If we are being sued by our neighbor because his son got shot with a BB gun that belongs to my 12 year old, what are the steps we need to follow next?

You could potentially be liable if you were negligent in how you secured and supervised the use of the BB gun--that is, if your carelessness in allowing it into the hands of some other child is what led to the shooting. Of course, even if you may be liable, the neighbors can only recover an amount commensurate with their child's injuries and medical costs, so if he is basically unhurt, there's nothing really they can sue for.

You should notify your homeowner's insurance of this--they may well resolve it for you, and if it turns out this is a valid claim, a failure to notify them in a timely manner could result in you losing your coverage. So provide them the notice.

You can ask for a copy of the police report--it's a public document. Contact the police to see what they need; they may simply give you a copy, since you are involved, or they may require you to submit a formal request under an open records or freedom of information law.