S.T.
what do you mean he's in with the 'dumb kids'? the teacher has put him in a group of kids who are at about the same level, and has determined this grouping by testing (an imperfect medium but the only one really available to public schools.) why would you want him with a group working at a level significantly higher than where he is?
it's also very common to blame the very normal highs and lows that kids experience in schools on 'bad teachers.' a teacher isn't good because she hands out compliments. compliments should be earned, and many professional educators rightly consider that they should be sparse and therefore pack a punch when they are given.
do you REALLY think that the teacher and principal are ganging up on your 7 year old?
i suspect your attitude of entitlement is hampering this child more than anything the teacher is doing. encourage him (without showering him with empty compliments!), help him practice, work with him on developing self-esteem that's not reliant on hot-air words from other people. and please, work on losing your own issues with persecution. the school professionals WANT your child to succeed. you're really not on opposite sides.
khairete
S.