I wanted to add two things to Barbara's advice. I can't excuse the way this woman spoke to a 5 year old and a 2 year old, but I did notice that he did respond to her in a way that is I would consider inappropriate for a 5 year old. He told her "he knows how she is." Now where did he hear that?

My first piece of advice is that children should never talk back to adults. Ever, no matter what the circumstance. What we told our children is that if an adult is speaking to you or acting towards you in an inappropriate way, come and get us. We will deal with adults.

My second piece of advice is that if you are speaking ill of your sister in law where your son can hear, you need to stop. He's not old enough or mature enough to process this information and know what to make of it.

Also, again, her language was not appropriate but something may have precipitated her outburst. If your son did do something wrong, her behavior does not excuse his and he should be disciplined if necessary.

Seems simple... Don't let your kids anywhere near this woman. You don't want them near her. She doesn't want them near her. Everybody is in agreement, at least on one thing.

If the son did something wrong in this case, I'd say he was already punished enough by the aunt's inappropriate outburst.
However, it seems like the LW was not even there and doesn't really know what happened. I'd say her boys are probably not as innocent as she thinks, and there is work to do in this area. Ash is exactly right about "speaking ill of your sister in law where your son can hear." Stop this immediately.

It is amazing what comes out of children's mouths and people's reaction to it. My 4 year old son once asked my OCD mother when she was obsessing about cleaning if she was crazy. Her response, "who told you that?" Confused (because she did not answer his question), he said, "nobody." I could truly claim innocence and was grateful to have a clean conscience. Your job is to model good behavior and protect them. Maybe when the kids are older your sister-in-law will feel more hospitable. There's no one stopping you from being a great aunt to her kids.

"My first piece of advice is that children should never talk back to adults."

What do you mean by "talk back"? If you mean a child should never speak disrespectfully to an adult...well, yeah, sure. Children (and adults) should never speak disrespectfully to *anyone*. If you mean the child should never challenge what an adult says, I strongly disagree. Children should be encouraged to stand up for themselves in a calm and respectful way.They should be taught that their thoughts and feelings matter, and that it's ok for them to say what they think as long as it's done with respect. I agree the kid's reaction in this situation doesn't sound respectful, but I think it would have been fine for him to say, "It isn't ok for you to raise your voice and curse at me." Otherwise, you're teaching your kid that he can never question authority on his own, and that he should always ask for outside intervention when dealing with difficult situations.

Have your husband explain calmly to his brother that it is not ok with you two that his wife shouted at your children while using the F-word. This conversation will likely include how inappropriate it is for any person to use that word around children, let alone an adult who has children. Your husband can tell his brother that he would be happy to invite him and his kids over, but that unless his wife can improve her attitude and be more of a responsible adult around children, she will not be welcome. (This improved behavior would include never swearing around your children and never calling a 5 and a 2 year old "bullies" because that's inappropriate and their interaction with other children at that age does not rise to the cognitive level of bullying, even if that behavior appears such--which it didn't. It is also inappropriate to call children so young and other negative label and the aunt should understand that that will not be tolerated.)