Clearly the safest thing is to get rid of the kids in the game. If you're willing to still accept some risk but want to minimize it, I agree with the others who have advocated a school club. Also, a way to perhaps dilute the obsessive focus some paranoid parents may have on D&D, you can have the club be not a D&D club exclusively but a game club with board games, card games, RPGs, etc. This way, D&D is just another game and not this cult...er club. It might make it look less fishy to some. If permission slips are normal for such extracurricular activities, by all means get them. If not, it might seem a bit strange to request written permission for the kids to play D&D as part of a club that doesn't require it by school rules. Still, in that case I would contact the parents of any kids with whom you want to play D&D by phone and discuss it to make sure they're okay with it. I assume, by the way, that normally a teacher doesn't set up a club based on his/her interest, but rather sponsors one that a group of students wants. So this school club idea is predicated on the assumption that there would be at least a small group of kids who actually want this, and not necessarily only kids who want to play D&D specifically and with you specifically. I think a great situation would be one where you talk to some of your current student players, ask if they are interested in starting such a club with you as sponsor, and go from there. Let them post flyers and have a meeting, and you just assist as teacher sponsors normally do. They can get interested students to come and play all sorts of table-top games including but not limited to D&D. Eventually, they can elect club officers and take care of business themselves. Once it's a bit settled as a student-driven thing with you just being supportive, then you can go ahead and participate in some of the games. Perhaps DM sometimes and play sometimes. Play some of the other games, too, if you're so inclined. Don't necessarily play every time the club meets. Encourage the student members to also play at home or other places in games with other students but without you. The point of all this is to show how benign this all is and, importantly, that you are not the center of it all. Not only is that good for not making parents suspicious, but frankly I think it's better for you and the students if you participate but are not indispensible to the group (except as the requisite teacher sponsor, although some other teacher could fill your shoes if necessary). Again, if you want to be as safe as possible, nix gaming with the kids completely. I think in your situation I'd go with the club, however, and take all steps to show how innocent it is and how much it has to do with the kids and not you per se. One other thing--if you want to pursue an idea like this, I would run it by your principal first. While he probably will want to cover his butt at all costs, including having to fire you, he's demonstrated that he is sympathetic and understanding. I would trust him to give you a fair appraisal of how a school club for games would fare in this situation.
The best idea I've heard is to set up a gaming club, stand back as the secretary or admin of that club, and encourage the kids to play the game themselves. Even though your immediate problem (the size of your group) will then not be fixed, you'll still be able to vicariously play the game by organizing the kids to do so, which is better than nothing.
