Since your friend's gsd does this, it is possible your gsd learned it from the other dog. Growling can also just be a type of talking and doesn't always mean aggression. For the teeth baring, that can also be different again depending on the circumstances. For example, when I give my Sting a good tummy rub, he will stretch out - grunt with pleasure and open up his mouth - I do give him his bear and he will mouth that. My aussie was the same way. But for your kids, since I assume your gsd does not do this with you, I think that your gsd is considering herself the mother and she gives out the pets which is what she does when she rubs against their hands. With summer heat and all, it may be better if when she growls your kids stop petting her - yawn (a calming signal) and walk away. Otherwise, I suspect the growling could get worse.
