SBH you couldn't have said it better. It is a flaw in their character and they can't stand to hear it yet admit this. It seems like this situation with her is not helped by her parents not setting her straight about this inappropriate behavoir even if blood is thicker than an inlaw. SBH I would tell you what I might say to her parents but there is so much anger and hurt (and Believe me I"am feeling the same things you are) in this matter that it probably isn't in your best interest.
You are dealing with a lot right now not only with your W and her parents and your children but all the legal matters that you have. You are a strong person I can tell by the way you are dealing with these problems. Take things one at a time and be patient with them you don't have to be in a hurry. Just remember you are not alone myself and others are going thru this as well and if you need someone to talk to or just to blow off some steam let it go.
As far as living with your wife for the welfare of the children. That's a tough call, but if you are miserable being around her then this may not be to healthy for anyone.
Take care of yourself SBH you are in our prayers

Jule