Your son shouldn't be taking part in anything he doesn't feel confortable with. Seems like a little bit of peer presure was involved here. It seems like you have everything under control now. Good luck :)
Thanks for the thoughts. No, I'm not going to scold him for doing what is just a natural extension of curiosity and the discovery of "Hey, that feels good". I just want him to tone it down as far as location and frequency goes. `I have a concern in the back of my mind that the frequency might be because he was exposed to the other situation though-and that doing it in front of us despite the number of lectures might be a cry for help/attention regarding this. Maybe I'm connecting too many dots though and they are unrelated.
The other situation-when I posted we weren't sure how to handle questioning my son about exactly what happened without making it worse and since my son had opened up to me my husband didn't want to make it seem like a breach of confidence by talking to him. We also weren't sure if it was serious enough to dig into. It kept bugging us though so finally we decided that he could sit down and read some kid-oriented literature about safe/unsafe touching to him and see what happened. My son seemed relieved to get the chance to talk to his dad about this and gave him a lot more details than he gave me. Turns out the boys had locked him in a room with them when they were playing this game and then suggested he join in. He was worried about the door being locked but took off his clothes for the chase part. Then the boys got much more physical with each other-enacting some mature scenarios-and my son got scared, put his clothes on and insisted they unlock the door or he would start screaming and pounding on the door for one of the boys mom's-this wasn't at our house. Seems this happened a while ago and he has been reluctant to play with this boy since but we didn't know why. We are friends with the parents and they had told us about a year ago that their son was having personality changes and they suspected a bully at school. After this tale we think we know what the issue was-so my husband went and talked to the other boy's father. He was very surprised to learn about this but took it well. We don't where it will go from here for him but my son is not going to be playing with the 3rd boy in the scenario any more and he certainly won't have unsupervised play with our friend's son either.
You took the masterbation issue very well, I am tired of parents who scold their children for masterbating.
Now to the sex games that your son has been playing. You will get a lot of answers on here saying that this is totally inapropriate. In fact, it is quite normal. When I was a young child, I did similar (if not more extream) things with other children, and it has not caused any problems for me. In fact, most people I have talked to have done this with friends when they were young at some point. It's more normal then you think. The children are just exploring each other. It's new and exciting for them. I can tell you, it has no affect on their sexuality. When I was a child, I engaged in such things mostly with other boys. I am straight and don't really have any interest in gay relationships. So don't worry about that...not that you should anyway.
Do not seek counselling, it will just cause embarecement for the boys. To be honest, I wouldn't even discuss this with the parents of the other boys. Not everyone is as open minded as you and me.
Its up to you if you want to stop these games or not. Just remember not to punish your son or any other boys. It sets a bad example about sex.