As though you are moving on with your oh-so-fabulous life. You see, when the WAS wonders off into Fantasyland, they somehow think we will just be sitting around waiting for them to return. It almost never crosses their mind initially that what is sauce for the gander, is sauce for the goose. Note, I am NOT advising you to date, or any such thing - but if H happens to see you all dressed up heading out for an evening of dancing with the "girls", or if flowers (roses) from a "friend" appear in the house with no card...... these kinds of things just might make him start to go hmmmmmmmm....
2)
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Should I be friendlier, more accepting of the affair?
No, you do not need to be accepting of the affair. But discussing it will likely get you nowhere either (although someday you may have the opportunity to slip in the phrase "if she'll cheat WITH you, she'll cheat ON you" - he'll get huffy but trust me, it'll echo in his head). Just act as if you are moving on and you deserve better (which you DO).
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Would it be better to tell the kids or keep hiding it?
Sounds like you're gonna have to tell them. If this was a fluke thing that just happened and was gonna be over in a month, I'd try to hide it. But sounds like this has probably been going on for some time behind your back, and is likely to take quite some time to resolve even if reconciliation is a possibility. The 8 year old probably knows already anyway - don't the kids talk at school? Tell them now. Don't protect your H.
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H has already promised that OW will not have contact with the boys indefinitely.
This is a lie. He's just trying to placate you. And the sucky thing is, you really probably have no control over this.
5)
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H is beginning to suggest that he will take legal action against me to stop me from "keeping the boys from him". This is ridiculous given the fact that I welcome him into my home to see them every day.
He's going to file for visitation, and you should let him have it. Right now you are still protecting him from the kids' pain and from the hard work of parenting. Don't stay in the house with him - if he has to come over, you go out during that time. Let him do their homework with them.
See an attorney and find out your legal rights. Get copies of all the financial statements. File an order for temporary support. Right now he's not experiencing any of the consequences of his actions. Sometimes the reality check is needed.
And - this is a biggie, and the hardest, I know, especially in light of the huge double betrayal you've had, but - DON'T put your life on hold! Pursue your dreams, have fun with your friends and your kids, learn new things. If he comes back, he'll be impressed at your confidence and resilience. If he doesn't (or if you decide you don't want him back) you won't have wasted all this time wallowing.
AND - the hardest and best part of this process - look at yourself, admit your role in the breakdown of the marriage whatever that was, and work on your own issues. They usually aren't the REASON for the affair - that usually is a flaw in the cheater - but we all have things we need to get honest with ourselves about.