No you are not over reacting unless we are talking about his nose!
Contact the head of year of his school and ask that your comments be investigated without you or your son being drawn in.It really is not
acceptable.They will tell the other school.
There again, on this forum, I feel sometimes I am a little old fashioned but...really if they were adults what would we say? Not acceptable and they need to learn. I have all girls - one in year 8 - I don't have words for what I would feel if she received the picture!
Take courage - your gut instinct is right - don't tell your son either and then he won't have to tell any lies.(tell the school he doesn't know too)