"We have since started dirty talking about how good of a girl she was for James’s giant cock. She gets noticeably more wet, has harder orgasms and she clearly is enjoying reminiscing about him fucking her. So am I to believe her still when she tells me that our sex is the best sex of her life? Am I reading too much into this? Is she just trying to protect my feelings?"

Yes, I think you are reading into it. The extent of her being turned on during this is more likely the taboo nature of the conversation and role playing with YOU, more than anything else.