Don't confront the other guy, confront your wife. If you talk to him, he (and your wife) will only see it as WEAK, and you'll elevate him in importance.
Yes, you should expose their relationship to his wife. She may or may not be aware of what's going on, but she has a RIGHT to be, and to be able to make her own decisions for her and her family.
How do you know she's lying? Because she's ALREADY lied to you, and people caught up in these things ALWAYS lie. Period.
C'mon, I think you know that already. It's human nature to want to focus on the positives, but frankly I don't see many. You need to confront the reality of the situation, and fight for your marriage -- if that's indeed what you want to do.
