I'm coming into this discussion a bit late, but as a parent of 10 and 9 yo's, I can feel your pain, OP...
I also have some issues about stranger danger. As a child in second grade I had an incident where I got off the bus alone (typically there were other kids dropped off at the front of the cul-de-sac but that day there was only me). A guy in a red convertible pulled up beside me and asked me if he could drive me to my house. I said no and started walking to my house. He followed and asked again. At this point I cut across the front lawn of the neighbor's house and walked behind their house to hide from him.
I never saw him again, but I absolutely remember that incident and because of it I operate from the assumption that while my kids need to have freedom, I also need to minimize opportunities for something bad to happen to them. Criminals are opportunists-they look for an opportunity to take a kid (I got off the bus alone-unusual).
So I try and balance the reality that my kids are at risk if they're alone with not creating an atmosphere of fear for them. So they have rules about travelling together and letting me know if they change location BEFORE they change location.
We had a backfire recently; I bought the kids walkie-talkies so they can walk to a friend's house and I can keep in touch with them if I need to-we have a very secure community where the houses are close together, we know everyone on our street, and there's only one way in and out so I am becoming more confident about letting them explore. So, I let the girls take the dog around the block to test out how the WT's worked. We chatted the entire way and as they came back around the corner (in my line of sight) some strange guy came on and said "You should be very afraid of walking around by yourself, I will come to get you!".
My ten year old absolutely freaked out. I spent a lot of time explaining to her that WT's were not like phones, that it was an open line that anyone could talk on within a radius of ten miles, and that guy had no idea where we were or who we were. I did realize that it was important if we were talking on the WT's not to give identifying locations, though.
Unfortunately, my ten year old now will not even touch the WT's and is scared to go outside, so we have to replace the memory of the bad incident with some good incidents with the WT's so she'll be okay with them. Younger DD9 thought it was funny (two girls with totally different personalities-it's a challenge). On the one hand, it was a good object lesson that there ARE strange men out there (I actually think it was a teenager being funny on the WT, btw), but I need to balance it with not locking yourself in a house to stay safe.
I always remember the line Chili Palmer used in the movie "Get Shorty": "Say as little as you can, if that." I seriously have to tell myself this all the time. It helps. I'm getting to the point now where I realize that I don't need to explain myself (or defend myself) to people. My boundaries are my decision.
Both schools that we attended have a no-bullying clause that allows you to request that your child not be put with another kid. You can't request to BE in another kid's class, but you can request that they be kept apart. If you bring up bullying concerns (and it sounds like OP's kid is hanging out with a bully-in-training), most schools with anti-bullying policies will listen.
When my kids were that age they were always within line-of-sight. It didn't hurt them and I needed it for my comfort.
You must not have kids. Any seven year old I know will absolutely cave to an adult telling them to do something they know is counter to the rules of their parents, especially if the parents are not there to back them up. That's why kids don't make decisions, adults do.
The OP is not talking about legality, she's talking about rules that she stated and the neighbor verbally agreed to, then ignored. It's not the kid's job to say "I'm not allowed to watch those kinds of movies", it's the neighbor's job to honor the OP's rules or at least let the mom know "I'm going to do this, if your kid comes over, he'll be participating."
And frankly, I didn't see any "ripping" from the OP, only from you. She's struggling with a situation that requires her to exert authority, and many of us in real life struggle with being as assertive as we are on message boards

.
Also, growing up, my circle of friends was my biggest influence. I also looked for kids that liked the same things I did (joined the school newspaper, drama club, etc.), and I found a good group of friends. I also have clear memories of dropping friends because of their habits (having sex, smoking). I don't have any intention of guinea pigging my kids with bad kids to try and help the bad kids, it's not going to make my kids any
better, it's just going to teach them that hanging out with people that do bad stuff is ok. I'm not the bad kid's parent, I'm not going to go all martyr and try and "fix" them at my childrens' expense...
I think there has been a ton of great advice on this thread about how to cool off the relationship, it's the implementing it that will be a challenge. Good luck, OP...