Parenting = Epic Fail

So this evening, we had a total fail as parents.
We had a friend of Bella's over to play. The kids were all upstairs -- being loud and obnoxious, playing like normal while I made dinner. Now, you have to understand something about my kids; it has almost always been just us in our house -- we either didn't know alot of people, or the kids were too young to have alot of regular company. Most of the kids that they have played with over the years were their cousins, so we are all related. (Not that this fact makes up for what happened at our house tonight).
So this friend of Bellas is obviously a little girl and she is the same age (6), but all of the kids were playing together -- William the 8 year old, Bella and her friend the 6 year olds, and Lorelei the 3 year old. (Jackson was not present as far as we can tell). After dinner, they all went back upstairs and played for another hour or so until the friend's mom came and got her. About 30 minutes to an hour after she left, the little girl's mom called me and said that she was very concerned by something her daughter had told her. Apparently in the course of playing Vampires, Bella got hit in "the privates" and felt it neccessary to pull down her pants to check herself out right there in front of everyone. Well this got attention (obviously) so Lorelei felt the need to check herself out, so she dropped trou as well. I guess William thought that he was just playing along when he decided to do the same which got an "Ewwww!" from the little girl who later went home to tell her mother about it. Greeeeat. So the mom calls to tell me that she is concerned by this, and obviously, I am too. We go to try to talk to the kids about it and they confirm the story. We try to express our disappointment in this type of behavior and they honestly do not get why this is so bad. Sooooooo....short of having the dreaded sex talk with our 8 and 6 year old, how do we handle this?? I mean, up until 18 months ago, our kids were still bathing together. They come and talk to me and Gary (and to each other) while we are in the shower or while we are using the bathroom. We feel horrible that it happened, but it did. Our fear now, is that that this incident will prevent the parents from allowing their daghter over to play. I mean, I am not sure I would want to my kids to go play at a friend's house where this had happened. Arrrrgh! So frustrated!! I mean, I am happy that the mom called me -- I would hate for this to have happened and her NOT call me. But what do I do now? I feel embarrassed, no, check that, I am MORTIFIED that this happened. But it is an isolated incident -- kids being young and stupid. So is anyone reading who has advice for me???