This is a tough issue, but I think you might be underestimating your kids in your hesitation to explain the situation to them. Even a very young child can be told something to the effect that just like sometimes people get sick in their bodies sometimes people get sick in their mind in a way that makes them act or speak strangely or not nice. It is not their fault, it is because they have this sickness, and we should daven to Hashem to help them. In the meantime we should try to ignore them if they say things that are wrong, because they don’t really mean it. Especially if your kids have previous experience with those who are mentally/ emotionally disturbed they should be able to understand that explanation. (Obviously not a baby, but I assume you are not so concerned with a baby who doesn’t understand to begin with!)
If that really won’t work, and it seems your kids are getting upset by what they are hearing, then perhaps getting together at times when you can go without your kids is the best solution. Can you tell your friend that you admire the difficult thing she has done by taking her brother in, and you do not intend it to come between you, but because being together is hard on your kids you would like to start getting together at times that you don’t need to bring the kids? Maybe a melave malka instead of the Shabbos meal, etc.