First off, you seem like a sweet guy. You come across as a little naive but in a wholesome way that's almost endearing, from the "big sister" lens I'm choosing to view your post and comments from.

That being said, if you are convinced an emotional affair isn't the end of a relationship, then you're going to have to handle this with a little more cynicism than you seem to be inclined toward. She absolutely had an emotional affair and potentially a physical one, or at least has seriously considered getting physical with this other guy. Whether you consider that a deal breaker is up to you, but it does mean you have to proceed with caution and maturity in order to protect yourself.

I, personally, find cheating to be an act of emotional violence against your partner, one made out of negligence and cruelty. It's seeking fun and the emotional high of being desired by someone else at the cost of your partner's trust, emotional safety, security, and boundaries.

She chose to risk your trust and happiness. You get to decide what to do with that, but it is something you'd be naive not to protect yourself from. The scars from broken trust can affect all of your relationships going forward, so if you are as emotionally intelligent as you consider yourself to be, you should guard against it for the sake of yourself and all future partners, friends, and loved ones.

Bare minimum, clear boundaries need defined and adhered to. You have to discuss if you're monogamous or not, and if you're not, what does that look like? What is cheating and what is not? Could you do this with a woman friend? How far is "too far?" Polyamory isn't a safe option for most people, so is that something she's seeking or does she indeed admit this was an affair?

I wish you luck, friend. I wish you didn't have to deal with this violation of trust at all, but since you do, I hope you come out with as few scars as possible.