Hey J.,
What does your hubby think of all this? In laws are such a sticky area! I have troubles with my in laws (save for FIL) so I feel your pain. I feely admit I feel hatred towrds mine. The saving grace in my situation is that they are all in New York, while we're here in Omaha. 1500 miles apart does wonders! But that's not a viable option here, so we'll have to figure something else out.
A lot of how you proceed will probably hinge on how your husband feels about the situation. If he's as upset as your are (and as I would be...I can't stand when people are rough with animals) maybe he can take the lead here and talk to her. At the very least she should apologize. Even better would be if she offered to pay the vet bill. If this poor puppy will possibly have these seizures for the rest of his life as a result of her mistreatment of him, then she should apologize and pony up the dough for the vet. And even then, I'm not sure I could really forgive her. But I suspect you are a better woman than I. :-) Because if it were me, I would probably tell my husband that he is free to see her with the girls, but I would not be joining. Animal cruelty is sort of a deal breaker for me, blood relative or not. Is she a bit unbalanced? I can't imagine a well adjusted adult behaving that way just because your husband was pointing out that the puppy didn't appear comfortable with how she was holding him. At best she sounds selfish. As far as forgiving her, remember that in order to forgive someone the first requirement is that they want forgiveness. You can't truly give absolution when someone doesn't ask for it. She hasn't indicated that she wants forgiveness, so I think you are right for not forgiving her. And really, until she apologizes and asks for forgiveness, I wouldn't have anything to do with her. If she had done that to one of your kids, it would be over, right? Well, I know a puppy is not an actual kid, but in my family, pets are family members, even if they're not of the human variety. Slightly below kids on the family totem pole, but certainly above crazy sister in laws. In other words, I think you have an obligation to the puppy more than the SIL. Her feelings come in second to the innocent creature she harmed. This was not some rude comment; her actions caused severe harm to another living creature. Until she shows remorse, I would say that she is not welcome to visit. Hopefully your husband is on board, because he should deliver that message. If your husband doesn't want to talk to her, then you might tell him that until this is worked out, you would prefer not to see her (but don't stop him from seeing her). Tell him until this is resolved to your satisfaction, you don't want to see her. That way, maybe your husband will have a talk with her (if he doesn't want to already). Oh, and make sure that apology is made to the both of you. Telling him she's sorry ain't good enough; she needs to face the both of you. I hope this helps, and I'm sorry for the little guy!
M.