K.F.
That's a tough situation. I can understand your position but I also know what it's like to have a "mean" child and have other parents judge you. When my daughter was two, she was MUCH more physical and aggressive than two girls in her every Monday playgroup. My husband and I are loving, loyal friends so we were terribly shocked. It was difficult for us but what made it more difficult was the shuning from our friends - the hints that they were talking about our parenting, the being excluded from get togethers, the clear disgust with our child. We became more easily angry with our daughter because we wanted her to be nicer so that our friends would be kinder to her as well as to us. Eventually, we chose to leave the group because their treatment was equally hurtful.
I can't tell you exactly what to do with your friend but I know I would have appreciated it if my good friends would have approached me in a loving, nonjudgemental way, directly expressed their concerns and offered help. Maybe if they had approached us by saying they were concerned because their child was afraid or distressed and how could we figure this out, we could have preserved our friendship together and with our kids. Sometimes by entering into such a discussion, you can make the relationships better - maybe your friends are perplexed and feel alone in their parenting and a little support from friends would be helpful. You might approach them with "I'm concerned because I hear my daughter say she doesn't want to play with your child. How can we figure this out." Maybe you bring with you to the discussion an arsenal of helpful tools like websites or resources on parenting.
Two wonderful resources my friends and I have shared are www.drsears.com and www.timeouttot.com. I believe Dr. Sears' wife has a blog where she talks about the struggles of parenting and Time Out Tot is a source for how to use time out correctly.
Anyway, I suggest if these people are good friends that it's time to be loving and honest with them. Sooner or later, the stress of dealing with their "mean" children will impact your friendship anyway. The result may be worse than if you had respectfully confronted them and offered support.