M.C.
Having been through this with my own son, and through my training as an early childhood education professional, it sounds like your son has a language delay.
DO NOT wait until he is three to have him set up a PPT with the school district, call Birth-to-Three right away (look it up via infoline 211)--you may miss out on early intervention services to which your son is entitled right now. Your son can receive services in your home/daycare/other location with trained professionals if they determine from the initial screening that he has areas that are delayed. They also will set up the transition meetings with the school district so that he will receive services (if he still needs them) from them once he turns three (as is required by law under IDEA). It's a great thing that you are having his ears checked. Children acquire language from hearing it since birth; if that hearing is distorted, your son will only be able to speak what he hears. This could lead him to imitate you in an unclear way which most of us wouldn't understand. Whatever the findings, give a copy of the report to Birth-to-Three. Make sure you tell them when you set up the screening appointment you are having his hearing checked and that you want to provide them with the findings; they will provide you with a release paper which, under HIPPA, authorizes them to have this information.
After about a year of college for early childhood education I noticed that my son was behind in language development for a typically developing child his age. He was about 19 mos. at the time. Birth-to-Three sent represenatives from Easter Seals to do his screening assessment and found that his fine motor skills were of concern (which was news to me) and that his speech and language communication was delayed. The information was forwarded to his pediatrician and he approved it. They then began in-home services right away, and because my son has Husky insurance they were free of charge. He initially worked with a tutor twice a month, and a speech and language pathologist once a month; this was found to be insufficient during a review, so services were upped to six times per month. Also, an occupational therapist was added to his IFSP (individualized family service plan) 2x/month, to deal with his sensory seeking issues.
For a very long time his language skills did not increase, and we were having the same frustrations you are; we tried doing the baby signs and verbal prompting, token rewards, edible rewards, and nothing worked. Then one day he started talking--while signing!--and making remarkable progress. He is now 32 months old and well on his way toward "typical" language skills for a child of his age. We are working on preparing him for preschool.
I have learned through a child development course that toddlers need to reach a fifty-word articulation behchmark in order to begin their "language explosion": fifty words gained PER DAY in their vocabulary from that point until about age 10 (see the book Magic Trees of the Mind by Marian Diamond and Janet Hopson for more information--this is a great resource!). Very young children's receptive language--what they understand--greatly surpasses their expressive language--talking. It is just taking your child longer to develop his expressive language than the norm for a typically developing peer. If you start now and have him work with trained professionals he will increase in progress much sooner, which will reduce his frustration as well as yours. If you choose not to intervene now (to avoid labeling him, etc.), he will probably still develop his language skills, just at his own pace--and you could be in for a long haul. Be prepared to discuss this with his preschool teachers if this is the path you choose.
Whatever you decide to do--and I'd strongly recommend that you contact Birth-to-Three--please keep in mind that your child is not unintelligent by any means. Try to make other people see that too. When my son had great difficulty talking I even had two of my own grown-up siblings say to me, "I was convinced he was autistic" and "When does he start his retard classes?" Most people who don't have at least some knowledge of child development will assume because your child doesn't talk he is dumb. Again, this is not my view because I know better, and I'm quite sure your child is not stupid, but there are plenty of people at the playground, in the grocery store, etc. who will assume so.
Two more things:
If you start him through Birth-to-Three, and his pediatrician delays approving his IFSP, give them a call and ask them to fax it to the pediatrician that day.
If you don't decide to start him with Birth-to-Three, you can have his school district screen and provide services for him as soon as he turns three. They may give you a hard time and try to give him inadequate services, but don't give up. There are parent advocates you can turn to to make sure your child gets the free, appropriate education to which he is entitled. If you and the school district disagree on his education in any way PLEASE call in an advocate to help you.
Good Luck, and I hope soon your son will be able to express himself the way he seeks.
--M.