Well- on one hand, that is the age where kids start to do that! I mean, it is perfectly normal to be curious and also, if a mom caught you or asked you about it, to run away and be all embarrassed.
I would just speak to the other mom about it- don't be angry or accuse her son of doing something 'bad'. Just let her know that he was doing a little "show me yours and I'll show you mine" and say that you thought she would want to know.
I would not keep your son from playing with the boy, but I would have a little talk with your son about that. Don't make it into TOO big a deal and scare him- but he is old enough to be reminded that our private areas are just that- private. We use them when we go to the bathroom, but no one else needs to see them or touch them, even friends their own age.
Tell your son it's natural to be curious, but that if his friend brings it up again, he should just say " No, my private parts are not for looking at." and ask him to let you know if it happens again. Remember, you want to always encourage your son to feel comfortable confiding in you and telling you stuff that happens- even UNCOMFORTABLE stuff!
but this sounds pretty normal to me- just talk to the other mom and your son, and maybe next time he comes over, supervise the play a little more- a movie or game where you can be around in the background!