Oh Kimberley that totally sucks!! I just don't understand why adults can not act like adults!!!! (Similiar to what I went through with the bus thing). How can the kids learn to be truthful if they have no parent as an example? In some ways it seems best if your child moves on from this friendship. If she grows up imitating her mother, your daughter will suffer for it. It's just so sad...I want to say I can't believe it, but it's reality that some parents are just not good examples and should not be raising children.
I hope you keep telling your daughter how wonderful she is and that you are proud of her for behaving like a young lady. Maybe her friend could spend more time at your house and you could be her example...