I've been in a similar situation -- also overseas, kids around the same age -- and our friendship ended for a time over it.
We've since "gotten back together" now that the boys are older, but we really try to limit their time together as they either get along really well or can't stand each other. It's easier now, though, because both kids are in school, so we can meet up without them.
From my perspective, her son was the one causing the problems (he's since been diagnosed with ADHD) and she wasn't intervening or doing anything to keep him in line. From her perspective, "about 50%" of the problems stemmed from her son.
For me, it wasn't as much her son's behavior that was the problem as what I saw as the lack of intervention/discipline on her part. I felt my son always got the short end of the stick. If I had to do it again, I would have gently intervened much earlier instead of waiting for her to do it.
Be that as it may, I think it's really really hard as a parent to see any of this clearly. I'm not saying your kid *is* to blame! Usually this stuff is somewhere in the middle. I think what you could do, if you want to salvage this friendship (and what i wish I'd done), is have a talk without the kids and say, "What are you seeing? what would you want us both to do in this situation?" Alternately, just try to meet up without the kids.
Hang in there. This stuff is hard.