JP has promised us a "pa que sepas" on this very subject hopefully i can help until he gets in. here's my 2cents

estabamos reirando is the wrong way to go.
 
This may be complete twaddle but  I'm pretty sure that when you want to say something along the lines of "we were laughing" you should ideally conjugate the thing you were doing (laughing) and not the fact that "you were"

The "when" can be handled perfectly happily by the new conjugated ending along with the "who" 

re/ia/mos = laugh/was/us

Reir is an ir verb so it would never take an ando ending (used for ar verbs) the "ing" form for reir is riendo

everyone will tell you that you should reserve ando/iendo forms for actions that you are performing right at that moment. (and then they will ignore their own advice.) I believe that there are legitimate ways to use the ing" forms other than when refering to immediate present but i've yet to find out how.
I dont know why estabamos riendo is frowned upon but i suspect it is spanglish. understandable but awkward

Of course you would pick a verb with a reflexive counterpart. reír or reírse? I'm drawn to reírse because of the feeling that you were making yourselves laugh rather than laughing at an external thing which makes it

nos reíamos

thats what i'd use but I may well be wrong

Siiii porque vivi con muchas personas Espanol en Francia et eramos buenos amigos!! I want to become fluent in Spanish :)