First, you're asking for opinions... so I'm giving one. I would NOT play again with that child. If the mother asks why, I would simply say I think my son is just a little too young to mix in with Frankie because he is just a little to rambunctious for us. You have not offended her by saying she is a bad parent. You have not offended her child by telling her he is out of control and a horrible role model. Actually, I think that is a VERY polite way of excusing yourself from a horrible situation.
I agree children need socialization and it is hard if you like the parent not to get together for playdates... but you also have to think about your child's environment. 2 1/2 is a very eager age when they are learning so much and developing so much. If you do preschool, you will only really have control of the situation for another year or two. Keep control. It is your job to keep him safe and teach him properly and if he is subjected to really bad behavior it will have an impact. As he gets older, he may try out some of that behavior. It is natural for them to test the rules and check out your reactions... do you really want this role model?
Also, the mother doesn't do anything... that suggests she doesn't respect your child or you. There are lots of wonderful parents out there who will respect your child and you. Don't put yourself in that situation. It isn't your job to fix them. If you go to church, scout out the parents in your son's class. If not, go to the playground without a playdate scheduled and get to know the other kids. If you like them, schedule to meet them back again in a day or two.
I am a SAHM and I think it is so important to use that time wisely and be the teacher for your child. I think it is wonderful that he reacted so well to the situation, but would you want to be scheduled into an abusive relationship? I wouldn't.
I suppose you were looking for advice on how to handle it and I'm saying not to... but really, is it worth it for the short time you have? If you choose not to avoid them, I would suggest you have a heart to heart about what you have experienced with the other mom. Explain how you are worried that your child will get hurt. I doubt it will change much, but you can try.