I agree with previous posters' points about it being pretty normal for little kids to look at/touch each others privates. The picture thing strikes me as being more abnormal. And unfortunately, it's true that when kids have been in foster care, they get exposed to other kids who have been sexually abused, as well as being at risk of sexual abuse from bad foster parents. Also, you didn't say why they were in foster care in the first place. Perhaps the mom left them in situations she should not have?

This is going to sound horrible, but my husband and I decided not to take in foster kids after we had our own children. We have both worked as attorneys representing abused kids and representing foster parents. It is terribly unfortunate, but also true, that many children in the foster care system are emotionally damaged. MANY of them act out sexually with other children. I cannot tell you how many cases I have seen and read about where the foster parents' own children are sexually abused by foster kids.

Until you have a better idea what your niece and nephew were exposed to in foster care, I would suggest NEVER leaving your daughter alone with either child and even having her sleep in your room if necessary.

And I also agree with the other posters about just dropping it at this point. Lectures and interrogations will just serve to upset her. It sounds like you've done a good job up this point about not doing that, and you've emphasized what you need to.