learning environment. The kids in his class range from 6-8 years old. Some of them are reading Harry Potter. Some of them are stumbling through BOB books. The teachers are highly trained and totally relaxed about all of the kids. The are adament that it is perfectly normal for this age group to fall all over the spectrum regarding reading skills, and that none of them are developmentally lacking. They are all bright eager kids, and they are all learning tons no matter their reading level.
Unless he is distressed about it, then I wouldn't worry about it if I were you!