In elementary school, I was bullied pretty horrifically by a couple people at whichever school I was attending, from pretty creative insulting/verbal abuse, to outright attempts at fighting me. I just reacted as violently as I felt was appropriate, and sometimes I got in a lot of trouble. When I look back on it, I think I did the right thing, because by the time high school rolled around, I didn't really catch any flack from anyone, except for one guy who called me a "fag" but is now a gay porn star. Irony at it's best.
I say, this is how you deal with bullies: beat the ever-loving **** out of them. If they get the better of you, spit blood in their eyes, and while they can't see, go for the nose. That works as a metaphor for life, as well.