Although it's rarely ok or comfortable to talk with someone about their cheating, because this situation involves you in more than one way, it may be time to have a conversation with her.
Wow, what an interesting situation. If it were me in the same or a similar situation, I would tell her. It is not fair to your son that she is doing that. However, some people might choose to keep the peace and keep it a secret. I think this comes down to your personal judgement.
What could would it do to speak with your daughter in law? Obviously, she has no respect for you, your son, her children, or herself. Just hold her at arm's length and keep a relationship with your grandchildren and for holidays.
