Thankyou so much to everyone for your hugs, advice and suggestions.
I spoke to DS about this, once I had locked myself away and had a good bawl about the situation. I rang my Mum, just because thats sometimes what we need to do, and DF. He is not DS's Dad, but he is so supportive and cherishes him as much as I do, and he too was disappointed.

DS has been out of the 'bullying' situation for 2.5yrs now, and I thought we had resolved all of the anger, issues and fear that was brought on by that situation.
I sat DS down when I was 'calmer' and asked for his side of the story. He gave it to me, the truth, and it matched up with what we were told by the boy and his Mother.
I asked him why, but he doesn't know. I haven't asked him if he is being bullied himself, as I thought I would be able to pick up on the cues if he was. I shall ask him this tomorrow when we have breakfast together.
He is aware of his punishment - grounding until further notice and no PS2 or XBox. These are the things that make DS realise he has crossed the line.
He cried, I cried, I made it clear that I love him, but am just so upset with his actions. I have told him that tomorrow we are going to sit down and write a letter together to this boy & his mother.

I just hope that this is a once off, and I never have to go through this again. I have now seen the 'bullying' issue from both sides of the fence, and even though it is horrific to find out your child is being bullied, it's just as horrid to find out that they are doing the bullying.

Thanks again for all your support. I will keep you updated.