Oh Belle, I'm so sorry to hear that that's how it went....I absolutely don't think that students should have to earn the right to learn. Yikes.
Regarding the reading comprehension: did she provide an example? How does she know he isn't understanding the text? If the problem is as you suspect, perhaps you could try something like, "I'd be curious to hear how he did with that task on a level ______ book".
I remember that when DS was in kindergarten I was rather surprised to hear his leveled reading score (it being dramatically below the level he was reading around the house). When I went in to ask the teacher about it she told me that a different teacher had given it and then she showed me the assessment. I burst out laughing.
The information in the questions he missed had been enthusiastically relayed in the car when he was telling me about the story he read--so I knew he had understood that part of the passage. The statements written down by the tester had zero to do with the question being asked. However, they WERE a classic display of DS's tendency to ignore information requests until after he has finished expounding on whatever happens to be of INTEREST to him. When I showed his teacher, she laughed as well and agreed that it was classic DS. She administered the next reading assessment and--lo and behold--he was suddenly reading at the same level in school as at home!
As for the classwork....It sounds like you may need to flat out ask the teacher to explain what parts of the classwork apply to his instructional needs. It's hard to imagine what her response could possibly be....maybe she'll realize that there IS no valid instructional goal attached to this?