Actually, she probably is envious and sad. After all, in most versions of her myth, Medusa died before giving birth to her own children. One of them was Pegasus.
I don't think parasitic worms can have children, somehow (and Zouken is just a collection of such), she never meets Avenger (in HF, at least), Angra Mainyu/the Grail isn't capable of having children, since it's a blob of pure evil, and Archer *is* Shirou (not that he's likely to ever have children with her).
The real give-away, though, is the red hair. No-one else in FSN has red hair, and Shirou is by far the most likely person to have a child with her anyway. Especially since Rider and Rin are around (and Rin is looking distinctly like she's going "aww, look at my cute nephew"), which implies it is post-HF, where they are closest. The only other possibility would be HA, but there's no-one else who is likely to have a child with her there either.
Do you just not like the art? I have to admit that it's not all that great (or particularly close to their canon looks), even if the concept is really "awwwww" worthy....
And who the hell stands up when they're breast feeding?
Sakura, apparently, at least according to artists.
