it's been said, but i really think you should talk to your dad about what you saw. i know you don't really want to just yet.. so you should leave it be til you feel a little more prepared, but you really should soon. and i'm not a confrontational person :S so i can totally relate with how awkward and hard it is. but sometimes you gotta do what you gotta do.
i think the likely consequences of talking to your dad about it would be that nothing between them will happen again and you'll have stopped their relationship from escalating further in this way. the other consequence could be that your dad decides his heart lies with the family friend... :S which is probably not the outcome you want, but everyone deserves the honesty that comes with this decision. having said that, i still think the outcome is more likely be the former and not the latter, which is a good thing!
if you don't say anything... i think it will really eat you up especially considering you don't think it's a good idea talking to any of your mates about it. is there any friend you can talk to in the meantime though that won't take it lightly? i think chatting about it would do you a lot of good (though getting perspectives from here is a good start). i think it could also mean that you will continue to wonder how far things have gone with them, and question your dad's integrity, actions and honesty for far too long a time. it could also mean that the relationship goes further than it already has...
anyway, of course it's your choice. both actions are going to be hard to take. what i've written is just from the top of my head, maybe you should take some time to come up with all the consequences you can think of from taking both of those actions (i.e. talking to your dad about it or leaving it) and then decide which one you should take.
good luck!!
*big hug*.