The "other woman" is a friend who will always be right there as a physical reminder to you that he finds her sexually appealing.
It's interesting that you are open-minded enough for paragraph 2 but get caught up in other things in paragraph 3. Sexual appeal is not a on-always thing. Sure, there are some things in life that people always find sexually appealing. There are other times that these 'kinks' are on and off again, and then there are those super rare times that you wonder just what the hell drug you down that rabbit hole to that conclusion.
It's definitely a taboo subject, and brings on all sorts of interesting questions. Is it wrong to be sexually appealing? Is it wrong to be attracted in the moment? Is there any shame in it?
There's a reason he kept it hidden, and I like to think it is because the world is (very potentially rightly) too afraid to accept the concept of just sexual appeal. You say it yourself:
I would never want to be with a guy i had to ask NOT to masturbate to my friend.
I'm willing to bet, there is a line in OP's BF's head that follows the same logic, to the T, with his friends. And I bet OP has at least once, secretly, in her mind made a correlation to the BF's friend and the BF - even enough so to say "No this is wrong, I know better". But that doesn't take it away - it still happened.
I dont know how to word it without people just saying "That's skeevy and shitty and wrong" because it's taking a step into perspective that is not commonly walked. If hormones can make women go from loving their husbands to wanting to kill them to wanting to eat the weirdest things, it seems silly to say it's so fardfetched to say hormones can make men going from idolizing their wives to looking at the strangest crap that brings appeal. It's a brain stimulus, you dont get to control your brain as much as everyone wishes it did.
None of your post is wrong, Coming from the other end I would give the OP this advice: BF likely knows it's wrong, knows it's something he cant openly share with anyone because the stigma of getting a boner is enough to cost him the relationship (see: this thread), and is likely something he had no intention of doing and regretted doing the second you walked through the door - but would have regretted probably 3 minutes after masturbating. Talking to him and asking him to be open will give you more knowledge on his actual thoughts of her, and if it's something to be concerned about, or simply something that is caught in the moment. My best analogy to this in terms of comparison is that if simply masturbating to the thought of your friend is assurance that the likes her, masturbation to bondage and more extreme kinks means those people really do want to have those things happen to them - that is to say, they dont. That said, you seeing it is a thing - and it has made you feel. So you should share it. He then at least knows that when and if you react weirdly in certain occasions or events that he can help you through with that. And you him.
Finally I know the world wants to - but finding something appealling shouldn't be a sin. Acting on a person would be. Taking steps to harm others would be. But a fantasy brought with visual? I personally dont see the harm. If my wife did the same with my best guy friend, I wont say it wouldn't make me react weird. But it would make me likely react the same way it does when she tells me that so-and-so actor is super hot, and she wants her free pass with him should the opportunity come. I would, and do, find that actor a little more weird, as stupid as it sounds. And if the opportunity came - I would wish her the best and to go for it. I wont be there when it's over, but hell this is the person I love... If it brings them happiness in the end that that's that.