Great chapter. Dumbledore really messed up this time.
I can just see the Hogwarts Express leaving Kingscross Station, and a few hundred meters out, the engine suddenly blows (Steam Engine - Steam is water, and Harry is the master of water!!!). If he knows enough about wards (maybe) he could mess with the anti-muggle wards, too, and there'd be a first class disaster for the Wizarding World. Maybe arrange for 9 3/4 and Diagon Alley to loose their wards at the same time... that'd create a real mess.
As for house, I can just see Harry telling the hat that he'd drain the magic from it, if he is sorted. On the other hand it'd be nice if the hat refused to sort people who really don't want to be at Hogwarts, and complains to Dumbledore that the school isn't a prison.
An interesting idea might be Harry as royalist; when he steps forward for the sorting he gives a speech about returning the Wizarding World to the legal rule of the Queen and remove the Ursurpers/criminals currently in power, if necessary with force.
Another way would be to declare that his sole purpose at Hogwarst is to cull the Death Eaters and their families; something along the lines of 'you have until tomorrow morning to leave, then you'll simply die.' Maybe a bit too cold for him, but it'd certainly cause problems for Dumbledore; especially if Harry used his power over water to kill Snape during the night.
If Harry really attends Hogwarts, I'd hope he'd ignore classes/detention and studied on his own (non-magical subjects, that is). Maybe even publically breaking his own wand; probably counter-productive, but it'd mess things up for Dumbledore really good.
As for Ron/Hermione/Draco?
Well, Ron is a no show. Harry loves knowledge and hard work; Ron hates that. No chance for any friendship.
Hermione would be possible, if she learns his story (Dumbledore forcing him to Hogwarts) early on. They certainly have a lot in common, even with his (justified) rage/hate against Dumbledore and co.
The twins may like him, but his total disdain for rules and the constant expulsion worthy acts of disruption he causes would be beyond what they're willing to do.
Draco is another case; no bad experience, but frankly Harry doesn't care about birth; it's what you do with yourself that counts, and that's the total opposite of the pureblood agenda. I don't think they'd get along at all; Draco admiers his father too much, is too brainwashed.
As for those that call for Harry to expose Dumbledore's actions... Hello, we're talking about Wizards here. They couldn't understand that someone would want to remain in the muggle world, that someone wouldn't want to attend Hogwarts. All that'd happen if he tried that is that people would think him mentally challenged, or perhaps insane.
I wonder how deep the Dungeons go... some fics have a window to the Lake (underwater) in the Slytherin common room. If that's indeed the case, he could meld the window and flood half the castle without any problems. Now that'd go over well. Or maybe meld enough stones to cause a tower to collapse. Melting the doors would also be nice. Oh the destruction he can cause at Hogwarts.
Now since Harry can't go to a muggle school, how about applying for another magical school. Assuming he learned French at school, he could try to go there; his status as BWL should be enough to get him in easily. So he may be forced to a magical school, but at least it'd be one outside Dumbledores control.
So many possibilities. I'm really looking forward to the next part!