My son, who is a 1st grader now, is having the same issues. He may be able to read some words because he knows them now by memorization (i.e. sight words).
My mom, who taught for over 30 years, more than 20 in 1st grade, got out her training book on dyslexia. We have been concerned about dyslexia because my son's dad is dyslexic. However, he was never treated in school, that was before there was such a thing as dyslexia.
Anyway, there is a form of dyslexia where people have trouble recognizing letters and then further connecting the sound the letter makes to the letter itself.
My mom suggested contacting Scottish Rite to have him tested, but they don't take anyone until they are in 2nd grade. The school she taught it would not retain in kinder, but would in 1st. However, she said there were times she would pass a student on to 2nd even though they were not reading because they suspected dyslexia and the child had to be 2nd grade to be tested and get into the program.
We have been staying with my parents and my son attending a different school since Ike. My mom works with him every night and the school has him going to 2 different tutors, plus the teacher is helping one-on-one when she can. He has progressed so much it's unbelieveable. We're planning on staying at this school until Christmas break. One of his tutors told my mom this week that she thinks he'll be reading (by sounding out the words) by Christmas. He's a very, very smart boy, unbelieveable the things he knows about stuff that interests him. So it has been very perplexing and frustrating that he's not recognizing letters and connecting the sounds.
Good luck, try not to get too frustrated with him (I know how that can be), and just keep plugging away.